Caplin Systems has launched a hosted, managed service to allow smaller banks to offer a single-dealer platform for foreign exchange, as such systems are expected to attract more volumes under new derivatives rules.

The technology company has launched Caplin Direct, which allows banks to connect to the platform and offer a customised online foreign exchange trading to clients in a matter of weeks and at a much lower cost than building a system in-house.

Paul Caplin, chief executive of Caplin Systems told Markets Media that in the early days only tier 1 banks had the capacity to build single-dealer platforms, and several used Caplin technology as the foundation such as Barclays, Citi and UBS.

“We then brought out Caplin Trader, which for the first time enabled many of the larger regional banks to afford SDPs,” Collins added. “Now, with the introduction of Caplin Direct, where we host and manage the service, it is easy and affordable for even the smallest banks to have their own SDPs.”

Caplin said the 10 tier 1 banks all have highly developed SDPs while approximately half of the 40 largest regional banks have SDPs in production, with the other half making plans for SDPs.

“There are between 200 and 300 regional banks who would probably like to offer a service of this kind if they could,” added Caplin. “The FX market has been the most lightly regulated of the OTC markets and has continued to grow fast. As a result, many banks are continuing to invest in this asset class.”

Over 50% of all screen-based FX flow now goes through single-dealer platforms and SDP volumes are up 32% year-on-year, according to according to Caplin Systems who cited data from the Bank of England. Caplin Systems said in a statement: “SDP flow is typically four times as profitable for a bank as flow through multi-dealer platforms.”

The Bank for International Settlements said in its December 2013 Quarterly Review said the FX market has become less dealer-centric, “to the point where there is no longer a distinct inter-dealer-only market.”

The report said: “Trading activity remains fragmented, but aggregator platforms allow end users and dealers to connect to a variety of trading venues and counterparties of their choice. With more counterparties connected to each other, search costs have decreased and the velocity of trading has increased.”

The BIS report said the market share of traditional inter-dealer venues, EBS and Reuters Matching, have decreased to 16% from 22% three years ago. At the same time dealers are trying to attract flows to their single-bank platforms to benefit from internalisation and the share of dealer volume on single-bank platforms rose from 8% in 2010 to 14% in 2013.

Last month consultant Greenwich Associates said in a report that regulations requiring multi-dealer platforms to register as SEFs may drive more trading volume to single-dealer platforms in the near term. The consultancy estimates FX trading on single-dealer platforms will remain steady or grow slightly in the next 6–12 months, especially among financials.

However Kevin McPartland, Greenwich Associates’ head of market structure and technology advisory service, warned in the report that this shift is temporary and the move to multi-dealer platforms will resume in the long-term.

McPartland said in the report: “The resurgence of  multi-dealer platform volume may be spread over fewer players and Greenwich Associates believes the regulatory burdens and other demands of operating a SEF will trigger the consolidation of multi-dealer platforms, especially those operated by a single parent company.”