How do users rate the electronic foreign exchange trading platforms available? The Banker and Charles Piggott find out in a poll of corporates, fund managers and mid-sized banks.
It may be the digital age, but most companies and fund managers still trade foreign exchange over the telephone. While banks have traded foreign exchange electronically between themselves for several years, their clients are only now discovering the efficiency of the electronic market.
As the $1500bn-a-day foreign exchange market gradually migrates online, a handful of internet-based trading systems are going head to head in what could be one of the largest land grabs in recent financial history.
To find out how new electronic systems rate against traditional voice-based methods of foreign exchange broking, The Banker asked corporates, fund managers and mid-sized banks that have changed over to electronic trading to rate the strengths and weaknesses of the systems that are currently available.
Just 5%-10% of forex trading between banks and their clients is estimated to take place electronically, either on the internet or over private networks. However, the electronic marketplace may be about to take off this year as leading banks in the foreign exchange market join together to create sophisticated multi-bank electronic markets that are accessible to their clients over the internet.
“All banks will eventually be forced on to web-based trading platforms. The buy side will demand it,” says John Key, head of e-commerce at Merrill Lynch. US research company Tower Group estimates that by the summer of 2002, as much as 75% of foreign exchange trading may be electronic.
“Transparency is often better [in the electronic market] than in the voice market,” says Richard Giltner, co-head of foreign exchange options at SG in Paris, commenting on web-based trading systems in general. “It gives equality to all players. In the voice markets, some clients have certain advantages but in an electronic market place, what you see is what is available.”
Two multi-bank platforms dominate the spot market for foreign exchange, one in the corporate sector (Currenex) and one in the fund management sector (FX Connect). FX Connect, part of State Street’s electronic multi-asset trading platform Global Link, has allowed institutional investors to trade electronically for around five years.
But it was only last year that the system was opened to multiple banks, allowing users to trade with a range of counterparties other than State Street. In our poll, users rate FX Connect top for its reliability and for the efficiency of the system’s straight-through processing capability.
The platform, which is registering between 4,000 and 4,500 transactions a day according to one financial analyst’s estimate, also rated top for liquidity. But, although users rate the system highly, the service is limited to State Street’s fund management client base and is therefore unlikely to dominate the market for foreign exchange.
Even though FX Connect has been converted into a multi-bank system in the past year, not all users polled have yet been able to access multiple banks over the system.
“The number of banks you can access on FX Connect is growing but there is still no effective multiple quote system,” says one London-based fund manager. In addition to its transformation from a single-bank to a multiple-bank trading system, FX Connect has recently mirrored a slimmed down version of its private network trading platform over the public internet.
Currenex, a California dotcom startup, is the early leader in online foreign exchange trading in the corporate sector. It was founded by AOL’s former head of business-to-business e-commerce, Lori Mirek. Ms Mirek, who is now president and chief executive of Currenex, has worked for technology companies Sun Microsystems, Oracle and Netscape and spent much of her time at AOL looking at inefficient markets that would be suitable for an internet revolution.
All Currenex users that responded to our poll praised the system highly. Stephen Picininni, a vice-president in Mastercard’s treasury department, says: “This new system is much better than having six people all shouting down the phones at the same time.”
Using Currenex has helped Mastercard to cut its internal foreign exchange dealing team from six to one principal trader plus one person back-up. However, respondents expressed fear that not enough banks trade on Currenex and that banks’ commitment to the site may decline after the launch of two new sites backed by the leading foreign exchange banks.
Users of Currenex say the system works well for deals of between $2m and $25m and that deals of up to $50m are probably possible. However, when they have had larger transactions to put away, they have used more traditional voice-based dealing.
Mr Picininni says he can usually expect six or seven banks to give quotes. “The fact that we regularly get six quotes at once makes it competitive,” he says. Timothy Power, a vice-president at Intel’s corporate treasury, says he regularly receives five or six quotes but that this rapidly tails off outside US trading hours.
But because he needs to trade currencies on average between 10 and 20 times a month, he finds the problem with Currenex is that not enough people use the system. “If more companies used the system, we would see more banks quoting,” he says. Although Currenex is younger than FX Connect, it was the first system to offer users simultaneous access to multiple banks. The site was founded in June 1999 in Menlo Park, California and Currenex also has offices in London and New York.
More than 25 banks now offer prices through the site and independent analysts estimate that trading on it has breached the $300m-per-day mark. According to our poll, Currenex is the easiest system to use and offers the best price discovery. Users are also the most loyal, giving the platform top marks overall.
They particularly like the reverse auction process by which they can request simultaneous quotes from several banks. Once their request goes out on the wires, banks have 25 seconds to respond. The offers are presented simultaneously to users, who then have five seconds in which to decide which, if any quotes, to accept.
Outside the spot markets, forex options and derivatives are also set for rapid expansion. The first operational derivative site specialising in forex options, Volbroker.com has been trading since August 2000. The online trading platform was originally conceived by Deutsche Bank and backed by Citibank, Goldman Sachs, JP Morgan, Royal Bank of Scotland and UBS Warburg.
It now has 500 individual desk users at 40 institutions in three time zones. Although some Volbroker.com users approached in our poll complained of technical teething problems, chief executive Dirk Ward says recent network faults have been tackled.
Not all forex innovators have been immediately successful, however. Last summer, another web-based foreign exchange provider, CFOWeb, tried and failed to challenge Currenex’s early lead in the corporate sector. “CFOWeb tried to drink the ocean,” says David Woods, a managing director at ABN Amro who is responsible for e-commerce.
“It tried to offer all products for all people where it should have started with just one or two products. In the end, it was too slow in bringing banks and their clients together.” Despite the involvement of 10 large financial institutions, including ABN Amro and Bank of America, users say that, dogged by technical problems, the system never really got off the ground.
One foreign exchange trader at a London bank says: “We used to trade over CFOWeb but it wasn’t any good and was removed from the system.” CFOWeb.com’s developer, a systems company called Integral which has now signed a contract with three of the industry’s largest foreign exchange banks to develop a new trading platform, declined to comment on the current status of CFOWeb.com.
The market is speculating about what will happen to the existing trading platforms when two new platforms, backed by the leading foreign exchange banks, go live later this year.
The three largest banks in foreign exchange trading, Citibank, Deutsche Bank and Chase Manhattan, have pitched together with Reuters to create a multi-bank trading platform called Atriax, while a group of 14 heavyweight banks that together control more than 70% of the foreign exchange market have joined up to create FXAll.
The participating banks include Bank of New York, CSFB, Goldman Sachs, HSBC, JP Morgan and Morgan Stanley Dean Witter. Phil Weisberg, chief executive of FXAll, says: “There will be some consolidation in the industry but it is premature to discuss how that consolidation will take place. It could be across asset classes, for example.
There is space in the market for more than one platform. There are clear precedents in clearing systems and stock exchanges.” Robert Iati, a senior analyst at Boston-based financial research company Tower Group, says: “The big bank consortiums will succeed through their sheer size and industry clout.”
He is not alone in believing that the launch of two blockbuster foreign exchange trading websites will take business away from existing systems. Merrill Lynch’s Mr Key says: “The market is unlikely to sustain more than two players in the long run, especially since clients would prefer it if there was just one.”
Although late on to the scene, these sites have promised to transform the spot, option and forward foreign exchange markets. Atriax was officially launched in late October last year. Between them, the three principal banks behind Atriax are thought to have a 30% share of the foreign exchange market.
So far, they have invested some $80m in the site. Headquartered in London, Atriax also has offices in New York, Tokyo, Singapore and Silicon Valley. Martin Haines, marketing director of Atriax, says: “We already have the liquidity – without that you can’t have a market. We have the proposition and now it is up to us to go out there and provide it.”
Although trading is not scheduled to start until some time in the second quarter, Atriax has already attracted more than 60 banks and hopes to attract up to 150 banks to offer foreign exchange trading in more than 100 currencies and other financial assets through the site.
Atriax chief executive Dan Morehead is preparing to roadshow the system in 15-20 cities in March. Like Currenex, Atriax users will be able to trade currencies on a reverse auction basis, but Mr Morehead says the system will allow users more flexibility in how they trade.
“This is a very competitive market and we believe banks and non-banks will use the cheapest system regardless of ownership. Atriax is a neutral platform that doesn’t favour the buy side or the sell side. To Atriax, both sides are clients,” he says.
Although the rival launch of FXAll lacks Atriax’s technical partnership with foreign exchange industry heavyweight Reuters, it has a slight head start – it has already begun to market the system to potential users.
Its original investors include Bank of America, Credit Suisse First Boston, Goldman Sachs, HSBC, JP Morgan, Morgan Stanley Dean Witter and UBS Warburg. It is based in New York, with offices in Europe and Asia. FXall chief executive Phil Weisberg hopes to see the first trade go through before the end of the first quarter. He has already hired a multi-lingual help desk prepared to give 24-hour support in languages ranging from Portuguese to Japanese.
“We are confident in success. This thing has been built to scale from the word go. No-one is taking any short cuts here,” he says. Users will be able to connect either over the public internet or over a private network.
Although Mr Weisberg would not be drawn on the costs to banks of developing the site (analysts put it in the tens of millions of dollars), he sees the return chiefly in terms of the significant back office savings for both banks and their clients.
“Why are the banks doing this?” says Mr Key. “Turkey’s don’t vote for Christmas. It is a case of: if they don’t do it, someone else will. Banks are being dragged along kicking and screaming. Multiple pricing leaves virtually nothing on the table for them.
Margins have already fallen to the point that unless banks are absolutely on the wire with a price, they do not get to trade.” The launch of FXAll and Atriax has shown banks’ commitment to multi-bank trading platforms and is likely to lead to significant changes in the industry.
However, not all clients think it is for the best. Some fear that banks’ recent co-operation could solidify into a cartel-like relationship. Intel’s Mr Power says: “We don’t really want a system set up and controlled by the big banks. We want independent control.”
Finding the right balance between bank and non-bank control of the new market has not been straightforward. CFOWeb, for example, had the moral high ground of bank independence but in the end it was too independent and failed to get enough banks working together. Currenex is also proud of its independent pedigree.
Although Barclays Capital has a stake in it, its main investors include Amerindo Investment Advisors, TH Lee, Putnam Internet Partners, William R Hambrecht and DLJ. At the end of November, Royal Dutch/Shell came on board with a $11.5m investment, taking the site’s total investment backing to more than $50m.
Another difficulty has been persuading companies to abandon voice-based trading, despite the disadvantage many clients feel in dealing with individual banks by telephone. Several treasury departments polled by The Banker were not yet ready to conduct foreign exchange trades electronically.
A Cable & Wireless spokesperson says: “There is a feeling that the traditional method of direct contact is better in terms of the consultancy element, particularly for large deals. Several banks have presented products to us and we might use these in the medium term for smaller and medium-sized deals.”
What worries corporate treasurers is that they may no longer be rewarded with better prices brought by cultivating lasting trading relationships. “For the moment, large deals are always going to be done by phone, simply because there is going to be an element of negotiation and reward,” says the deputy treasurer of a large continental European car manufacturer, who has looked at one web-based trading site but not pursued internet trading yet.
There are also fears about security, however, particularly about systems that use the internet. Although the slow rollout of high-speed internet access in Europe is another hurdle that web-based systems face, FXAll’s Mr Weisberg says in development trials the public internet came out better in many of the benchmark tests than the private network.
This may be surprising but it is supported by our poll in which users rated web-based Currenex above private network based FX Connect for speed. Another new player, Gain Capital, which focuses on the needs of the small to mid-sized FX trader, allows clients to deal instantly from live, streaming quotes. “This is a significant departure from the market standard ‘request for quote’ pricing model employed by the vast majority of online FX platforms,” says Gain chief executive Mark Galant.
“The ability to deal directly from live bid/ask prices ensures price transparency, simplifies the dealing process to support faster deal execution and promotes dealing anonymity, which precludes price ‘shading’ or ‘reading’,” he says. Online trading is in its infancy and its growth is taking place against a background in which corporates have found that liquidity, while at times excellent, can also be patchy.
“Not all banks are sitting on the other side waiting to respond,” says Mr Power. Although Currenex, for example, is rolling out its activities in Europe and Asia, companies say it can be hard to obtain quotes outside US trading hours since Currenex is strongest in its home market.
“It can be hard to get a quote outside the US time zone,” says one corporate treasury employee. “When I want a price, I want 10 people giving me quotes, not just one or maybe two.” The Banker approached approximately 50 corporates, banks and fund managers targeting those with experience of multi-bank electronic foreign exchange trading to rate the systems they use.
At present, less than one in 10 leading companies trade foreign exchange electronically, but 15 treasurers, fund managers and other professionals involved in foreign exchange trading were confident enough to give their views on this emerging technology (see table).
Useful websites:
www.fxall.com
www.atriax.com
www.currenex.com
www.cfoweb.com
www.volbroker.com