Technology can provide banks with the answers to their FX trading problems but only if they ask the right questions, says Mark Pelham.

Which came first: the technology or the trend? There are two schools of thought in the foreign exchange (FX) markets. First, that the increasing use of technology has facilitated volume growth through greater client awareness and access; and second, that technology has helped banks and their clients deal with increased volumes that would have been generated in any event. Either way, technology has changed the dealer-client relationship and looks set to continue doing so.

This was not always the case, according to Justyn Trenner, principal and CEO of research analysts ClientKnowledge: “Banks initially thought that technology would answer many questions that it doesn’t, such as how they can get tighter spreads or conjure up liquidity. Therefore, over the first three or four years that they were seriously looking at technology, some asked themselves the wrong questions. But over the last year, banks are increasingly exhibiting a real understanding of the questions that technology answers.”

Justyn Trenner: banks finally understanding

Cost considerations

Key among those questions is how to execute trades more efficiently and cost effectively. Anecdotal evidence suggests that the typical cost of a telephone-based ticket is around $20, whereas the typical marginal cost of an e-ticket is negligible. Even when the cost is fully loaded (allowing for technology investment), estimates are that a ticket costs in the range of $5 to $10.

Furthermore, Mr Trenner says: “If your e-ticket data has been properly entered by both the buy and sell side, the probability of a failed trade is radically reduced. This also reduces the time and costs a bank has to allocate to cleaning up trades.”

It is not just a question of cost-saving. Ed Hulina, global head of FX marketing at UBS, says: “Technology allows providers to make more prices, more quickly, and provides a level of transparency that never existed before. From our point of view, the volume of tickets we process has roughly tripled in the last few years, while our head count has remained more or less constant. We could not have dealt with this tremendous increase in volume without e-commerce, without having online tools and high performance technology platforms to enable us to broadcast prices and capture deals from our clients.”

Mr Hulina believes that clients too are benefiting from the increasing use of technology, whether or not they deal electronically, clients are now getting price discovery from e-technology. And those who have adopted online trading, to the extent that the tools on their desktop enable them to execute trades, are finding dealing online is a more efficient alternative to dealing over the phone.

Ed Hulina: unprecedented transparency from IT

Made to measure

Some FX customers have gone even further than adopting a click and trade model. Mr Hulina cites the example of Siemens Financial Services: “Siemens has a very sophisticated, proprietary, stochastic model that essentially looks at the market and generates frequent trade signals. While this was highly automated for them pre-trade, it still required someone to look at those signals and execute trades in the market. We then gave them an application programme interface to our trading system and linked the two together, so now everything happens automatically, which is critical to Siemens since their model is intraday and generates loads of signals. There is still human supervision, but no manual intervention in the trading process, which automatically books the trade into their system.”

Taking such a bespoke approach is becoming increasingly important, according to Vikas Srivastava, MD and global head of foreign exchange e-commerce at Citigroup: “In the last three to four years, we have seen a divergence between different client segments as to what is needed and what needs to be supplied to maintain our relationship and the volume of business. As a result, you cannot use a broad brush to create dealer-to-client connectivity.”

Vikas Srivastava: divergence of client segments

Client segments

Mr Srivastava says that, although there are many client sub-segments and the approach to implementing FX technology must be on an institution-by-institution basis, they can be grouped into four major segments – real money managers, corporates, hedge funds and buy-side banks.

For real money managers, he says: “Their FX needs are a function of what gives rise to their FX trading in the first place – is it a question of somebody trading because they have bought some international equity, or are they doing FX because they have a currency overlay programme? The answer will drive the type of risk advisory services we provide them with and which channels they will use to execute that business.”

For corporates, Mr Srivastava says the prime consideration could be to get quotes from three dealers, for example, as soon as a ticket hits a treasurer’s desk and quickly execute at the best possible price. Alternatively, it could be more important to aggregate the needs from all of a firm’s subsidiaries and net them, therefore minimising the transaction cost.

With hedge funds, however, minimising slippage is generally the principal requirement. They may also occasionally want to access a large amount of liquidity in the market in the least disruptive way.

“Perhaps the clearest illustration of the need for a flexible approach is with banks,” Mr Srivastava says. “As margins have thinned and commoditisation and consolidation have increased, some sell-side banks have become buy-side banks.”

Unlike a corporate, such banks’ prime need is to access liquidity and technology to maximise their internal efficiency and ability to serve their customers. Such technology will help them to distribute prices more efficiently throughout their organisation and on to their clients, possibly utilising white labelling.

“A bank’s product offering has to be flexible because there is no single channel that suits the needs of everybody,” Mr Srivastava concludes. “It’s about understanding what underlies the business and supplying technology that fits. If it takes longer to get there that way, so be it.”

The technology imperative

Even though it can be time consuming, banks and their clients ignore technological progress at their peril. Andrew Coyne, head of FX prime brokerage and e-FX for Europe at Deutsche Bank, says: “No one can afford to ignore the changes that technology brings to the marketplace. For example, although awareness of FX prime brokerage and its benefits is growing rapidly, product volume will not continue to grow unless people employ technology that makes dealing quicker and more accurate. It’s not unreasonable to expect that in a year’s time all prime brokerage ticket flow will be electronic and trade matching will be done within a very short space of time. Today, people are used to things taking a bit longer with the manual prime brokers, but I don’t think that is acceptable, as the technology is available to everybody.”

To soon for some?

That is not to say that technology should be compulsory. Mr Coyne says: “No one has to do business electronically, but it has to be an available option. Each client is different and banks have to accept this – we can’t force people to change their business models for our benefit. Admittedly, there are stories of banks trying to force small clients to go electronic because it suits them, but it’s short sighted because they will force them away. The key is to offer a choice – some clients just won’t want to deal electronically, and that’s absolutely fine.”

Ultimately though, the vast majority of clients are expected to adopt technology. Mr Trenner concludes: “I think it’s a win-win situation for both banks and their clients because you are simply eliminating frictional costs. Once clients are integrated with at least a couple of providers, there is enough competitive edge in the marketplace to ensure that clients will be able to get the best price.”


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