Roundtable participants
CH, Euromoney What are the main developments that are driving the global foreign exchange markets today?
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Robson, Reuters: "The volumes done on
EBS and Reuters matching services has
grown, providing a more reliable price feed
for single- and multi-bank portals ." |
MRobson, Reuters The latest reports from Celent say that eFX is about 60% of interbank trading and about 40% of dealer to customer FX. By 2007, they predict that these figures will rise 90% and 70% respectively. The global banks have been the first to differentiate themselves, to improve service to customers, to take out costs and reduce some of the risks around trade capture and trade reporting. During the last couple of years the key themes have clearly been the establishment of multi-bank portals, such as FXall and Hotspot. There is the growing importance of FX prime brokerage. And there is the reduction in the price and complexity of technology that has broadened the appeal of eFX.
Initially the dealer portals – the single dealer platforms – were the Rolls-Royce product, afforded only by the biggest global customers. But as the price of the technology behind those portals has come down, Reuters and some of our competitors have moved to offering a hosted ASP model for provisions, so you need fewer staff who are trained to use this technology.
Also, in the interbank space the volume done on EBS and Reuters matching services has grown, and that's provided a more reliable price feed for engines to power the single- and multi-bank portals. We have also seen, in the last year and a half, the birth and rapid growth of prop trading from black boxes on the sell side, and that will continue to drive substantial growth.
CH, Euromoney Is that what you see from your perspective at FXall and Hotspot FX?
PW, FXall Yes, and what's interesting is that different sectors of the market want different things from e-trading. The traditional users of foreign exchange were looking for work-flow improvements rather than price transparency and efficiency, which they had already achieved. And there is growth there because only a third to a half are on-line. At the same time, e-trading has empowered a whole new class of investors to actively participate in foreign exchange markets. And because of the speed with which investors can now execute trading ideas a whole new dimension of trading strategies became possible.
Exchange evolution
CH, Euromoney John, if we're looking at the platforms, how do you see the platforms differentiating themselves?
JE, Hotspot FX The platforms are fundamentally different. There are marketplace exchange structures like Hotspot and there are RFQ structures. These different structures have evolved to suit different market participants, different points of the trade and provide different features to different depths in the market.
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Eley, Hotspot FX (centre): "The platforms are
fundamentally different and have evolved to
suit different clients at different points in the
trade." |
Looking at trends, clearly the change in technology has had an impact. As you remove points of friction, as you introduce APIs and FIX protocols, you can bring in short-term momentum models, statistical arbitrage models and very specific directional models that simply weren't viable before. That has been and will be the biggest driver of growth in our view.
CH, Euromoney Where do the banks fit in with this proliferation of different types of online platform?
SF, Bank of America Our job is to provide clients with a one-stop shop for liquidity, prime brokerage, execution and research. We can also provide market colour, insight to where we think the market's going, how they can leverage technology and a range of pre- and post-trade services.
EH, UBS Exactly. UBS was pretty early in adopting electronic channels as part of our business strategy. We embraced the change that we saw coming and invested heavily in our own single-dealer platform, and it's been a big success. We've also invested in plugging into various channels, such as FXall, and now Hotspot as well, and trying to source both our existing clients and their needs for execution over these various channels, as well as new clients that we don't talk to currently. But I think what we see going forward is another sea change in the FX market. There are a lot of competing offerings out there and banks can't just change investment strategies every time a new opportunity comes up. I think banks will make decisions about where to invest and what to plug into based on a realistic expectation of return on that investment and how it can benefit clients.
CH, Euromoney What about the investor perspective? How have you seen your eFX trading grow and what are the key issues as you see them?
UL, AG Bisset We decided to move to electronic trading as much as we can. As an overlay manager with large portfolios in basically three major currencies we end up having big trades on certain days when our model triggers and we need to trade without moving the market too much. In those cases it's good to talk to a dealer and have them spread it out on the market as much as they can. But for all the other smaller trades, we trade electronically. So we see very rapid growth for smaller trades in the more exotic currencies through electronic systems. It's more; it uses less staff and you still get some anonymity.
Centralization
MRzepcynski, JWH We've started to employ electronic trading, but it still hasn't met all of our needs. It's very good for doing non-information trades such as monthly portfolio adjustments. In this case, the portals are much more efficient than the telephone. But our motives for using these platforms are different from those of the dealers. The dealers want to cut transaction processing costs – the number of people involved in trading. And they want to eliminate the competitive threat of outsiders, such as a centralized system of trading. They do not want a centralized exchange that brings together all order flows because that could take away their competitive information advantage. Customers, on the other hand, want better execution services because, in a fragmented dealer market, there are search costs for the best price.
