Forexster throws down client-to-client patent challenge

When Forexster launched, it said it wouldn’t be just any new forex trading platform. It would revolutionize the market, taking banks out of forex trades and enabling clients to deal directly with each other. Banks and existing platforms scoffed at the idea, saying that while that model was attractive, the complex structure of credit lines involved would never work. Forexster begs to differ. Now it is filing for a patent to prove it. Still the banks think this is pie in the sky but if the patent works it could damage banks and rival platforms.

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Author: Tessa Oakley

"We have a reputation for being pretty nice people, astute but nice," says Arman Glodjo, co-founder and CEO of Forexster. "But this could blow up in a bad way for quite a lot of people if they force Forexster to seek justice."

This is fighting talk , and it is pretty audacious for the founder of a forex platform that is not yet up and running. Up to now, most of the big arguments in online forex have centred on which of the major platforms - FXall, Atriax or Currenex - has got the best banks, the most dealers or the highest volumes. But now Forexster, the new kid on the block, says that not only is it going to change the way that forex is executed but is also going to patent its technology, blocking any of its rivals from trying to do the same.

Forexster claims that by linking clients to each other through the credit lines they have with their banks it can provide a network to allow them to make and take forex prices from each other. So the banks are sidelined, becoming no more than one of many links in a credit chain. Glodjo says: "The only thing holding back our business model becoming a reality is banks' greed and fear of disintermediation, even in light of the fact that almost all the banks we have spoken to have said 'This is the future of FX'.''

Though banks may accept that they will eventually be disintermediated, they know that they are needed to set up the platforms to do it. So for them, and for other platforms, the mere idea of excluding banks from forex transactions in the near future is far-fetched.

Forexster has always known it has a battle on its hands. It has to challenge the banks and existing multibank portals just to get established. But it knows that rivals like the idea of linking clients directly to each other, so it has brought in its intellectual property lawyers.

Forexster has filed a patent application with the US Patent&Trademark Office, as well as an international application under the Patent Cooperation Treaty, which covers more than 100 countries, to protect the use of implicit credit lines. It says its claims range from the very broad to the very narrow, covering business methods as well as software programmes, so prime brokerage models, such as Currenex's Enhanced Market Access (EMA), would fall under the patent.

These claims are not yet publicly disclosed. The application was filed in November 2000, which means it is too early to allow for its publication. Should the patent be issued in two or three years' time, possible infringement would be enforceable from the date of publication.

Banks and other platforms dismiss Forexster's use of intellectual property law. Jim Kleckner, vice-president of products at Currenex, says: "There's a big difference between filing a patent and one being granted." Karen Steele, Currenex's vice-president of global marketing, adds: "It's a little out of step to file a patent before they [Forexster] have a live product."

But Forexster's lawyers at Californian law firm Fenwick&West believe they have a strong filing with a good chance of approval. Ed Radlo, Forexster's attorney, says: "When Forexster filed, its trading model was pretty well developed. A lot of software work had been done. We're very happy with our patent position. I'm extremely impressed with it."

The benefits of patent ownership are clear. An issued patent gives the owner exclusive rights to whatever has been patented for up to 20 years in the US. During that time, anyone wishing to use whatever has been patented, be it consumer products or business methods, must pay royalties or seek a licence from the patent owner. If they do not, they are in danger of infringing the patent, knowingly or unknowingly. If the patent owner chooses, this may result in long litigation to enforce the patent, including costly court fees, and a risk to the defendant of paying compensation.

Patents are designed to give their owners a monopoly on whatever is involved regarding the subject of their patent, which includes guaranteed market share. In Forexster's case, if its patent claims are granted largely unchanged, it says it will have a monopoly over the use of "implicit credit" in online forex trading, encompassing client-to-client and prime brokerage models. If this proves to be true, it would take market share from the multibank portals, not only Currenex, but also Hotspot FXi, a prime brokerage model launched by Hotspot FX and AIG. It would also hit Atriax and FXall, both of which plan to launch prime brokerage services this year.

Forexster says that Currenex is already on its list of possible patent infringers, because of its EMA product. But until its patent is published, it has decided not to approach Currenex because it cannot claim infringement of a patent that is not yet published, let alone issued. Currenex is not taking Forexster's claims seriously. Prime brokerage, it says, is not patentable - it is an existing way of conducting business that is not novel or non-obvious. Currenex says that if what Forexster is laying claim to is patentable, it is not the same as EMA. Steele admits Currenex does not know much about Forexster and its business model but that nonetheless it has no concern about its patents claims, or its competition. "It'll be interesting to see what they have, when they have it," she says.

Forexster's intentions in filing a patent are twofold. First, it would help it to succeed in establishing a share of the new market it is trying to create. In addition, it would mean that, because Forexster is sure that client-to-client trading is inevitable, banks would be forced to work with it as the only option in providing what their clients want.

Seeking to dominate a new market
Forexster claims the trading model it has designed is in the best interests of buy-side clients. It will take the banks' exclusive right to price from them and it will also create one, industry-wide forex exchange-type model. Atriax, FXall and Currenex all claim clients can trade with each other on their systems but they do not facilitate credit arrangements.
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Forexster throws down client-to-client patent challenge

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