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Skip Navigation LinksHome :: Back Issues :: Forex ventures beyond the phone

May 2001

Forex ventures beyond the phone


The development of online foreign exchange trading has lagged behind e-trading of other financial products but optimists predict it will account for 70% of the market by 2004 and 95% by 2012. The advantages are obvious, so why has take-up so far been so slow?




       
Henry Wilkes
The application of online technology to foreign exchange trading has taken a surprisingly long time to get going. One of the industry's leading players admits that the pace of innovation has been, until the last year, disappointingly slow. Only two online platforms are trading so far - the independent Currenex and State Street's Global Link FX Connect system. These will soon be joined by the new consortium sites FXall and Atriax.
Though no firm dates are yet forthcoming for when these will begin full trading, both are in final testing and are expected to go live this summer.
It may be that development of these online forex facilities has been held up by a lack of consensus among leading forex banks as to how to develop the sites and a reluctance to undertake investment. Some insiders even contend that certain of the bank members of the consortia sites have deliberately held back developments in order to buy time to perfect their own proprietary systems. Others simply have doubts about the benefits of the multi-dealer model for either dealers or end users.
The benefits of moving more business to online and other electronic systems would seem self-evident. By using electronic means to carry out the bulk of trading, operational efficiency should be greatly improved. Fully electronic systems offer a higher level of straight-through processing, ensuring that less time is spent on post-trade administration and vastly reducing the possibility of error, a major headache when manual input is used.
Although many forex dealers fear that online trading could hurt their profits, the benefits to customers in terms of easier access to research and analysis, quicker and more comprehensive price discovery, and more efficient processing and transparency, suggest that they will demand these services. That almost compels banks to undertake the necessary investment in time and money.
Henry Wilkes, senior vice-president and head of European foreign exchange at Brown Brothers Harriman, sums up the benefits for some players on the sell side. "The long-term advantages will come through straight-through processing and the associated benefits it brings for clients," he says. "Online initiatives also level the playing field as all dealers are able to get their prices out to clients equally, irrespective of size. We are more able to compete with the larger banks through these systems."
One of the chief unanswered questions for many on both the buy and the sell side is whether moving to electronic trading means a fundamental change in how forex business is conducted. Fear of the unknown has played its usual role, perhaps delaying innovation. But the extent to which patterns of behaviour will change is debatable. Some in the industry feel it is on the brink of a revolution but others believe that the change is more evolutionary than revolutionary.
Phil Weisberg, chief executive officer at FXall, thinks that the truth is somewhere in the middle. "At FXall we believe that online trading will revolutionize the way business is done, but this is really an evolutionary process," he says. "Over time, many things will change but this will not happen overnight." Lori Mirek, president and chief executive officer at Currenex, is also keen to allay fears. "There is certainly a significant change here," she says. "I think that many in the banks are worried about the prospect of disintermediation but this is not what we are about. What these systems do is offer a new way for all concerned parties to come together in a digitally efficient marketplace. The efficiencies gained will allow both banks and buyers more time to concentrate on their core competencies."
Although adapting to new technology is always challenging, it is important to remember that most developments are intended as a means to replicate existing processes much more efficiently, speeding the system up while reducing the possibility of costly mistakes.
Fabian Shey, managing director and head of global e-commerce for interest rates and foreign exchange at UBS Warburg in London, confirms this. "Electronic markets like FXall will play a significant role in the business from now on," he says. "But these systems are complementary to traditional channels, not an entirely new way of doing business."
Additional capabilities
Online protocols match the existing methods of price discovery and trading. Instead of ringing a bank for a quote, a buyer simply registers the inquiry via the screen. Where online systems score highly, though, is in the additional capabilities offered. Finding prices from a number of different banks in the past would have meant phone calls to numerous dealers. This can now be performed in a fraction of the time, as a quote can be requested from many banks simultaneously. As FXall's Weisberg points out: "You simply can't do this over the phone."
The flexibility of the various platforms is such that a number of pre-trade and post-trade procedures can be performed automatically, saving even more time. As well as improving price discovery and post-trade processing, the systems can be tailored to meet the specific rules of engagement required by each client.
Users are able to define the type of trades that each individual trader is able to make, set up warning systems and reminders if the value of a trade exceeds a certain level, and carry out much of the onerous but essential detail of trading. Electronic platforms also provide a full audit trail for all trades executed and quotes obtained. This latter is particularly useful for transparency, making report generation and justification of trades a much less tedious affair.
There's also reassurance for those worried that online platforms will take the human element out of the business. Although the telephone will play less of a role in the business, most of the platforms offer online chat facilities, meaning that interpersonal contact is still possible: only the medium has changed. UBS Warburg's Shey says: "Dealing online doesn't have to mean no human contact. Indeed, a well-designed discussion channel may actually enhance relationships."
Online trading may actually help to improve buy side/sell side relationships as less time spent on the actual mechanics of trading means more time available to focus on a client's needs. Stephen Smit, managing director of State Street's Global Link in Europe, points out that the system informs the dealer about who is making a request. Both sides know who they are dealing with at all times and are able to maintain their relationships. And online platforms do not, of course, prevent protagonists from picking up the phone and talking to each other whenever they want. The online system is not intended to replace the other methods but to augment them.
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