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"We’ve been successful because we built a scalable way to distribute liquidity. We got lucky that it worked and nobody else caught on for a few years"
Rhomaios Ram, Deutsche Bank |
Back in the old days when foreign exchange dealing was transacted primarily by telephone, if you asked who the best trader in the market was, you would invariably be told that it was someone at one of the big banks who was running the book in one of the main currencies. There was an element of truth to such views but there was as much chance that the market’s best dealer was hidden away trading a minor currency at a small institution.
Looking at today’s market, Deutsche Bank’s Autobahn trading platform is frequently described as setting the benchmark for what an e-commerce offering should provide. But has Autobahn’s reputation been exaggerated because it belongs to Deutsche? After all, Deutsche is easily the market’s biggest sell-side player, with a huge 19.3% market share according to the Euromoney2007 FX poll.
What seems clear is that the success of Deutsche and the reputation of Autobahn are inextricably intertwined. But is Deutsche successful because of Autobahn, or vice-versa. What is the cause, and what is the effect?
Synergies
Autobahn was originally launched as a fixed-income offering in 1996. In 2000, with the dotcom boom in full swing, Deutsche formed an e-commerce group and decided to rebrand all of its trading platforms as Autobahn. "In principle, we were looking for synergies," says Rhomaios Ram, the bank’s global head of e-commerce sales.
Oral history – which is readily embellished with half-truths – suggests that Deutsche Bank’s foray into e-commerce, like that of UBS, was a roll of the dice from a bank that had nothing to lose; in effect, the myth says, Deutsche was only a bit player in the FX market. In reality, that is not true. Even in 1997, Deutsche was a top-five player, with a market share of 4.8%. It was not the powerhouse it is now but it was still a big player.
There is no doubt, though, that luck has played an important role in the bank’s development over the past decade and much of this centres on how Autobahn has developed. When the platform was rolled out for FX in 2001, it was originally offered as a white-label solution to second-tier and third-tier institutions. It was not envisaged that it would be used as such an important direct link between the bank and its clients.
Deutsche declines to say how much volume goes over the platform. However, with a 19.3% share of what is now likely to be at least a $3.5 billion market, Autobahn could conceivably be the biggest trading venue in FX. Market sources say that Deutsche manages to internalize as much as 85% of the platform’s flow, which suggests that there are some extremely smart risk management programmes behind it. It also suggests that it is extremely profitable.
Autobahn is now far more than the mere interface through which the bank’s clients access liquidity. In fact, the interface – or the front end – is becoming increasingly less important as a business differentiator. "Traders primarily want it to be fast and reliable. But fronts ends are relatively homogenous," says Ram. "Last year, there was a lot of pressure to build a new front end. But we decided to spend a lot of time and money clearing up the processes and that proved the correct thing to do; nothing broke in August, when the system was really put to the test. Increasingly, the front end is not the most important of the chain. All of the big banks have legacy systems, and we’ve spent years now ironing out so we have one system across the business. Every year, even though we’ve done a good job, we have to rip things out."
In or out
Autobahn’s technology has all been developed in house. Perhaps surprisingly, Ram says this is something the bank would consider changing. "Autobahn is a machine. It’s a trading engine and we have the people that helped develop it sitting and watching it to develop it further. But my current thinking, though, is why do we need to build everything in house? If we can get something off the shelf that will be serviced by the provider, why not look at using it? Technology changes so fast, if you are using another company’s system, they can do the updates and servicing," he says.
In theory, Ram reckons some banks might take this concept a stage further. "Perhaps one day we could even see the whole outsourcing of a bank’s FX business to one of the smart, technology-led players. They don’t have the problem of having to rip out old technology. When you’re a big institution the will to make that change is sometimes hard to summon up."
For Ram, technology remains a means to an end. "The bit that’s important is the pricing, the risk management and the business logic. My philosophy is changing. I’m becoming less convinced that owning the technology is so important."
These statements get to the core of what Autobahn is and what it does for Deutsche. It is almost as if it has been cloaked as a dealing platform, when the reality is that it is a trading engine that could in theory be accessed by anyone else’s front end. It almost sounds as if Deutsche is preparing itself to adopt the model pioneered by the London futures and options exchange (Liffe) when it went electronic a decade ago; instead of providing front ends, it encouraged independent software vendors to do the job for it.
Ram recognizes the similarity but plays down the likelihood of Deutsche becoming a quasi-exchange, even if that is what it effectively is. "It depends what you think you’re good at. We’re good at selling liquidity, not technology. My reason isn’t a budget constraint. It’s just that things are developing so fast that if you lock yourself into a technology, you could be stuffed in two or three years," says Ram.