Clients of UBS and the other banks listed above are thoroughly spoiled for choice when it comes to forex trading connectivity. Any of those banks can and will go to extraordinary lengths to ensure that clients have the fastest, most reliable and most appropriate trading technology, in whatever format those clients choose.
UBS is simply the most ambitious bank in this area. At 70% of cash and 45% of options, it trades more foreign exchange products electronically than any other firm. It also routinely offers streaming dealable rates in larger volumes than most other banks. It can handle e75 million as a rule, and it is working on increasing that. For some clients it can already go further.
That means two things: first, that clients have an enormous amount of control over how and what they trade electronically; second, that the bank has excellent internal risk management tools. If a bank is prepared to auto-quote only up to e20 million in spot, and many do, it clearly is more worried that its risk management engines will fail.
In line with all the best banks in this area, the bank offers an open API, which is essentially a fancy way of saying that it can pump prices for execution into any interface. That interface could be a single-bank or multi-bank trading platform or a dynamic Excel-type screen loaded onto the client’s desktop. It can also link its trading systems directly to client’s trade order management systems or treasury work stations.
Also in line with the best banks in this field, it can offer executable streaming rates. Smaller firms tend to rely on requests for quote, so clients open a deal ticket, enter the amount they want to trade, and electronically ask the bank for a price. The bank can then generate the dealable price automatically or manually. All sizeable forex banks can handle this most basic form of electronic trading. UBS, however, in common with the very best banks, can pump out streaming rates that clients can theoretically deal on with one click. Most banks require two clicks, to avoid errors, but the infrastructure is the same. Again, the ability of a bank to do this demonstrates how accurate and fast its pricing engine is. As a further level of protection, UBS carries out instant electronic credit checks on clients as they trade.
UBS and the highly commended banks can also accommodate black-box traders. To do that, a bank’s pricing engine has to be extremely fast and accurate and with particularly strong risk management tools, otherwise these hedge funds’ algorithms will find mispriced currency pairs and pick them off relentlessly.
Deutsche Bank is particularly good at protecting its trading desk against such attacks. To do this it uses tools such as liquidity rebuilding, whereby if a client hits a favourable price for the maximum volume of, say, e50 million, that volume will then shrink and then take a minute or so to build back up to its original level. Deutsche Bank can also boast probably the most advanced order functionality. Compared with UBS, it executes a much smaller proportion of its volume electronically, but it is a quality service provider in this area.
The same can be said of Goldman Sachs, which, like Deutsche Bank, is proud of having built all of its forex trading systems in house. Again, it can handle unusually high volume limits, and it has sophisticated risk management tools.
Barclays Capital is impressive. As well as all the basics, it can offer streaming executable rates on forwards out to tenors of up to two years, and it also combines some commodities trading into its forex trading applications. At over 50% it executes an unusually large proportion of its volume online. And for certain clients it can price even larger volumes than UBS in executable streaming rates. It clearly has a very powerful infrastructure, and it could easily use that to help it rise up market share league tables in the same way as UBS has done in the past.
Citigroup is always solid in this area. There are some peculiar gaps in its execution offering, however. It cannot trade options electronically, and although its clients can place orders electronically, they cannot yet amend them.
Nonetheless, it clearly has one of the best systems of its kind, covering almost all of the key functionality outlined above. And on top of that, it offers some unusual and innovative products. AutoFX scans investors’ securities trading systems to find and execute required forex trades. Similar tools are on offer for cash management clients.
CitiFX Chief Dealer allows subsidiaries of large corporates to enter all their trades into a single point. The company’s head office can then send the required foreign exchange trade or trades to be executed at a trustworthy and transparent fixing rate. And FXCross allows pension funds and real money managers anonymously to match trades with each other. This entire application works based on transparent commissions and fixing rates rather than on spreads. Rival banks were initially sceptical that such a model would work, but the activity on Citigroup’s platform clearly shows that it is suitable for certain types of clients.
KA
