“I don’t know what to say,” said one UK fund manager when we rang him to ask what he thought about a particular bank’s equity trading offering. “I’m not a great fan of it. The performance is atrocious.”
This was not the response we had expected. As part of our assessment of the 160 or so sites that we were shown for the 2001 internet awards, euromoney.com asked the banks to provide names and numbers of people who used them, to get some user feedback. The bank that recommended this fund manager considers itself unrivalled in its ability to gauge client satisfaction.
Some of the site users that the banks gave us were particularly enthusiastic, but then most of them turned out to be former employees of the firms that had recommended them. Nice try.
This reveals a serious point: banks still have some way to go before they can say they know what clients want, especially in trading. They have even further to go before they act on it. They have, on the whole, done an excellent job of improving web offerings over the past year. The analytics now offered by some firms are impressive, bringing new levels of transparency, giving clients the same portfolio modelling and pricing tools as the banks use themselves. Research sites are also becoming far more intuitive, even if most clients prefer to receive research by email. But that’s where the good news ends.
Where banks distinguish themselves in online excellence is often in trade execution. Yet there is no consensus on how this should work. Many banks are evangelical about their single-dealer trading platforms, yet admit that these won’t survive for long. Others tend to assume that trading will move to multibank sites. Few people have questioned this, but it may be wrong. What’s more, almost all e-commerce bankers openly criticize multibank sites for being costly, for doing poor volumes, and for following bad business models.
Amid all this confusion, some banks do excel. UBS Warburg wins the largest number of internet awards because of its focus on transparency and on niche services. JPMorgan Chase is close behind with its excellent suite of online derivatives tools. And Morgan Stanley performed well again, especially in equities. Although it didn’t notch up the awards, Goldman Sachs again demonstrated excellent and highly regarded online platforms, mainly centred on WebET, the multiproduct trading platform. Our journalists have described the winning sites in more detail.
But, for the second year running, no one bank stands out as the best overall in online wholesale finance. For that award, we were looking for a bank that excelled in all the disciplines – forex, equities, fixed income and derivatives – and could perform from pre-trade research and analytics through execution and settlement. And we were seeking a bank that works best with its rivals to find multibank solutions to give clients what they want. Several came close, but few can truthfully say that it is client service rather than politics that pushes them into multibank initiatives.
Selling bad news
If the e-commerce enthusiasts at banks are going to do a better job of getting clients to accept the web for trading, they must make sure that their colleagues accept it too. The senior e-commerce executive who described himself to euromoney.com as the “grim reaper” might want to reconsider his image.
As one forex trader says: “My job may be at stake. I’m going to be replaced by machines!” This fear is not abating, even though few redundancies have sprung from web initiatives. Jonathan Chenevix-Trench, managing director, head of European fixed income at Morgan Stanley, says that he wants the bank’s online tools to help the bank’s staff, and they are trained in how to use them. “We don’t want people doing stuff that can be done by technology, and we want people who can adapt,” he says. “European fixed income is on a very steep growth curve and one of the only ways we can keep up without significantly expanding the headcount is through leveraging technology.”
Especially with analytics, bank staff use the sites as much as the clients, if not more. Thorkild Juncker, managing director at JPMorgan Chase, says: “You can’t tell where the internet ends and the business begins – it is completely integral to the whole business model.”
Nervous traders aside, internal acceptance of banks’ web offerings is clearly improving. This is in part because the firms are cleaning up the reporting lines for e-commerce initiatives. Almost across the board, e-commerce groups are no longer their own little empires, spending lots of money with little to show for it and no-one to answer to. Mike Zamkow, managing director at Goldman Sachs, says: “E-commerce is integrated into each business unit. It is not separate and competing with each business.” This may seem painfully obvious, but too may banks were getting this wrong 12 months ago.
Once the job of internal acceptance is done, banks move on to rolling out products to clients. But they must be careful not to be too heavy-handed. One bank admitted that if it has small clients that insist on doing simple trades on the phone rather than on the web, then those clients will find that they are slowly cut off. It would rather not deal with that client at all than spend valuable time on the phone to him. That is bad news for clients who are stuck with slow internet connections.
The great trading debate
Online trading is where firms come unstuck. Whatever banks say about their fancy internet-based trading platforms, Bloomberg is still the dominant force. Last year, one bank alone traded $22 billion to 22,000 customers just through its Bloomberg channels.
Lou Eccleston, a director at Bloomberg who manages the network’s trading platforms, rejects the idea that the net is a threat. He doesn’t have a strategy for defending Bloomberg against the internet, saying that he doesn’t need it. “If I’m not confident, we’re all in trouble,” he says.
Bloomberg has its critics. Some banks are frustrated at being constrained to Bloomberg design and standards when building new pages. One vice-president of fixed income e-commerce at a large bank says: “The problem with Bloomberg is it’s not very transparent as a service. Also, both Bloomberg and Reuters are now competitors of ours in brokerage. If a rival broker set up a site and wanted all your business and contacts on it, would you do it?”
But the internet still has problems with reliability, speed and security. “All the net is, is telephone lines,” says Eccleston. “Everyone likes to make a big deal of it, but that’s all it is. It is a network that no-one is responsible for. No-one is watching its reliability or security.”
Internet enthusiasts beg to differ, saying that the flexibility and mobility of the web make it ideal for trading. But few clients trade on the move. Since investors already have Bloomberg open all day, they would often rather trade through that. Bloomberg isn’t standing still. It is working to improve its platforms all the time, but until a better product comes along, it is not going to panic. And in any case it is available on the internet.
Despite Bloomberg’s strength, several banks have set up single-dealer websites. These are almost all sophisticated click-and-trade platforms. At the same time, multibank initiatives have come along to do much the same thing, except that they are request for quote systems, with indicative prices only. These systems are, as one head of e-commerce jokes – email on steroids. But they work.
Almost every bank worth its salt has a proprietary forex trading platform. CSFB, Goldman Sachs, Deutsche Bank and Merrill Lynch are the only ones that do the same for bonds. The banks that can’t offer this are quite jealous, but don’t like to admit it. They say they are a waste of money, that Goldman Sachs has built a Ferrari when it only needed a Fiat Uno. Rumours about how much WebET cost vary wildly, but it certainly wasn’t cheap.
Goldman Sachs is adamant that it has built a quality tool for its clients. Zamkow says: “We obviously don’t think it cost us a fortune. We think we have a bargain. If we didn’t think we had a bargain, we would have shut it down, not put every other product we had on this.”
Zamkow also answers criticisms that clients just use WebET to find prices before calling a rival to do the trade. “We think that’s great, he says, “because in these products, we are crushing competitors’ profit margins. If somebody can pay a salesman, pay a trader and tighten up my spreads on a 10-year Bund, good luck to them.”
The rise of the single-dealer site is also giving rise to a new generation of sales people. And not just the fabled value added sales person who has more time to structure complex deals, but the one who has got the joke. One fixed-income e-commerce head says that he has a salesman in New York who has signed all of his clients up to the bank’s web trading platform and happily sits reading the newspapers while his commission rolls in through the internet. Nice work if you can get it, and he probably won’t have it for long.
Single-dealer sites will be around for longer than most people thought, and they can live alongside Bloomberg platforms and other trading systems. Even Morgan Stanley, which in 2000 rejected the whole idea of proprietary web trading, is building its own fixed-income trading platform and a platform for forex. It says it will cost a tenth of what other banks spent building theirs.
Multibanks pick up pace
The only problem is that single-dealer sites do not do what investors want. Malcolm Jones, head of fixed income at Aegon in the UK, says: “We don’t want 20 different systems – we want a couple of solutions at most. A multitude of banks means a multitude of problems. Multibank systems are the preferred way forward for most of the buy side.” The same is true in foreign exchange, hence the launch of FXall, Atriax and Currenex.
And the banks know this. Stuart Clenaghan, head of fixed-income e-commerce at UBS Warburg, says: “We have asked our clients and we think we understand them. We don’t think there is any one client who just wants to deal with one dealer.”
TradeWeb is still the most successful multibank bond trading platform. Its staff joke that they are getting fat on all the beer and pizza evenings they enjoy when they hit monthly trading records. It is difficult to argue with its success. Its cumulative trading volume since launch in 1998 hit $5 trillion in July 2001. And TradeWeb Europe’s trading figure for September 2001 was e25.6 billion. The platform continues to sign up high-profile dealers.
The platform is an evolutionary step from the phone. An indicative pricing screen shows investors the dealers’ bids and offers. The investor then sends a group of those dealers a request for a quote, and the traders come back with firm prices.
The platform now trades US treasuries, US agencies, CP and MBS. In Europe, where it already trades euro sovereigns, it is about to start trading Pfandbriefe, then European supras, then EuroCP. Towards the second quarter in 2002, it will even start trading high-grade corporate bonds. It says it will overcome the difficulties that other platforms have had here because it is already established and already has a set of well-regarded dealers.
But it has problems. Banks say it is expensive to join. Dealers with an equity stake are rumoured to have paid several million dollars. And other dealers pay a hefty fee for every market on the platform that they use – just to access their own clients. But TradeWeb has a business to run. Roger Jones, managing director at TradeWeb Europe, says: “It’s all about customer demand, and we have reasonable charges for providing a tremendous service.”
But that’s not the only reason why some banks dislike the platform. As one head of e-commerce at a leading bank says: “Traders hate TradeWeb.” It makes traders uneasy that although they can see the indicative pricing screen, they cannot see what the other traders are quoting back to clients. “That doesn’t make a lot of sense,” says Steve Hall, vice-president at TradeWeb. “On the phone they don’t know that either.”
A further problem with all multibank trading platforms, whether in forex, governments trading or credit, is that banks often join them for the wrong reasons. Most of them have good intentions – they work hard to make sure that sites have the right functionality for their clients. But some say that they are interested only in the shareholder value that may come from investments in these platforms. If they are, they may be waiting for some time before they see decent returns. Another trend, on the part of smaller European banks in particular, is to join multibank initiatives in an effort to join the Wall Street club. It seems like a high price to pay to convince clients that they have friends in high places, and it doesn’t look like good client service.
Unfortunately for banks, the only real alternative to request-for-quote sites is exchanges. And that is even more unpalatable. Banks are reluctant to throw weight and money behind platforms that allow clients to trade directly with each other. One forex exchange site, Hotspot FX, has encountered just that problem. CEO Howard Silverman says: “A lot of banks have their own agendas.” Another online exchange model, BondBook, had difficulties getting illiquid credit to trade online. It has now shut down after banks withdrew from the project.
But exchanges may be a way forward. They are not perfect by any means. They will probably only ever work for high-grade credits, as traders do not like too much price transparency lower down the credit ratings. They are also best suited to relatively small ticket sizes. And they raise questions about the relationship between banks and investors during volatile periods. The whole idea has certainly taken a knock since BondBook closed down. But it wasn’t necessarily BondBook’s model that was wrong – it was its timing and its ability to manage expenditure.
If banks don’t want to develop the exchange model, and there are plenty who rubbish it entirely, then they would be well advised to stop making off-the-record jibes about TradeWeb, as that will dominate at least in the medium term. Some dealers may be waiting to see if exchanges prove themselves. They never properly supported BondBook, so CoredealMTS has become the test case. Sometimes they lack the right pricing engines, but with all the electronic platforms around at the moment, all of the brokers will have to build these soon. The truth is that banks love to hold on to opaque markets – it’s where they make their money. And e-commerce chiefs are no doubt hesitant to go to the board and ask for yet more cash to build a whole new trading platform. They must be even more hesitant to admit that they have to scrap older websites after all that time, effort and money.
