FX: Forex goes into future shock
When forex trading first harnessed the internet, banks tried to attract clients to their individual platforms. They soon faced the problem that some customers were obliged to seek the best price for every transaction. Hence the difficult birth and troubled childhood of multi-bank platforms. End-users seem little more happy with these systems than the rival banks that set them up. And before they have had a chance to digest their implications clients are being offered the prospect of trading directly with each other. Jennifer Morris reports on a market whose innovators may have taken a step too far
Author: Jennifer Morris
Campbell Harvey knew he had a captive audience. Stand up in front of a group of CFOs and suggest that perhaps they're paying over the odds for foreign exchange transactions and you very quickly become the centre of attention.
"They were all nodding and saying yes, the costs are huge," recalls Harvey, whose day job is teaching finance at Duke University business school in North Carolina. "So I pointed at one of them and said 'you have e10 million to sell'. Then I turned to another and said 'you need to buy e10 million' - you guys should be talking to each other.'"
It seemed obvious to Harvey and his then PhD student and now business partner Arman Glodjo that the online forex markets could do better. "The standard spread on a $1 million euro transaction is $500 by pips, then there are other costs, such as clearing and settlement, that add on around $25," says Harvey. That is too high. By slimming down the banks' role to preserving credit lines and providing a clearing mechanism, he estimates that end-users could cut the cost of doing a standard $1 million transaction in half and stand to save even more on larger deals.