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Foreign Exchange

FX debate: The growing pains of foreign exchange

It’s not easy to see, but behind the trillions of dollars of FX trading a collision between new technology and traditional banking is changing the economics and mechanics of the business. So far, participants talk politely of cooperation.

FX debate participants 

JT, Clientknowledge Variety – both in terms of users and in terms of execution possibilities – is the name of the game in FX today. Which channels are the buy side around the table using, and why?

IB, Russell Over the next six months, we plan to compare what the various portals can deliver. Our main selection criteria for the portals we use is their ability to reduce trading costs, offer expanded liquidity and improve our post-trade functionality, all while improving transparency.

MG, GAIN Just about everything we do is electronic. We are both a price maker and taker on various portals. The majority of our business is done through single-bank relationships, and we also trade on EBS. As our business is based around electronic trading, when we need liquidity we go electronic.

UL, AG Bisset We do most of our large deals with client-specified banks so we don’t move the market against us. However, we do our small deals through electronic trading. Our currency overlay strategy is totally model-driven, so we have selected FXall. It allows us to prepare all our trades in advance, load them up into spreadsheets and send them off, which simplifies back-office procedures.

Ian Battye, Russell: as trade size increases, you need to interact with the trading platforms differently Ian Battye, Russell

JT, Clientknowledge Do voice trades have less measurable market impact? How does everyone avoid the hazard of increased price impact when dealing electronically? UL, AG Bisset It’s easier to use voice trades for larger transactions because your traders work with you to distribute them rather than you dialling up and trying to get rid of half a billion electronically.

MG, GAIN Our trades are probably a bit smaller. We do a lot of five million and 10 million dollar trades; $50 million would be a large trade for us. The electronic markets can absorb a $50 million trade relatively easily whereas two years ago $50 million was a difficult trade to do on most electronic exchanges, apart from EBS. When you get to half a yard, it’s a different story.

DO, HSBC The empirical evidence suggests that average ticket size has not increased in the past two years, while volume has. A proliferation of smaller programmes have migrated to the electronic media, whether through an ECN, a multi-bank portal or single bank portal.

JC, FXall At FXall we’ve seen average ticket size continue to grow but there’s also a very wide range. One of the key reasons for using an electronic channel is to benefit from workflow efficiencies and integration into other systems. A customer looks for those benefits for all of their trades, regardless of size. The fact that you are doing a large trade, on a multi-dealer system, does not necessarily mean it’s done in competition. By asking one bank to manage a large trade, the customer might get better results and less market impact. That can be done on FXall, and we provide, as part of the trading message, an indicator that the trade is not in competition. Then the bank can manage it accordingly.

LO, Market Media So instead of picking up the telephone, ringing a bank and saying: “Can I have a price in a hundred?”, somebody’s just putting it into the system and saying: “Can I have a price in a hundred”? Isn’t that a different type of trading to one where you have streaming prices coming into an electronic marketplace?

JC, FXall Some 98% of our trade requests are executed off automated streaming prices. But even for the largest block trades that might be priced manually, you can have that conversation entirely electronically and achieve the benefits of all the workflow efficiency tools and straight-through processing. Execution methods differ greatly depending on the time and the currency. One of the keys to success in electronic trading is to avoid the one-size-fits-all approach.

IB, Russell One significant issue for the trading platforms is whether the party requesting the price is anonymous or not. For a platform offering streaming prices, knowing the identity of the party accessing the stream is an important determinant of the risk profile in offering that liquidity. That is increasingly so as trade size increases. The sell-side want to protect themselves when they don’t know the identity of the client. Russell’s experience has been that platforms offer tighter prices in a larger amount if they know who the counterparty is. Therefore we tend to be driven to executing significant size trades directly with our bank counterparties in a disclosed environment.

MG, GAIN I think electronic trading is keeping the average deal size lower. Because liquidity at the lower range – call it five, 10, 20 – is so good and because the record-keeping is all done for you electronically, it’s easy to take a large order, spread it over time and piece it out at your leisure instead of trusting a bank to do it for you. The last I heard was that the average trade with EBS was under $3 million, but the minimum trade on EBS is $1 million. So there are lots of small trades in the marketplace and e-trading is facilitating that.

JT, Clientknowledge The average trade size has not moved that much but the standard deviation has increased materially. We have a lot of typically algorithmic traders doing ones and twos who can make a penny out of a trade but have very little cost associated with execution. Does that throw out new cost management challenges to the sell side?

SF, Bank of America I think it highlights the need for us to continue to invest in the space, focusing primarily on our infrastructures. How do we price and how do we risk manage? How do we pool it? How do we distribute it back out to market? How do we warehouse it? Some of these tools increase these challenges.

With new technologies, application programme interfaces, fixed connections and lots of smart people trying new short-term strategies, we spend a lot of time figuring out how to extract value from all types of clients. We struggle to extract value from multi-bank platforms – that’s no great secret. But we look at clients holistically. We’re extending our balance sheet, we’re processing other valuable products and services – research, strategy, capital introductions, prime brokerage – and it’s part of the overall relationship.

DO, HSBC As you have a wider spectrum of client interests and a broader book of business, with e-trading a growing proportion of that, you have to be more dynamic about how you manage the order flow and employ different strategies. It requires investment in capital commitment, but that differs depending on the institution itself. If you’ve identified it as an area of growth with increased demand from your client base, then it commands your investment of capital resources, personnel and strategies.

JT, Clientknowledge To what extent has e-FX been the driver of change in the market versus being symptomatic of those changes?

UL, AG Bisset I think it is symptomatic. The basic trend is driven by the fact that the world has become larger. Twenty years ago, pension funds in the US had no foreign investments. Now it’s all cross-investment across borders. That’s the main driver of the volume. Trading platforms and how we deal is merely the oil that helps that to happen.

Electronic retail boom

MG, GAIN I disagree with that to some extent. Electronic trading has enabled an entirely new group of people to deal in the market on the retail side. Our revenue growth is 23,000% in the past four years. We’re doing over $100 billion a month based off these new little guys, when just five years ago they didn’t have access. Now, a client doing decent volume with us can get a one- or two-pip euro price and that’s what is most important to them. And even someone with a $500 margin account can get a three-pip price in euro, 24 hours a day. It has spawned a tremendous amount of growth, at least in that market segment. The banks now see us as a liquidity aggregator, and they also want to get this flow, but they don’t have the mechanism to go after it. We take all these little guys, consolidate them and then essentially lay off our risk to the banks.

John Cooley, FXall John Cooley, FXall: we try to offer multiple ways of executing under one umbrella. One model won’t suit all circumstances

DO, HSBC The trend in volume growth was already established long before the proliferation of the various types of currency programme that the e-space facilitates. The volume surveys by the BIS and the Fed, were all on a strong upward trend that predates this and providers delve into the e-space for different reasons, depending on their breadth of distribution. For an institution like HSBC that is on the ground in 77 countries and territories, it can significantly improve our distribution network to efficiently provide a multiple-solution product offering through one portal to bilateral clients. We are able to tailor that product to a particular client’s needs, as everyone’s requirements are slightly different. JT, Clientknowledge The model for FXall is materially different from the model for FX Connect and for Hotspot, and you’ve alluded to the anonymity on certain platforms versus others. Does it all come down to bid-offer spread, pricing and cost of putting the trade away? Or do you see certain types of trade as more likely to be more successful, with less market impact, down certain avenues?

IB, Russell Our experience is that as trade size increases, you need to interact with the platforms differently. You may choose to disaggregate a very large trade and execute it in smaller pieces over time because you have the ability to be less focused on absolute levels and more focused on contemporaneous execution and market impact. Should you choose to execute a larger trade in that fashion, then our experience is that the anonymous trading platforms will be an efficient means to execute. Alternatively, should you wish to execute a single large trade we feel it makes more sense to execute with banks directly and to use a disclosed electronic means to execute that trade.

Choose channels carefully

MG, GAIN We use multiple channels and there are many functional differences between them. It really depends on what you want. We deal a lot with individual bank portals because the more we give them the better they’ll look after our order and we get a better service dealing bilaterally. There’s a give and take in these relationships, but with some anonymous portals there is no take. A lot of people are obviously after size of spread and where they can get the trades off is the compelling reason for most.

SF, Bank of America From the sell side, we also look at disclosed versus non-disclosed platforms, and if we know who we are dealing with and the client wants a level of service, we provide a higher level of service. On the non-disclosed platform, that doesn’t exist. There are no orders, you don’t know who you’re dealing with, and to protect ourselves we generally price the non-disclosed platforms to the lowest common denominator – we have to.

JT, Clientknowledge On a trade over FXall, you’re paying away brokerage but it’s not anonymous. You are seeing the counterparty. But if it’s possible to exact better service, would you prefer to see that trade bilaterally?

SF, Bank of America It depends on the client and what it costs to trade with them. Clients have so many access points to liquidity, and they have lots of different ways they can trade with us. We just do the best we can to manage our expenses. It’s got to be win-win. If we want to trade with that client we must work out how to do it profitably.

JC, FXall For most clients, best execution is achieved in the context of a relationship with dealers that value their business and are committed to providing them a high level of service. It’s for this reason that trading over multi-bank portals such as FXall on a disclosed basis has had very strong growth. Some single-bank systems see good flow for the same reason. At the same time, many providers have pulled back from streaming prices to anonymous channels, reducing their liquidity. So clients who value anonymity have to weigh up the trade-off between liquidity and anonymity.

JT, Clientknowledge Is the very number of channels to the market an unhealthy fragmentation? If you look at the costs in maintaining those multiple channels and in post-trade connectivity, is there an inherent inefficiency there?

IB, Russell I think there’s always a balance. Clearly there are increased costs associated with maintaining and using a greater number of platforms but those marginal costs are not linear. In the short term, this increased cost makes sense for us as we are focused on understanding what benefits can be generated from these platforms and over time making an informed choice as to which combination works best for us.

JC, FXall Multiple execution makes sense in different circumstances for different clients, but that doesn’t necessarily mean different venues. We try to offer multiple ways of executing under one umbrella. One model won’t suit all circumstances.

JT, Clientknowledge Does the sheer number of platforms make it hard to prevent abuses?

Ulf J Lindahl, AG Bisset: in terms of setting the price or seeing where it is, the e-commerce platforms don’t add anything Ulf J Lindahl, AG Bisset

DO, HSBC The market is still evolving. It’s coming to grips with continuing trends and how to regulate behaviour. In terms of a non-credit intermediated model, if I’m in the open marketplace and I’m bidding or offering, there is some level of accountability because the broader market knows who I am. Self-regulation becomes very difficult when you can’t identify the players involved, due to the credit intermediation factor. So how do we regulate best-practice behaviour? It’s a very difficult thing to monitor, and incumbent upon each institution to manage their own client relationships to promote the best market practices. MG, GAIN All this is true and compared with the bond and equity markets we’re fragmented, but over time we’ll have fewer and fewer outlets. It’s quite right that in the early days of e-trading there should be lots of multi-dealer platforms because of the lack of transparency. We deal mostly on single-bank platforms because we know the price will be very tight. Why isn’t everyone on EBS? Well, they are letting people in. We’ve dealt on EBS, and while we very much like being on EBS, it’s not the be all and end all. The banks, on a unidirectional basis, have to put themselves at a bit more risk to get your business. Whereas in a multi-dealer environment, banks can choose whether to make liquidity or not, so when the market starts moving they can back away.

UL, AG Bisset There’s one more issue. We have clients with foreign exchange exposures, who keep their assets with their brokerage firms and custodians. The banks give us credit based on the client’s assets. So we have to trade with that particular bank and take whatever price they quote. Fortunately there’s enough competition, so they’re always market prices. However, if you look at the equity market, for example, and if you were buying stocks for your own account electronically, you’re on the hook for that money. You have to pay within a couple of days to get those securities. You’re not involved with huge credit risks for months until you close the position, so that’s a different issue for those seeking electronic trading.

DO, HSBC You also have to look at e-FX within the context of a broader client-dealer relationship that crosses many products, from emerging markets to options to fixed income to equities to cash management. It’s just one point of access for the bank and, as such, both buy- and sell-side will work to tailor the best solution on an individual basis.

JT, Clientknowledge If we believe that algorithmic trading will start to affect foreign exchange, as it has in other asset classes, what will be the impact of those algorithms being bolted on to your single-bank portals?

SF, Bank of America Most likely they’ll trade through either fixed connections or application programming interfaces.

LO, Market Media And is there capacity for those portals to handle that?

SF, Bank of America We work on it every day. We have made a massive investment in infrastructure and will continue to do that, but it comes down to storing and analysing terabytes of data, and to analysing your capacity in real time to see when you have capacity constraints. To survive in the business you have to invest in the technology that pushes out accurate pricing – that allows you to risk manage what is now very aggressive flow. From our perspective, most of the portals are profitable, and will be for the next five or 10 years. I don’t know if that has to change.

Scott Freeman, Bank of America Scott Freeman, Bank of America: to survive in the business you have to invest in the technology that allows you to risk manage what is very aggressive flow

DO, HSBC I think Lee Oliver was also alluding to another question. Do the banks risk being disintermediated by the migration towards electronic application program interfaces? It’s an industry question but I don’t think they do. We have a variety of resources that we offer to our clients such as research, quantitative strategies and derivatives and they lever our depth of interest provided by our global footprint. We have a natural FX interest that we use to enhance our relationships on a case-by-case basis. A true client-dealer relationship will not be disintermediated just because someone wants to buy their 10 units at a certain price. That particular customer will be allocated a proportionate amount of the company’s resources, and someone who needs a more diverse product offering and allocation of resources from the bank side will get just that. Best practice elusive

JT, Clientknowledge Given the efficiency of the FX market in terms of liquidity in pricing, how much does e-FX enhance market efficiency?

IB, Russell At its core the foreign exchange marketplace is efficient. There’s a tremendous amount of liquidity. However, our research has found that while most of the people at this table would be effective in accessing that core wholesale price, there are many institutions that are unable to do so. Russell and others have been measuring and researching currency transactions cost for many years now. Through that research we continue to observe very inefficient relative execution outcomes by many participants, direct or indirect, in the FX marketplace. We’ve spoken a lot today about e-commerce and its applicability to improving execution outcomes but we haven’t spoken about the practical problems of doing so. Attempting to define best execution in e-commerce in the FX marketplace is a commendable endeavour. The solution involves focusing as much upon the process as the outcome, which is something we feel the market needs to concentrate more upon.

JT, Clientknowledge Have you analysed the causes of the slippage?

IB, Russell Yes. It tends to be a very simple trade-off between operational risk and relative execution outcomes. One can outsource operational risk but that drives up relative execution cost. If one commits resources and builds an infrastructure internally, execution outcomes can be improved, but there are risk outcomes to be managed. We view that as a fundamental trade-off based upon the principal nature of the foreign exchange marketplace. For participants struggling to manage that trade-off there is another alternative available to them. That is the agency model, which involves hiring a specialized implementation provider that gives participants a valid means of managing both trading costs and operational risk effectively.

JT, Clientknowledge Is the slippage a function of inefficiency or just the nature of the market in which you differentiate between the price made to retail and wholesale on the basis of very large differences in trade size and frequency?

IB, Russell This is not simply a problem confined to retail investors. Research shows that participants in the wholesale institutional marketplace are the ones most affected by high transaction costs. This is an issue driven by the structural inefficiency I referred to earlier. Many participants are motivated by a desire to manage operational issues, with a consequence being a failure to focus upon execution outcomes. The breadth and persistence of this inefficiency is particularly difficult to rationalize when one considers the existence of the agency approach as a valid alternative

Justyn Trenner, ClientKnowledge: the average trade size has not moved that much, but the standard deviation has increased materially Justyn Trenner, ClientKnowledge

DO, HSBC Is it all predicated on the notion that the entire order is transacted immediately? Does best execution mean accessing the immediate price over the portal or venue that is offering that best price, or is it working in conjunction with your dealer to say: “You’re going to have to add some value here”, or perhaps it comes by adding a little bit of sell-side expertise to the transaction, or levering our internal flow/depth of book, or there might be another way to create a better execution? Over what timeframe is best execution measured? Relative versus absolute price achievement

IB, Russell That’s a distinction between the achievement of an absolute price level that you’re comfortable with as opposed to about the focus of Russell’s research, which is relative pricing. At the time one goes to the marketplace, adjusting for relative size, time of the day and type of currency, there exists a fair and reasonable price. At Russell our research shows that in many instances relative-price executions are not efficient. Efficiency in this context being measured as the proximity of the actual price applied by a principal price-maker to the contemporaneous market price. It’s very difficult for someone historically to understand what relative price they paid to execute their currency trades. What revenue did a client cause a principal price-maker to generate from that clients foreign exchange trading activity? We help clients to research that and help those who are uncomfortable with their pricing to think about an alternative way to implement their currency trades.

JT, Clientknowledge What exactly are you measuring?

IB, Russell Here’s a simple example. The market is 20/23. Someone has an amount of base currency to sell; let’s assume it is a small amount with no conceivable market impact. You would expect to receive a 20 bid, perhaps even a 21 bid. If you were to receive a 10 bid, then looking back and analysing that transaction, most people would assess that wasn’t an efficient price. An arbitrage profit is being delivered to the price-maker in that example. That arbitrage profit is slippage as we define it – measured as the execution price relative to the contemporaneous price, taking into account trade size and liquidity.

JT, Clientknowledge Aren’t you just pointing out not so much the inefficiency of the market as the inefficiency of some of the clients’ behaviour, and practice?

IB, Russell As I had mentioned earlier; at its core the foreign exchange market is efficient. We’re finding that many investors are not able, for a variety of reasons, to put in place an infrastructure that allows them to obtain that core wholesale price. Bear in mind this could be a plan sponsor, relying upon their investment managers to execute their foreign exchange deals. Research indicates that many investment management firms are extremely inefficient at accessing the core wholesale rate on behalf of their clients. Best execution is not only about the execution outcome one receives, but is also about the post-trade analytics, settlement and messaging to the custodian, matching of foreign exchange trades, benchmarking and performance-reporting. Our research indicates that these elements are all largely absent from the wholesale foreign exchange marketplace. There’s very little in the way of transaction cost analysis being done and yet, as a principal marketplace, it is characterized by a lack of transparency and disclosure of costs. Clients are more discerning and demanding. We live in an environment where lower absolute returns have been institutionalized, at least in the short term. Basis points matter, so we are seeing a tremendous amount of interest in the means available to reduce relative execution costs on foreign exchange now.

Mark Galant, GAIN Mark Galant, GAIN: half of our business comes from us white labelling our platform to other users so they can give it to their clients

UL, AG Bisset If you really want to get the market price, you pit two banks against each other. However, best execution for a client is to obtain a price and to get rid of that big position sensitively over the day. Even when we’re required to do competitive bidding, we may gain one pip from the bidding but lose two because the market moves away from us before we get it done. You can measure the best price at that minute for the 10 million you have to do very easily, but it has no relevance to what you’re trying to achieve for your client. IB, Russell That is only relevant for trades of large size that have an impact upon price when executed and presupposes that the introduction of competition unnaturally delays the time taken to execute. For securities-related trades of small size, for which the notion of market impact is not applicable, the only relevant execution benchmark is the contemporaneous price.

JT, Clientknowledge If we’re defining best execution as developing best practice for the buy side, does e-commerce have a specific role to play in that?

UL, AG Bisset On the processing part, clearly you get value out of it, but in terms of setting the price or seeing where the price is, I don’t think the platforms add anything. You see what the Reuters price is, you see what the banks are dealing, and you call up your bank and it’s there.

JC, FXall I don’t agree. Electronic trading does have a lot to add to best practices as they relate to achieving best execution in a number of ways. First, with the right systems and integration, you may be able to achieve faster execution electronically. In terms of the reporting and analytics that Ian Battye referred to, electronic systems should be able to capture all the information to prove best execution, even if you’re not dealing competitively, and sometimes a competitive trade is not the way to achieve the best price. So the audit trail is an important part of that. In addition, best execution should involve some concept of reducing the risk of error or out-trades, which electronic trading can facilitate. One attempt to define best practices is a paper that’s published by the New York Fed’s FX committee. It makes clear the important role that electronic trading has in achieving best execution and, more generally, best practices for foreign exchange dealing.

JT, Clientknowledge Mark, you have less of a best execution requirement in the nature of your business but that means you are uninhibited in the way you transact. Are there best practice lessons to be learnt from the way you work?

MG, GAIN I think it’s the small entrepreneurial firms that drive these best practices and make the market more efficient. We were the first of anyone to offer instantaneous click-and-deal trading back in early 2000. You saw the price, clicked it, and you got it. You’re talking about firms doing large size and getting filled several pips away from the market. There is no excuse for any trader in the world to be getting wider than a three-pip market in euro/dollar right now. We make three pips wide, 24 hours a day, to even our smallest clients. A bigger trader can get one or two pips wide all day long. We don’t have a big bank name, and we need to make a tighter, faster, more aggressive market that you can deal on instantly. It’s only now that some of the banks are providing the features we’ve offered on our platform for years.

JT, Clientknowledge Surely there is a point at which that process has to stop?

MG, GAIN As the markets become more transparent and more efficient, spreads get tighter. Euro/sterling is now most commonly traded in partial pips. It’s inevitable as the market matures and gets more sophisticated and transparent. So is it a big deal? No. Will prices get a bit tighter? Yes. But in my view spread compression will taper off, because as the number of market-makers contracts, there is less risk appetite in the marketplace.

SF, Bank of America We spend a lot of time figuring out what the right price is. Is it a one-pip price or a two-pip price? What do you show at what time of day and what is the market? Often we quote within what we think is a market price because we have to get business. There are other times where we won’t quote certain business at the spreads being requested by clients since we feel that we’ll lose money.

JT, Clientknowledge Could spot FX become a loss leader so that you can attract clients for higher-margin products in the FX area?

DO, HSBC It depends on how large the institution is and their breadth of FX product. We view the actual capital markets product offering as one holistic product that keeps the client’s needs at the centre. So while I don’t think it’s viewed as a loss leader, you do have to find more and more dynamic ways to run your franchise and your business, and that comes from investment and resource allocation. In terms of the competitive landscape, as the industry consolidates further, there will be fewer players, because of the level of investment required to remain a significant player in the space.

JT, Clientknowledge To what extent do you think banks are underpricing the credit component of the FX transaction?

Lee Oliver, Market Media: do banks risk disintermediation? Lee Oliver, Market Media

DO, HSBC Banks are scrutinizing their credit analysis structure in a different light and are much more vigilant in correctly evaluating the credit component. It becomes more relevant in emerging markets, structured products and options, because a lot of investment goes towards coming up with the right price. How do we judge the right price when you take into account credit, liquidity, market movement, volatility – all of the above? As credit is managed more aggressively, spreads can widen as the market more accurately prices all of the risks associated with the trade. SF, Bank of America And remember, if we don’t make money on a credit line, there are eight other businesses in the bank who want that credit, who think they can make money out of it, so we’re under constant pressure to show that we’re going to monetize these loans.

Benefits of e-FX

JT, Clientknowledge It seems then in general that e-FX has created new challenges for the banks – some very difficult to deal with – but also benefited clients in a number of ways. Aside from price and liquidity, what are the other benefits?

IB, Russell They assist in improving risk outcomes. There are straight-through processing benefits that flow from these platforms. These allow you to build scalability in your business and to transact larger numbers of trades at lower risk than was the case some years ago. That’s a very important part of what the platforms offer. Additionally, there are things like embedded research and the improvements in transparency to understand where to access the best bid? Where to access the best offer? Finally, by facilitating the role of the prime broker these platforms provide opportunities to benefit from access to different types of liquidity.

MG, GAIN For example, we provide a full back office for hedge funds that deal with us. A lot of the things they were outsourcing to Bermuda we provide free of charge if they deal with us. The same is true of white labelling. Half of our business comes from us white labelling our platform to other users so they can give it to their clients. The technological benefits and the transparency are the biggest things, but there have certainly been a lot of benefits over the last five years.

JT, Clientknowledge Does the increased efficiency put at risk the provision of some of the ancillary services that aren’t properly costed and charged against a revenue line? I’m thinking about research.

IB, Russell It helps to better define the needs of the buy side and allows the sell side to allocate resources more efficiently and develop and build research capabilities that service the needs of their core client base. That efficiency likely makes the research more focused.

SF, Bank of America I think it has to be. If a client doesn’t want research, we won’t give them research. Hopefully the clients we do provide with research will be better clients for us so that we can justify the cost. Our research team spend a lot of time with heads of central banks from round the globe. There’s value there and clients who find value there appreciate that.

DO, HSBC I agree wholeheartedly. You become more efficient in the product that you deliver to an individual client. If customer A wants to see a more structured product offering, leverage that area. If he wants to see more quant-driven research, leverage that. If he wants to see more basic fundamental economic research, do that. But the key is to offer the broad suite of products and then know your customer and deliver the most effective product line.

SF, Bank of America Technology should deliver better analytics now, and more cheaply. It’s so much easier for us to run reports, regression test the models, and distribute those to specific clients.

UL, AG Bisset And since currency overlay managers now have the reputation of adding value, it’s important to know what they are doing, what they’re buying and when they’re selling. That’s the information that the bank can use and then filter out to their other clients. Electronic distribution has made it cheaper to get it out there once you’ve produced that research, then whoever reads it, reads it.

JT, Clientknowledge So how do you make money in FX these days?

SF, Bank of America There’s not much easy money to be made in FX any more. You have to be efficient, invest in technology and use it correctly. You need smart people who are good at what they do.

DO, HSBC You have to be very good at your game.

JT, Clientknowledge I think you have to be very specific about your game too, because there are multiple games. There are a few banks, like Bank of America and HSBC, who are engaged in all of the games but a limited number of banks are very good at servicing real money, and pretty much only that. So you’ve got the Mellons, the Bank of New Yorks and the Northern Trusts.

The future is data

JT, Clientknowledge Looking forward, what e-innovations or e-developments do you believe will have most material impact over the next few years?

MG, GAIN I think that data-mining post trade, doing mathematical quantification and analysis is going to be the next big thing in this marketplace. Scott mentioned analysing terabytes of data. We’ve been in this for years, but my feeling is that the few banks that have adopted this type of statistical analysis already have an advantage. This wave will be as big as the e-FX wave has been over the last five years. It’s not surprising, because people have become efficient at sifting through a lot of data and deriving their data needs. It is a post-trade analysis, so there’s nothing that affects the client on the deal itself, but the banks that are able to do this analysis will be able to offer tighter spreads. In the current pricing scheme there’s not much more room to go, but there might be by utilizing those quantitative techniques. This opportunity, so far, is pretty much untapped.

IB, Russell Yes, the study of market microstructures might well be the next big thing. This research will allow price-makers to more effectively manage inventory and better understand the impact of a particular trade on subsequent market movements. That will facilitate the development of better risk-management tools. We will continue to focus on the integration of these front-end platforms with our management systems to provide more straight-through processing benefits and scalability. The industries focus upon integration still has a way to develop, so material improvements there will likely characterize the market in the future.

Daniel O’Sullivan, HSBC Daniel O’Sullivan, HSBC: as credit is managed more aggressively, spreads can widen as the market more accurately prices all of the risk

SF, Bank of America The current trends will continue, and we will continue to focus on client problems and trying to solve them. What we do, either on the efficient pricing or efficient risk management, will give us an edge to better service our clients. On the back end, the integration, allocations and breakdowns and custodian business, will continue. So other assets, options possibly, will grow, but that still remains to be seen. DO, HSBC I would highlight some more of the derivative products and the emerging market as more of a one-stop-shop offering within the broader FX suite of products. We’ll continue to tailor our offering to suit the specific needs of an individual client.

JC, FXall We’re seeing an important trend with our hedge fund clients. As that industry has matured and started to consolidate, there’s been more concentration on workflow solutions that focus on control, and many of the functionalities that real money managers have been demanding are being taken up by hedge funds. So the distinction between real money and hedge funds is disappearing, in terms of going beyond execution toward the controlling and integrating of the entire trade life cycle.

JT, Clientknowledge By way of a wrap-up observation, more than half of the client FX market is still not electronic, so there’s a lot of potential growth from developing what we already have. Thank you very much for your thoughts and comments.

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