TCM Guide 2007 : Online FX


Key players in the online foreign exchange markets are hoping that new entrants and the integration of interdealer and dealer-to-client platforms will end the stagnation that is hindering workflow development.


Theodorou: Many corporations use electronic systems to trade exposures generated by their subsidiaries.

Firms accessing the online FX market have more and more products and services to choose from, yet the workflow development and integration into back-end systems continues to lag. However, with players in the interdealer market now breaking into the dealer-to-client space, this could signal big changes on the way, not least the continuing development of multi-asset-class platforms.

Online foreign exchange trading continues to grow in terms of both volumes and numbers of firms using online platforms for FX. Elena Theodorou, head of electronic client solutions in foreign exchange for Europe and North America at JPMorgan, says: “As with electronic trading across other products, we have seen an increase in use of online FX trading across the board in all types of clients. In the middle markets we see a preference for single bank systems, while larger corporates and investment managers still tend to go for multi-bank systems.”

Active traders are increasingly treating currencies as an asset class while asset managers and corporations are increasing their trading activity in step with the growth of cross-border investing, says Keith Hill, head of EMEA sales at online FX trading giant FXall. “These drivers of growth remain firmly in place, and as a result we anticipate further growth in both the bank-to-customer and anonymous trading models,” he adds.

One market watcher notes that corporates tend to give the portals 80% of their volume but only 20% of the value. “Corporate clients are using them for smaller trades, but the big trades are still relationship-based,” he says. “They get a lot of volume but not the responsibility of the big trades.”

Richard Thornton, partner at PA Consulting, says that there is a change happening in terms of what is being offered. “We are seeing a shift in the marketplace. Bank platforms are becoming more multi-product to encourage customers to use their own proprietary platforms. But that does not provide the same amount of price transparency as the independent multi-bank platforms,” he points out. “The multi-bank platforms are also moving to provide other products, such as money market funds,” he notes.

Firms are looking for more of an overall service, and systems that offer a full range of tools rather than purely the execution piece, says Theodorou. “Unless you have a one-stop shop, then clients may need more than one system.”

While better pricing and ease of use are big drivers of online trading, another big advantage of moving online is that it can help companies improve efficiency across their internal processes. “If you look at why many corporations use electronic trading systems, it is to trade exposures generated by their subsidiaries,” says Theodorou. The collection of information from subsidiaries around the globe is still typically done manually. Head office will receive information by fax or email and will manipulate the information in Excel spreadsheets to collect the cashflow forecast, FX exposures and so on. “Corporates can then use an electronic trading system to execute transactions for those exposures. Over time we have begun to see more banks and third parties offering solutions that assist with the piece that comes before execution—the actual collection of information,” she adds.

However, not everyone agrees that online FX platforms, particularly the multi-bank platforms, are doing a good job of handling workflow into client systems. “What customers are really looking for is a solution to the whole STP issue and integration back into their internal trading and processing systems,” says Thornton.

Simon Wilson-Taylor at State Street, which in addition to owning the FX Connect platform recently bought multi-bank platform Currenex, believes that corporates still have the same needs as they did when the online FX market first began. “What they need is something that helps them manage the complexity of inflows and outflows, handle risk management, do trades and handle accounting requirements,” he says. “Generally we in the market have not been very good at meeting those needs. Partly it is the economics of it.”


Benjaminsen: Portals create transparency and with that the potential to take margins away.

The corporate market is a very small portion of the overall FX market. And whereas in the institutional market there are a number of major players taking up much of the volume, in the corporate market there are thousands of companies, each with unique needs in terms of workflow processes. Thus the ongoing investment that would be required has simply not been seen as economical.

Bent Benjaminsen, a senior vice president at SunGard, explains: “FX portals are part of a process for corporate treasury that is ripe for workflow enhancement. The technology is there to do it, but there has to be a willingness to put the money behind it.” One of the problems with online trading applications for corporations, he says, is that everyone is in a race to the bottom; they want to get applications for a very low cost. “The question is, Who is going to keep putting money into it? Portals create transparency and with that the potential to take margins away,” he adds.

Melissa Stevenson, director of foreign exchange at Wall Street Systems, agrees: “Post-trade workflow is still an issue. There needs to be improvement in the integration of post-trade services.”

New Entrants
One big change that could have a profound impact on the online FX markets is the interdealer platforms breaking into the dealer-to-client space. As Celent analyst Axel Pierron notes in a recent report: “The importance of new market participants on the buy side and their ability to improve and generate liquidity is blowing the wind of change in FX markets. The segregation of the market between interdealer and dealer-to-client is already being attacked, with the two major interdealer platforms reaching the wall to attract these profitable new customers. The question to ask is not whether the FX market will adopt an exchange model, but when.”

Interdealer giant Reuters now offers Reuters Trading for Foreign Exchange (RTFX), which allows banks and their clients to handle trading from their Reuters desktops. RTFX saw 500% growth in 2006. It opens the way for Reuters to attract new clients—corporate treasurers, hedge funds and so on—and creates a multi-asset offering, including equities and fixed income.

Reuters’ main competitor in the interdealer market, EBS, has also taken steps to enter the dealer-to-client market with EBS Prime Professional, which opens up spot market trading to non-bank market participants.

There is also a trend toward multi-asset trading platforms. Pierron notes in the report: “During 2006, financial institutions and especially hedge funds promoted the emergence of multi-asset trading venues, which would allow them to implement sophisticated strategies across foreign exchange, fixed income, options, futures and equities.” He says that e-trading platforms could soon play an important role as consolidation and expansion continue across asset classes.

Denise Bedell