This week, Stockholm-based SEB Merchant Banking announced that it's joining Forexster, a new online dealing-facility for foreign exchange as a liquidity provider.
SEB - the tenth largest foreign exchange player in the world - internally developed a streaming price application programming interface (API)) that plugs into the Forexster network-based architecture. The API allows SEB to provide live, executable prices through the Forexster platform.
Because SEB wrote the API using the Financial Information Exchange (FIX) protocol, which is commonly used in equities, it's also in a position to draw in equity trades involving foreign exchange. "We're looking to offer this facility to equity-arbitrage funds that are looking to do currency overlay," says Seppo Luskinen, head of foreign exchange at SEB Merchant Banking (London).
Part of SEB's strategy is to offer the API to lure currency funds that are model driven, says Steve Earl, SEB's head of e-foreign exchange. "If they want to connect into streaming prices, (they) have the ability to execute based on those signals," explains Earl.Even though SEB already participates in FXall, a multi-bank portal that reaches corporate treasurers, and also provides live, executable prices through its own Web site, SEB is counting on Forexster's network-dealing model to connect it with customers that it would otherwise not know.
"We are not selling our own trading platform to the end user one-by-one, but connecting ourselves to client clusters," says Luskinen.
"That's why Forexster for us is interesting. It represents access to multiple clients," he adds. Though the system is not yet live, Bermuda-based Forexster is about to go live with Bear Stearns' prime brokerage customers. "We will sit on the other side of those customers and act as a liquidity provider," explains Luskinen. The function of a prime broker is to extend credit and clear and settle the customers' trades.
Bear Stearns plans to "white label" the system to its clients, which include hedge funds, commodity trading advisors and money managers, says Luskinen. SEB will take advantage of existing credit relationships so that it can trade with prime brokerage clients of Bear Stearns. "All of their prime brokerage customers will deal in (Bear Stearns') name, and our counterparty will be Bear Stearns," explains Luskinen.
According to Arman Glodjo, Forexster's founder and chairman, the system "is not a platform (like Currenex or FXall or EBS) where people come to trade," but rather a "network of platforms which are each offered by a bank to its clients (buy-side firms or banks)."
While Forexster supports request for quote (RFQ) services, it also provides for anonymous trading where any participant can provide liquidity as a market maker though streaming prices displayed on an electronic limit-order-book. Here, it will compete against Hotspot FXi, an electronic communications network (ECN), that allows for bank-to-client and client-to-client trading.
One analyst predicts that Forexster could pave the way for more customer-to-customer dealing in foreign exchange. Sang Lee, Manager of the Securities and Investments Practice at Celent Communications, says that most volume is coming through the RFQ services, offered by FXall and Currenex, because banks and brokers are not keen on trading foreign exchange anonymously. With RFQ, the dealers know the identity of their counter parties. "They want to know who they are dealing with," says Lee.
But through these existing credit relationships, Bear Stearns could be trading with a client of another prime broker, he says. "This could snowball," he adds.
Glodjo says the degree of openness will vary from bank-to-bank. "If everyone throws all switches open, clients of one bank can trade with clients of another, across an arbitrary number of lines of credit and banks can trade with other banks, all the while, settlement risk is preserved," says Glodjo.
Lee says that Forexster still needs to add more forex prime brokers or more dealers involved in this, beyond SEB and Bear Stearns, which came onboard in March. Taking a more cynical view, Lee says just adding big names doesn't work because there were plenty of failed e-commerce systems.
Glodjo notes that several other banks are signing up as liquidity providers and others have not made their support public yet. Forexster is currently customizing its plug-ins for several banks and will launch its services for each bank as the process is completed, he says. The launch date will be announced by each bank to its clients, and by Forexster on its Web site. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio