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Foreign Exchange Market Places Go Head to Head

In June seven leading financial institutions banded together to create an online foreign exchange trading site, FXall.com, where they can compare prices from different dealers. Early this year, newly formed Currenex launched a similar platform, however it entered the foreign exchange market with a purely independent electronic market place for foreign exchange.

In June seven leading financial institutions banded together to create an online foreign exchange trading site, FXall.com, where they can compare prices from different dealers. Early this year, newly formed Currenex launched a similar platform, however it entered the foreign exchange market with a purely independent electronic market place for foreign exchange. Now theindustry is wondering, which site will gain the most liquidity and become the dominant FX player? The FXall consortium believes it has an edge because comprised of financial services firms, which includes Bank of America, Credit Suisse First Boston, Goldman Sachs, HSBC Group, J.P. Morgan, Morgan Stanley Dean Witter and UBS Warburg. Having these major forex players on its side equals liquidity.

However, Currenex doesn't see it quite the same way. According to Currenex President Lori Mirek, Currenex handled five billion dollars in FX transactions last year and is on track to do over a trillion this year. She says the 20 banks that trade through Currenex-she declined to name any-gives it a level of liquidity unmatched in foreign exchange and an 18-month headstart over FXall. Mirek was very clear as to why she says Currenex is the superior FX platform. It comes from the difference in ownership. Currenex is backed by venture-capital funding from Thomas Lee, Putnam Internet Partners, WR Hambrecht & Co. and funds associated with Donaldson, Lufkin & Jenrette. She adds that in contrast, FXall is funded by a consortium of banks that are a party to the actual trades that take place through the site. Mirek says that makes her suspicious. Officials from FXall would not compare the systems or respond to Mirek's comments.

The FXall site seeks to provide a one-stop-shopping experience for clients of FXall.com-affiliated institutions-one where they can see multiple prices in one place. "A lot of clients were saying they needed a common route to the liquidity providers that did not exist," said FXall.com interim CEO Philip Weisberg. That common route, said Weisberg, should afford clients the opportunity to find the best price among participating dealers.

Though there are seven founding members of the site, Weisberg said the number of banks affiliated with FXall.com should increase with time. "FXall.com is meant to be an open and non-exclusive system so we are actively going to encourage other banks to join." Provided, that is, that they fit FXall.com's criteria: "The initial members all have the ability to provide research, 24-hour live pricing and capital commitment to make markets and they all shared a common vision for how the future of foreign exchange trading was going to evolve."

Weisberg added, "We're really going to streamline how foreign exchange business is transacted and we're going to handle it from the initial point where the order is generated down to sending the instructions to the banks to make the payment and everything in the middle. There is a tremendous opportunity for efficiency here." A phased rollout is expected by the end of the year.

The Currenex offering is similar, however Mirek feels strongly about one thing. "We believe we shouldn't be a counterparty because as soon as you're a counterparty your other objective becomes to maximize your profits and that is fundamentally at odds with saying you're building an efficient, neutral exchange. That's part of the other problem, candidly, with FXall. Every single one of the banks that provided folks on their board came up through the training of the banks and it's the banks who benefit from the upside if that particular cartel is successful," says Mirek. Currenex trades in foreign exchange, spots, forwards, swap, and secondary major currencies. The site was formed in the second half of 1999 and launched in April of this year. She says she is not worried about competition from the new FX player. "They don't have a management team, they don't have a business plan, they don't have a product. They are even actively soliciting on their Web site for folks who might want to provide technology to them," Mirek adds.

Currenex makes its money by charging a commission on the buy and sell sides of a deal that occurs over their network. With a neutral third-party exchanging the information between investor and institution, Mirek says there is very little risk. But with FXall, she claims risk abounds: "There is pricing collusion risk as well as sharing of sensitive customer data risk as well as barriers to entry risk, there is the whole market access risk and the ability to potentially leverage all of that into other markets." Which platform will be victorious? Only time will tell.

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