Online FX Systems Eye STP

Players in the foreign-exchange markets agree that adoption of electronic foreign-exchange-trading portals will continue to increase in 2004. Not only will e-trading portals become places to execute trades, they will expand their post-trade operational capabilities.

"My view for 2004? I think you'll see an accelerated adoption of FX-trading tools," says Jeffrey Scott, senior vice president at Brown Brothers Harriman.

Last year, BBH focused on what Scott considers the pain points - trading to reduce operational costs, and minimizing risk. "That has been the basis for development of these e-foreign-exchange-trading tools," says Scott.

While adoption of foreign-exchange-trading platforms has increased over the past five years, these systems haven't had as great an impact as was envisioned when they first debuted in 1999, according to Tim Sangston, principal at Greenwich Associates, a research and consulting firm in Stamford, Conn.

Last year, foreign-exchange customers-corporate treasurers, fund managers, hedge funds and buy-side banks-surveyed by Greenwich said that 30 percent of their volume was executed through online systems. These systems include FXall, FX Connect, Currenex as well as Hotspot FXi and single-bank sites like UBS.com and Citibank.com.

For 2004, survey respondents forecast that they will do 40 percent of their business via e-trading systems. "Whether that becomes a reality, we'll have to wait and see," says Sangston.

At BBH, which executes foreign-exchange trades on behalf of global investors, about 30 percent of its clients' trades occur through trading platforms such as FXall and FX Connect, as well as its own single-bank trading platform.

Though it was predicted two years ago that single-bank platforms were dying, interest is being reignited, according to Scott. He suggests that this is because the bank takes the time to work with institutional clients to customize solutions that fit within their workflows, such as building interfaces between their FX order-management systems and BBH's system, he says.

In 2004, Scott's goal is to have 50 percent of client trades executed through electronic-trading systems. That includes the bank's proprietary trading platforms, FXWorld View and FX Index Link.

"We want to renew the push to make our clients more efficient," Scott says.

In terms of driving adoption, the missing link to the electronic foreign-exchange business may be straight-through processing, says Sangston. "That is sort of the Holy Grail."

Sangston notes that "everyone in the industry uses these platforms for pre-trade information, research and executions." However, what's still missing is automation through to settlement.

"When you get a true straight-through-processing situation, where you push a button and everything is done and it doesn't have to touch human hands, that is when you can start to quantify the benefits [of electronic platforms]," he adds.

BBH's Scott agrees. "Competitive pricing and STP efficiencies" are probably two reasons for using electronic systems, he says. Sixty-five percent of trades coming into BBH are electronically transmitted to the operations group, according to Scott. However, that leaves 35 percent that are not. Electronic confirmation seems to be the last frontier, he says.

Meanwhile, competition is expected to heat up among the various multibank-trading portals. FXall, a multibank portal, is pursuing the global investor market, which has been dominated by FXConnect, a State Street platform.

In November, the bank-owned portal announced that institutional customers, especially asset managers, are responsible for increased trading volumes. Institutional customers account for 55 percent of total volumes, up from 40 percent in early 2003.

Chasing Hedge Funds and Prime Brokers

Another trend that's on the upswing is the pursuit of hedge funds as clients because they are active FX traders. With capital flows going towards hedge funds, other portals-even mainstream ones like FXall-are targeting hedge funds.

One way to pull them in is by creating solutions for prime brokers. "Prime brokerage is important because it is a link to the hedge-fund community," says Greenwich's Sangston. Prime brokers provide their credit ratings to guarantee trades and run the back-office operations of hedge funds.

Hotspot FXi, which appeals to hedge funds and commodity-trading advisers, integrates several prime brokers, including AIG, Bear Stearns and ABN AMRO.

"We're the only e-trading platform that has fully embraced the prime-brokerage model," contends John Eley, CEO of Watchung, N.J.-based Hotspot FXi.

Rival groups are trying to introduce a common protocol to automate the trade "give-up" process between hedge funds, executing banks and prime brokers to clear and settle the trades. (A give-up occurs post-trade when an order is sent from the executing bank to the prime broker who will clear and settle the trade.)

Last year, FXall launched a messaging solution targeted at prime brokers through its Settlement Center application and announced that 10 banks are supporting it.

Separately, a group of leading FX prime brokers teamed up with San Mateo, Calif.-based vendor Traiana Inc., whose software is considered the Mercedes Benz for prime brokers, according to one source. Together they developed Traiana Harmony, a messaging hub that's attempting to create a common communications protocol for post-trade give-ups.

How this will all shake out in 2004 is uncertain. But one thing is clear: Hedge funds and prime brokers will be a hot topic.

Even BBH is interested in becoming an executing bank for hedge funds. "The FXall prime-brokerage [facility] is of interest to us," says Scott. "Anything that automates that give-up process I think is a good trend that minimizes risk."

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New Players to Watch

Hotspot FXi is going to see a new entrant in its space, Forexster Limited, notes Hotspot CEO John Eley. Forexster is backed by Bear Stearns and SEB Merchant Banking, a division of SEB, a North European financial banking group that provides foreign- exchange services in the global marketplace. Look for eSpeed, the technology arm of fixed-income broker Cantor Fitzgerald, to enter the e-FX space as well, notes Eley. Another player to watch is Bloomberg, which is making a big push in foreign exchange, says the CEO. As part of its transactional strategy, Bloomberg struck a deal with EBS Trader and is thought to have a couple of others in the pipeline, adds Eley.

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