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Ethical e-FX - self-policing and supervision

versus regulation

Real-moneymanagers- improving the e-FX value proposition

Build, buy or partner? - e-FX strategies for the sell-side

FOCUS onPricing innovation - fuelling the FX technology arms race

Ethical e-FX - self-policing and supervision

versus regulation

Real-moneymanagers- improving the e-FX value proposition

Build, buy or partner? - e-FX strategies for the sell-side

FOCUS onPricing innovation - fuelling the FX technology arms race

april 2006

We want to draw your attention to two important initiatives

we are currently undertaking.

The first is the launch, later this month, of the new quarterly

magazine Automated Trader. This exciting international

publication will be devoted to algorithmic and automated trading

across all asset classes. It’s aimed at both the buy-side and sell-

side. We have recently reported on the growing interest in

algorithmic trading in the FX market and our forum article in this

edition brings together some of the leading technology

companies operating in the algo trading space. Here they are

talking about why the FX market is so attractive from an algo

trading point of view and what lessons it can learn from the use

of algo trading in the equities market. Many of the issues our

forum participants have raised will be developed in more detail

in the new Automated Trader magazine. More information about

this can be found on page 116.

Our second major initiative is the launch of the e-Forex Retail e-

FX Technology Awards 2006. We have continued to highlight the

growing importance of e-FX technology amongst the Retail FX

trading sector. Our awards will focus on the e-trading technology

capabilities of the leading international online FX brokers and

dealers and will reflect, for the first time, how effective traders

believe their brokers are, in leveraging technology to assist them

with their online trading needs. We are rewarding respondents

who take the trouble to register a vote at http://www.e-

forex.net/survey/ with free access to our website for 6 months.

Finally, we look forward to seeing you at the ACI Congress, which

this year is taking place in Manila on 25-27th May.

As usual we hope you enjoy this edition of the magazine.

Charles Jago

Editor

e-Forex

Spring 2006

welcome to

Susan [email protected] Editor

Charles [email protected] (FX & Derivatives)

Charles [email protected] Manager

Helen [email protected] Manager

Michael [email protected] Manager

Louis [email protected] Manager

Anthony [email protected] Manager

Helen MurrayPhotography

ASP Media LtdSuite 10, 3 Edgar BuildingsGeorge Street, Bath, BA1 2FJUnited KingdomTel: +44 1225 868 947 (switchboard)Tel: +44 1225 868 948 (e-Forex sales & editorial)Fax:+44 1225 868 998

Design and Origination:Phill Zillwood Design [email protected] in the UK by Broglia Press

e-Forex (ISSN 1472-3875)is published quarterly in January, April, July and Octoberwww.e-forex.net

SubscriptionsSubscription rates (including postage)UK & Europe: £120 per year Overseas: £150 per yearPlease call our subscription department for further details:

Subscriptions hotline: +44 (0) 1225 868 948

Although every effort has been made to ensure theaccuracy of the information contained in this publicationthe publishers can accept no liabilities for inaccuraciesthat may appear. The views expressed in this publicationare not necessarily those of the publisher.

The entire contents of e-Forex are protected by copyrightand all rights are reserved.

Pre-trade, trade, post-tradeFX e-commerce solutions.

JPMorgan is a marketing name for investment banking businesses of JPMorgan Chase & Co. and its affiliates worldwide. J.P. Morgan Securities Ltd. is a member of the London StockExchange, regulated by the Financial Services Authority. ©2006 JPMorgan Chase & Co. All rights reserved.

JPMorgan offers its clients much more than standardcapabilities in e-trading. We offer fully integrated solutions inpre-trade, trade and post-trade FX e-commerce. With speed ofexecution and straight-through processing for all tradesthrough JPMorgan, our package allows you to act immediatelyon current market trends and gain advantage on pricetransparency. Combined with our ability to specialise andinnovate across all areas, our FX e-Commerce solutions addmore than an electronic dimension to your business.

We look forward to trading with you.

jpmorgan.com

With no trade-offs.

EBS Data Mine provides a unique insight into and analysis of FX market trends – enabling the creation and back-testing of models, together with auditing and price verification.

EBS®™, EBS®™ DataMine and the EBS logo are trademarks of EBS Group Limited and are registered in a number of countries with applications pending in others.

A wealth of information

EBS®™ Data Mine

EBS®™ Market Data

Find out more about EBS Data Mine.Go to www.ebs.com/marketdata

Complete and certified data for all EBS Spot currencies since 1997

New

Companies and organisations in this issue: Godfried De Vidts How far can electronic

trading go?

Mark Synder Ethical e-FX

Harrell Smith Foreign Exchange ECNs

Devin GrahamFX prime brokerage

6 april 2006 e-FOREX

Peter D’AmarioNew drivers of

e-trading growth

Frances MaguireTaming the OTC market

Robin PoynderBuild, buy or partner

Reine DossouThe e-Forex Interview

A

Abn Amro page 98ACI page 24ACI Philippines page 142ACM Inside

Front CoverApama page 131

B

Bank of America OutsideBack Cover

Barclays Capital page 8Baxter Solutions page 19BIS page 55Bloomberg page 46BMO Nesbitt Burns page 97Brown Brothers Harriman page 82

C

Calyon page 13Capricorn Asset Management page 64Castle Currency Management page 90Celent Communications page 55CFTC page 30Chicago Mercantile Exchange page 37Citigroup page 98CLS page 62Cognotec page 9Comstock page 117CQG page 139Currenexpage 21Custom House page 93C-View page 65

D

Danske Bank InsideBack Cover

Deutsche Bank page 72Divergence Software page 139Dresdner Kleinwort Wasserstein page 12Dynex Corporation page 64

E

EBS p 4 & 5eSignal page 141Eurex US page 36Eurobase page 112

F

FIX Protocol Org. page 62FlexTrade page 113FNX page 89ForexExpo page 18FXall page 25FXDirectDealer page 135FXpress page 63

G

GAIN Capital page 119Global Forex Trading page 111Greenwich Associates page 32

H

HotspotFX page 15HSBC page 98

I

Identica Corporation page 96IFX Markets page 67

Insch Capital Management page 68Integral Development Corp page 17Interbank FX page 81ISDA page 52IT&E Global page 83

J

JP Morgan p2 & 3

L

Latent Zero page 122Lava Trading page 23

M

Marex Financial page 20MarketXS page 117Metastock page 139Microsoft page 95MIG Investments page 115MG Financial page 137

N

NASDAQ page 40Nordea page 77NYBOT page 35

O

ODL Securities page 121Option Computers page 41Orc Software page 115

P

Peloton Partners page 80Portware page 31Principal Global Investors page 65Progress Software page 122

Q

Quay Capital page 64Questrade page 93

R

RBC Capital Markets page 91RBS Financial Markets page 98Reuters page 12

S

Saxo Bank p26 & 27Scotia Capital page 92SEB Merchant Bank page 10SmartTrade page 51Societe Generale page 143SS&C Technologies page 54SSiSearch page 62State Street Corporation page 60Sungard page 76SwapsWire page 14Swapstream page 14

T

360T page 84Tamiso page 68Terrapinn page 16Townsend Analytics page 79The Boston Company page 64The Russell Investment Group page 64Tradermade page 22TraderTools page 71TradingScreen page 45

U

UBS page 74 Roger Bright Improving FX Connectivity

Peter KelleherCollateralised FX trading

Foreword24. How far can electronic trading go?

Godfried De Vidts looks at the prospect of machines takingover some of the basic trading functions.

Features28. Ethical e-FX: self-policing and supervision versus

regulation

Mark Synder outlines why ethics matter in the foreignexchange market and how market-based discipline plussupervision equals a healthy marketplace.

32. The new drivers of e-trading growth

Peter D’Amario assesses the importance of Hedge Funds,Real-Money managers and the Retail market in drivingcurrent e-trading growth.

34. Taming the OTC market

Frances Maguire writes about the advantages of trading on aregulated exchange.

38. Liquidity provision: an alternative slant on multi-portal

strategies

Andy Webb looks at the challenges facing banks who needto stream quotes across multiple FX portals.

42. Growing FX ecommerce revenue through Wealth

Management product distribution

Dave Clarke describes how High Net Worth clients have beenoverlooked by many FX eCommerce groups.

48. Build, buy or partner: e-FX strategies for the sell-side

Robin Poynder looks at the choices facing banks wishing tooffer new e-commerce services.

52. Collateralised FX trading: the growing need for real-time

Margin Management

Peter Kelleher outlines the range of solutions that arerequired to cater for the growth of margin trading.

55. Foreign Exchange ECNs: The Limit Order Book model

gains traction

Harrell Smith examines the growing importance of the ECNmodel in electronic FX trading.

58. Beyond STP: The next generation of eFX integration

Harpal Sandhu outlines how by leveraging on-demand dataand service grid technology, FX market participants will beable to better manage their businesses.

60. Improving the eFX value proposition for Real-Money

managers

Chip Lowry illustrates how the emergence of EMSs for tradeaggregation together with confirmation/ settlementinitiatives are helping to improve the eFX value proposition.

64. Real-Money Managers talk Digital FX

Heather McLean talks to a variety of managers to see howeFX technology is helping them succeed.

68. CASE STUDY: Insch Capital

e-Forex talks with Christopher Cruden.

72. VIEWPOINT

Ian O’Flaherty discusses: Value-added services – the key todifferentiating amongst single bank Portals?

74.Technology: Fuelling the growth of FX Prime Brokerage

Devin Graham explains why the future success of FX primebrokerage will rely heavily on technological advances.

76. The cross-asset platform environment: overcoming a

siloed history

Paul Hodgson shows how we are now well on the roadtowards successfully trading across asset classes.

82. PRODUCT SPOTLIGHT

FX OrderView: Taking control of the limit order process.

84. e-FOREX SURGERY

Trading FX Options online: the multi-bank portal perspective.

86. Improving FX Connectivity – harnessing a new

generation of technology

Roger Bright shows how the systems responsible for RFQs,credit, execution, risk management and back officeprocessing are maturing and why we need to improve theway they talk to each other.

90. Regional e-FX perspective: Canada

Andy Webb examines e-FX within the country.

122. FORUM: Meeting the demand for FX Algorithmic

Trading

With Progress Software, Portware, LatentZero, Lava Trading,Orc Software and FlexTrade.

132. Retail eFX: Strengthening trading relationships with

clients

Heather McLean interviews a selection of online FX brokersto see how e-trading technology is impacting on theirrelationships with clients.

138. Traders Workshop: Advanced Technical Analysis - are

you getting the most from your e-FX toolbox? By RagheeHorner.

The e-Forex Roundtable98. What does it take to be a full service FX provider?

With The Royal Bank of Scotland, Calyon, Abn Amro, HSBCand Citibank.

FOCUS: Pricing innovation –

fuelling the FX technology arms race

104. Big Wednesday - Current challenges to FX price engine

capability and performance

Greg Surman looks at how the demand for Price Enginesolutions is evolving from "more features" towards a mix of"raw performance” and “more analysis”.

108. Pricing IQs - developing more intelligent rate engines

Yaacov Heidingsfeld illustrates how advances in technologyare facilitating the challenge of meeting increased demandfor deal flow by enabling the development of moreintelligent FX pricing and rate engine solutions.

112. First rate: Building FX business through intelligent

pricing technology

Carl Martin explains how, with the right rate engine, pricingtool and trading venue, every provider can deliver the levelsof speed, quality and service need to build a successful FXbusiness.

118. Over stretched pricing engines feeling the pain

John Brennan sets out why upgrading and adapting pricingengines to meet the demands of the marketplace is currentlya priority for many financial institutions

The e-Forex Interview143. With Reine Dossou, head of e-business at SociétéGénérale, Corporate & Investment Banking

Supervision versus Regulation

Taming the OTC market

Real-Money managers

Wealth Management

contentsapril 2006

april 2006 e-FOREX 7

news Barclays Capital launchesstreaming FX option pricingBarclays Capital has launched electronic trading of vanilla FXoptions on its proprietary platform, BARX for FX Trading. BARX forFX Trading offers live two-way streaming tradable prices of FXoptions across 17 currency pairs, out to 1 year, with auto quotingup to $125m in some currencies. It also offers the ability to priceany type of exotic FX option.

The new service is aimed at corporates, hedge funds and banks andhas been launched in the US and Europe, with plans to roll out toAsia in the near future. Barclays Capital also plans to add morecurrency pairs, raise auto quoting levels and add higher tenors.


HSBCnet Market Data offersimproved usabilityHSBC has launched a new set of enhancements to its Market Datamodule on HSBCnet. With this improved usability, users can viewintra-day charting of real-time spot rates in their selectedcurrencies, take a snapshot of HSBC’s rates and download them toMS Excel, view Fixed Income benchmark rates, view HSBC MoneyMarket deposit rates and view HSBC’s contributed rates for fixingson HKD HIBOR, USD LIBOR, GBP LIBOR and EUR EURIBOR.

In addition, users can access FX charting, forward calculator, researchpublications and other information via a single interface. The ‘all-in-one’ FX expanded tool provides easy access to FX charting, provideslinks to the Currency Weekly or Currency Outlook research reportsand has a forward calculator providing indicative prices.

Deutsche Bank launchesstreaming prices on FX IndicesHaving invested in the infrastructure during 2005, DB recentlylaunched live streaming prices on a broad range of FX Indices. Theservice is available via DB’s premier online trading platformautobahnFX. Indices are widely used in most other marketsincluding fixed income, equities and commodities, but until recentlytheir application to the world’s currency markets has been limited.

DB’s indices are based on the trade weighted currency basketswhich central banks publish as their benchmark of currencystrength. Liquidity is as deep as the spot FX rates upon which eachindex is based. Participants who trade these index products willenjoy direct and economical market access to a benchmarkexposure: a more sophisticated and diversified kind of currency risk.

MAREX Financial selectsLavaFXLava Trading Inc has announced that MAREX Financial, a firmauthorized and regulated by the Financial Services Authority, hasselected Lava's LavaFX™ product suite to provide foreign exchangetrading services to MAREX clients. Built upon Lava's leading,proprietary technology core, LavaFX offers a Central Limit OrderBook of live dealable prices, full price transparency and depth ofbook, and the ability to place bids and offers, together with Lava'ssophisticated order types. The system aggregates multiple sourcesof FX liquidity into a single access point, which can be tapped via thefast, intuitive LavaFX user interface, or through a FIX API gearedtowards model and programtraders.

"We welcome this collaborationwith MAREX," said David Ogg,Chief Executive Officer, LavaFX."LavaFX is designed to meet thedemanding needs of institutionalFX traders seeking anonymous,high-liquidity trading destinations.We are confident our fast, reliableand intelligent FX trading solutionwill prove very valuable toMAREX's clients." David Ogg

DEALING IN EXPERTISE

Cognotec RealStream™ offers genuine one-touch trading and enables banks to offer true streamingbespoke pricing. Intelligent positioning of critical data facilitates the seamless integration of rates andexecution enabling the delivery of instantaneous trade execution across all trading channels.

In addition to bespoke pricing Cognotec RealStream™ provides built-in safeguards that protect the bankagainst off market prices and unusual trading activity there by enabling the bank to retain complete control.

As a result of major technical innovation RealStream™ is:• Bespoke – true executable streaming rates tailored to your needs• Instantaneous – real-time prices dynamically updated• Intelligent – one key stroke by the client completes the deal• Scalable – enhanced distribution with built-in scalability• Reputable – buy into an outstanding record

TMRealStream

ARE YOUR EXECUTABLESTREAMING RATES THIS FAST?

www.cognotec.com/[email protected]

New York +1 212 433 1520London +44 (0) 207 448 5917Singapore +44 65 6837 2008

Tokyo +81 3 3507 5776The Future of Executable Streaming Rates

news CME adds second market makerfor Russian Ruble futuresCME has added a second market maker for CME Russian Rublefutures. HSBC Bank plc. will provide continuous, transparent andcompetitive markets for this contract during London trading hours.HSBC is one of the top liquidity providers in the off-shore RussianRuble non-deliverable forwards market as well as a market maker inlocal Ruble-denominated products.

A single CME Russian Ruble futures contract represents 2.5 millionrubles with a notional value of approximately $86,000. Unlike mostCME FX futures, this contract is cash settled so that it complies withcurrent Russian exchange control regulations. Last year CMERussian Ruble futures and options traded $4 billion in notional value.

Currenex offers Staged Order ManagementCurrenex is now offering a new risk control feature, Staged OrderManagement, which is in direct response to customer demand fora large block trading tool. Staged Order Management, Currenex’sblock trading tool, is an order management system for clients whorequire advanced controls to enhance operational riskmanagement. Order staging creates separate and independentroles whereby a Submitter has the ability to upload Staged Ordersto the Currenex platform for execution by a Trader who can workand execute a trading order in a controlled manner.

All activity on Currenex platforms is controlled through strictauthentication and authorization procedures. Currenex providesseveral levels of permissions to achieve separation and ensurestrong, auditable Straight through Processing (STP) from frontoffice to back office reporting and confirmation. Staged OrderManagement is an optional feature that further strengthens aclient’s security when staging block trades.

Calyon continues the roll out ofAquariusCalyon is now offering live streaming prices 24 hours a day on itstrading platform Aquarius. The platform has been designed withthe FX professionals in mind, offering real time price informationand "click and trade" technology.

Clients require fast and accurate price detection and rapid executionand Aquarius offers this with other key features including:

• "Click and Trade" for FX Spot

• RFQ for FX Spot, Forwards and Swaps

• Fast and secure on-line trading

• Real time Deal Log

• Live tradable streaming prices

• Configure your screen to suit your currency needs

• Live trade blotter available

Calyon specializes not only in G10 currencies but also EasternEuropean currencies (HUF, SKK, CZK & PLN), Asian currencies(SGD, THB& HKD), Latin American currency (MXN) and SouthAfrican currency (ZAR).


SEB joins FX ConnectSEB Group has joined FX Connect, State Street’s electronic foreignexchange trading system. Launched in 1996, State Street’s FXConnect became the industry’s first buy-side, multi-bank FX tradingplatform in 2000 and last year, FX Connect surpassed $45 billion indaily trading volume, underscoring its dominant position in theonline electronic foreign exchange marketplace.

“FX Connect complements our overall eFX strategy with its global distribution into the AssetManagement community,” saidDavid Steiner global head of eFXat SEB. FX Connect is offered viaState Street’s proprietary GlobalLink® network, which deliversunique fact-based research,decision support tools and tradingtechnology for six asset classes toclients in 24 countries worldwide,who collectively manageapproximately 75 percent of theworld's total professionallymanaged assets. David Steiner

news DKW launches FX PrimeBrokerage businessDresdner Kleinwort Wasserstein (DrKW), has launched its newForeign Exchange Prime Brokerage business (FXPB), whichrepresents the completion of DrKW's Digital Markets cross assetclass Prime Brokerage product offering. Using innovative proprietarytechnology, DrKW has developed a flexible and user-friendly front toback FXPB platform which provides a variety of clients, includinghedge funds, with access to products and services including FX Spot,Forwards and Swaps; Vanilla and Exotic FX Derivatives; local marketcurrencies and derivatives; and precious metals and commodities.

Clients also have access to a dedicated FXPB account managementteam, structuring and advisory expertise in addition to relevantanalytics - including market sentiment - and research.

GFT Introduces Joe DiNapoli’sIndicatorsGlobal Forex Trading (GFT) is now offering D-Levels™ by JoeDiNapoli directly within its award-winning trading software,DealBook® FX 2. The complete suite of D-Levels™ is a turnkey set ofleading and lagging indicators and Fibonacci analysis and is based onDiNapoli’s highly regarded book, Trading with DiNapoli Levels: ThePractical Application of Fibonacci Analysis to Investment Markets.

“These new indicators in DealBook® FX 2 offer traders the totalDiNapoli-based approach, which gives subscribers and customersa real advantage in the currency markets,” said Gary L. Tilkin,president and CEO, GFT. The D-Level™ indicators are highlyregarded by traders worldwide due to their application in helpingtraders to eliminate subjectivity when identifying Fibonacci supportand resistance levels and targets for entry and exit the FX market.

Portware experiencingsignificant growth in Algo FX Portware is experiencing significant growth in client’s use ofalgorithmic trading for FX trading through its executionmanagement system. The PortwareFX platform offers users thepower of Portware’s algorithmic engine coupled with a deep poolof liquidity that is customized based on user preferences.

PortwareFX aggregates liquidity from multiple banks and ECNs intoa single access point where users can access that liquidityprogrammatically via the system’s API or by using Portware’s GUIfor point and click dealing. Users can see all the liquidity availableacross all their sources at each price level in real-time and then actupon opportunities presented to them. PortwareFX’s smart routingtechnology seeks out the liquidity across all sources while blackbox models get a consolidated view of all liquidity, callingPortware’s FX algorithms to enable intelligent order routing.

Reuters adds Thai Baht to itselectronic matching serviceReuters has become the first company to introduce the electronictrading of the Thai Baht (THB) against the US dollar, through its premier electronic matching service, Reuters Dealing 3000 Spot Matching.

Banks globally are able to trade the new currency pair, USD/THB ona spot basis, adding to the existing Reuters electronic matchingservice which now provides liquidity to 43 countries, covering 26currency pairs listing 43 instruments.


Expanding was the least we could do to connect you to the major worldmarkets

The merger between Crédit Agricole Indosuez and

Crédit Lyonnais’ Corporate and Investment banking unit has created a new name: CALYON.

The complementary nature of these two institutions makes CALYON one of

the leading European banks. CALYON enjoys a global coverage (60 countries), a full range of products and services,

and strong ratings (AA- Standard and Poor's, Aa2 Moody's, AA FitchRatings). Over 1,800 Capital Markets experts

deployed in 30 dealing rooms will help you find the best solution to attain your goals.

This is why, we strive to remain your privileged partner.

www.calyon.com

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news Nordea releases new version of e-MarketsNordea has released a new version of e-Markets. The new version isbuilt on Sun Java technology for Windows and includes highlyimproved usability for the target users of e-Markets.

All market content is easily accessible through a left-side menuproviding country, region and product perspectives of streamingquotes, news and research. Moreover, users can create personalviews for monitoring the markets which are relevant for them. Usersof e-Markets also have access to a suite of in-depth analytical toolsfor risk management, pricing and portfolio analysis across differenttypes of financial products.

Option Computersimplements market riskmanagement moduleOption Computers has implemented a market risk managementmodule within its DealHub application suite which allows banks toimplement real-time controls over algorithmic trading models. Thesolution is now live globally with a major customer and controlsmodels executing via Reuters Dealing 3000 and EBS AI. Additionalvenues will be available soon.

Banks are able to impose a gross turnover limit and net limits on atotal, model or per currency basis. Warning level breaches generatevarious alerts and can stop the trading API automatically. An audittrail for MIS, brokerage and usage analysis is also created.

Interbank FX enhancesinstitutional offerings Interbank FX’s Money Management and Introducing Brokerapplications have already been garnering praise from clients acrossthe globe. Now the Forex market pioneer is adding real-timestreaming news to the offering. Interbank FX’s proprietarytechnology and distinctive approach to foreign exchange tradingallow their customers to execute directly from a streamingInterbank quote feed and receive instant trade confirmation. Theyalso provide each and every client with free technical analysis tools,an advanced trading platform, and now real time streaming news.

Their institutional offerings include the PAMM platform, whichenables money managers to manage the allocation of block tradesfrom a master account by either percent allocation or pre-selectedcontract or lot sizes for each individual account, and the IntroducingBroker program, that supplies partners with comprehensive backoffice support, online tracking, instant commission payments and avariety of other tools.


Swapstream goes live withSwapsWireSwapstream has announced it’s gone live with its interface withSwapsWire, the electronic confirmation and straight-through-processing (STP) network for derivatives. Deals executed onSwapstream by banks and brokers can now be fed to the SwapsWirenetwork for trade capture and confirmation.

In addition to electronic price discovery, price dissemination, orderand trade management, and negotiation for IRS, this interfaceenables Swapstream users to ‘close the loop’ in terms of tradeconfirmations and immediate updates to their internal systems.

news

Reuters launches new e-trading capabilityReuters has launched an e-trading capability for professionalsdealing in exchange traded markets. Reuters Trading for Exchangeswill, for the first time, allow buy-side users to discover the price ofan instrument, select from a range of brokers with which to tradeand execute a trade, all from a single screen. Deutsche Bank,Barclays Capital and FIMAT International Banque S.A. are the first tosign up to offer trade execution and clearing services, with morebrokers, including ABN Amro Futures, committed to joining during2006. Mark Redwood, ManagingDirector of Reuters Sales & TradingDivision, said, “The growth oftrading in exchange listedinstruments has been exceptional.Reuters is the first company tooffer a broker-neutral globaltrading capability in exchangetraded instruments and its additioncompletes coverage of major assetclasses available for tradingthrough the Reuters desktop.” Mark Redwood

FXpress enhances offerings withFIRST™ Allocate FXpress Treasury Solutions has recently released FIRST™ Allocate,an automated hedge request and trade allocation tool. This advancedWeb-based technology has created a workflow where remotesubsidiaries can request hedges from a centralized trading center.Those requests are consolidated and hedged with a single derivativeand the system automatically creates all of the inter-companytransactions and properly accounts for each legal entity involved.

“Prior to FIRST™ Allocate, corporate treasurers had to either booka series of derivative transactions, or create complicatedspreadsheets to effectively track P&L and accounting results ofconsolidated foreign currency forecasts,” said James Gilbert,FXpress Corporation’s Director of Business Development.

D U B L I N • L O N D O N • M O U N T A I N V I E W • N E W Y O R K • S I N G A P O R E • T O K Y O • T O R O N T O

w o r l d w i d e

s t a t e - o f - t h e - a r t

u . s . p a t e n t e d t e c h n o l o g y

i n t e r n e t

s o f t w a r e & s e r v i c e s

i n n o v a t i o n i n c a p i t a l m a r k e t s

e - b u s i n e s s s o l u t i o n s

e n t e r p r i s e j a v a

Welcome to next generation eFX.

To upgrade your eFX solution, contact [email protected] or visit http://www.integral.com/eFX.

i n t e g r a l d e v e l o p m e n t c o r p .

news

MIG Investments, now with 2pip spreads on six currency pairsMIG Investments is now providing new and lower spreads on almostall of its currency pairs with just 2 pip spreads on six pairs (EURUSD,USDJPY, AUDUSD, EURGBP, EURCHF & CHFJPY) and 3 pip spreads onanother four (GBPUSD, USDCHF, USDCAD & EURJPY). Five new pairshave been made available on the MIG Trading Station, allowing clientsto trade a total of 25 currency pairs as well as spot Gold and Silver.

The minimum amount to open an account is now just $2,000, withthe possibility to trade mini-lots. Clients can also choose to havetheir accounts denominated in USD, EUR, GBP, JPY, CHF, AUD orCAD. Even more advantageous conditions apply to institutionalclients opening accounts with a minimum of $100,000, includingrebates of $15 per traded million.

360T launches streaming‘click & trade’ 360T®, operator of Cross-Product Multibank Portal TEX® andprovider of OTC trading technology, has launched new tradingfunctionality allowing instant execution of continuous streamingprices from multiple providers. Clients of 360T now have the choicebetween an event driven ‘request-for-streamed quotes’ and thenew functionality of instant ‘click-and-trade’ on multiple continuousprice streams. Both mechanisms are accessible through 360T’spopular Multibank Portal TEX®.

“We have faced tremendous demand for this functionality and havetaken advantage of the intellectual input provided by some of ourmost professional users and prospects on buy and sell side” saysCarlo Kölzer, co-founder and member of 360T’s executive board.

To organise a demo please contact Gabor KORMOS or Franck MIKULECZ.

BAXTER-Solutions Kft.1075 Károly krt. 1.Budapest, Hungary

phone: +36 (1) 235 06 87e-Mail: [email protected]

BAXTER-Solutions LLC2116 3rd StreetSanta Monica, CA 90405USA

phone: +1 (310) 399 00 93

BAXTER Financial Services Ltd.Dublin Exchange FacilityIFSC, Dublin 1Ireland

phone: +353 (1) 670 04 55

The TrackWheel®:An efficient visual interface for

traders to quickly and intuitivelyadapt their pricing in real time.

"Skew" commands are sent to theserver side, allowing to integrate

the Dealer's knowledge in the PriceStream.

Trade Blotter:Real-time market activity is

reported at lightning speeds,even over remote networks.

Trades can be marked-to-marketfor instant evaluation of

counter-party profitability.

Admin Tool:Fine-grained but practical administration

provides control to management at various levels of the firm. Market

makers can access the parameters thataffect their trading profitability.

Alternatively please call a member of our professional technical sales teams in the following offices:

news

Saxo Bank offers wireless FX Saxo Bank now offers one-click FX trading from any computer ormobile phone with the new, browser-based WebTrader. Nodownloads or installations are necessary, so clients can log in to theirSaxo Bank accounts from anywhere in the world in under a minuteand trade FX on competitive, up-to-the-second streaming prices.

WebTrader includes a built-in MobileTrader function, letting clientsopen or close their FX positions from any GPRS mobile phone.MobileTrader is equipped with features including financial analysis,an advanced charting tool and dynamically calculated P/L.WebTrader is open 24 hours a day, with streaming prices, charts,real-time news and market analysis and all account information issecurely encrypted.

RBS launches FX ElectronicOrderbookThe Royal Bank of Scotland, Global Banking and Markets, haslaunched its FX Electronic Orderbook, an addition to its foreignexchange dealing platform, RBSTrade. Orderbook allows clients tosubmit directly orders for automatic or manual execution via theRBS trading desks – both for Spot and Forward rollover orders.

The FX Electronic Orderbook can handle a full range of ordersranging from the simple to the more complex, e.g., Take Profit, StopLoss, One Cancels Other (OCO), If Done Other (IDO), on a GoodUntil Cancelled or Good Till Time basis. Clients can submit ordersvia Trade, the bank’s online trading service for FX, Money Marketsand Global Treasury Funds. Orders can be submitted, monitored,amended, cancelled, and booked, directly through RBSTrade’s real-time blotter or via an API.


MAREX Financial selects FXallFXall has been selected by independent brokerage companyMAREX Financial, a firm authorised and regulated by the FinancialServices Authority, to provide foreign exchange liquidity andtrading services to its clients. The deal enables MAREX customersto tap into multiple sources of liquidity for fast execution and tightpricing in more than 200 currency pairs. By using MAREX as a prime broker, customers can trade on a non-disclosed basis whileleveraging MAREX’s strong creditlines with the market’s majorsources of liquidity. Traders alsohave the option of connectingalgorithmic trading models toFXall via an API or FXall’s FIXGateway for fully automatedtrading.

Farooq Muzammal, Head ofForeign Exchange at MAREXFinancial, says: We selected FXallbecause it offers our clientsaccess to a marketplace ofunparalleled depth and consistency, as well as having a trackrecord for building strong, collaborative relationships with partnersand clients.”

Farooq Muzammal

RBS signs 100th client onBloomberg FX The Royal Bank of Scotland, Global Banking and Markets hasannounced the signing of its 100th client on the Bloomberg ForeignExchange ("FX") Platform. RBS’s traded volumes have grownsharply on the Bloomberg FX Platform after only six months ofgoing live which reflects the growing appeal of Bloomberg's FXplatform, which is part of the Bloomberg Professional® service.

RBS was the first major international bank to announce back in May2005 that it had gone live with streaming FX spot trading via theBloomberg Professional service. This development complementedRBS’s existing electronic trading capabilities on Bloomberg allowingclients to trade FX and Fixed Income electronically. The BloombergFX Platform offers enhanced straight-through processing and greaterFX trading functionality, allowing clients to keep an eye on themarkets, obtain news, use technical analysis and access research.

For more information about ESP™ contact Currenex at [email protected] phone +44 (0) 207 400 6200 or +1 212 685 5950

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Executable Streaming Prices from Currenex. Instant execution, filled limit orders,automated prime broker give-up, full STP.

YOU DON’T NEED SIXTH SENSE FOR ESP™.JUST COMMON SENSE.

Currenex UK Limited is authorised and regulated by The Financial Services Authority

newsKnight Capital Group toacquire Hotspot FX Knight Capital Group, Inc. has agreed to acquire Hotspot FX, Inc. Thetransaction is expected to close later this month subject to regulatoryapprovals, afterwhich Hotspot FX will operate as a separatesubsidiary of Knight Capital Group.

"The addition of Hotspot advances Knight's ambition to become avirtual exchange for high-quality trade execution across multiple assetclasses," said Thomas M. Joyce, Chairman and Chief Executive Officerof Knight Capital Group. "In an increasingly fragmented market, clientswant a centralized source for deep liquidity in the widest variety ofsecurities.

"Both firms share a culture of client service and both are deeplycommitted to driving market innovation through creative technologiesand market structures," said John H. Eley, President and ChiefExecutive Officer, Hotspot FX Inc. "Knight has strong clientrelationships and deep technology resources that will help take theHotspot FX marketplaces to the next level."

20 january 2006 e-FOREX

Thomas M. Joyce

John Eley

HSBC adopts TraderMade'smobile solutionsHSBC has selected analytics vendor Tradermade Internationalto help deliver real-time charts and quotes via mobile devicesfor its global treasury staff. Available on BlackBerry, mobilephone and PDA, TM-Cell offers a mobile window into the recentprice action of a number of FX rates, precious metals,commodities, futures and stock indices. No software needs tobe downloaded onto the device and a simple bookmarked pageenables quick and easy access. Communication costs are alsokept to a minimum due to the efficient delivery mechanism ofthe chart images. "It’s one thing to see real-time market priceson your mobile device, but it's a real bonus to be able to view achart of the last few hours," said Alan Clarke, Global Head of E-commerce FX at HSBC. "With their high-quality data andinnovative technology, TraderMade have enabled us to equipour staff with the information they require, 24/7."

The RIM and BlackBerry families ofrelated marks, images and symbolsare the exclusive properties of andtrademarks or registeredtrademarks of Research In MotionLimited - used by permission.

BBH offers third party solution combiningInfomediary and FXBrown Brothers Harriman has introduceda new solution combining BBHInfomediary and FX execution. Thisplatform allows active third party FXexecution without the need to build aninfrastructure, eliminating operational andtechnical pain points. Using Infomediary,FX trade instructions are routed to FXWorldView where trades are aggregated,ensuring competitive execution andcapturing netting efficiencies.BBH Infomediary solves global assetmanagers' communication issues:communicating with multiple custodians(both SWIFT and non-SWIFT), translatingbetween un-interoperable formats, maintaining industry standards, normalizing disparate data, andautomating manual processes to improve STP. BBH clients use BBH Infomediary for streamliningtrade communications, corporate actions processing, cash and securities reconciliation, and FXinstructions through a single tool designed to send and receive messages in any format.

How far can electronic trading go?How far can electronic trading go?


Foreword

The human race has the ability to take charge of

its own destiny. This has proven to be

detrimental in some cases but at the same time

has also been the driving force since the

creation of the earth. Financial markets emerged

with the first barter trade when man exchanged

surplus goods for other needs. In ancient times

coins and later on notes have been invented to

facilitate trade finance. And yes, at that time the

first foreign exchange traders emerged!

Long gone are the days when we had to do

physical trading to exchange surplus liquidity

in one currency for deficits in another as bank

transfers are now common around the world.

Central banks would also like to see a decrease

in the float of currencies in the system as

the cost is huge, and black market practises

would decrease.

When ACI celebrated its 50th anniversary last

year, publications commenting on the

evolution of our profession mentioned many of

the trends we experienced. Ever faster markets

are now driven by increasing use of new

technologies that bring all products traded in

the financial markets around all corners of

the world.

Regular readers of this publication will have

noticed the increasing number of articles about

electronic trading and many firms are making

significant efforts to promote their electronic

trading portals. In the exhibition hall of last

year’s ACI World Congress in Sweden many

vendors offered their electronic solutions to the

delegates. And at the coming ACI World

Congress in Manila the same will happen.

Markets are increasingly global and electronic

trading systems facilitate globalisation.

So where is it all to end? When the first foreign

exchange electronic systems came to market,

many of us thought this wouldn’t last.

Subsequently, many other products have been

introduced into our markets from the simple

money markets instruments up to various

derivative products. Clearly, many more

products that become commoditised will be

added to these platforms. It’s not impossible

that machines will overtake some of the basic

functions now performed by human beings.

If one looks at the population in dealing rooms,

the profile of traders has changed. Gone are the

noisy spot traders of the early days, people are

experts on “mouse” manipulations these days.

We now have systems that combine voice

trading and electronic trading. Highly educated

traders are increasingly a much looked for asset

as they are capable of handling the most

sophisticated products. As these products

become easier to capture by systems, they will

be added to the range of fully electronically

traded products by the same individuals.

This is further induced by other factors. The

highest cost of running a bank has always been

human resources, electronic trading has meant

job losses in a number of areas. Many

associations’ membership numbers have

decreased as a direct result of this electronic

evolution. Support staff are also decreasing as

straight-through-processing has suddenly

moved from straight-to-the-printer to full

information flows into the records of the banks

and automatic generated payment instructions.

The increasing use of CLS for FX related

transactions and the potential increase in the

use of Central Counterparties for many other

products will intensify the use of ever more

sophisticated electronic applications. Job

creation will still happen, but this time on the

IT side.

There are clear dangers as well and sometimes

we should really think about what we are

doing. On the internet individuals have the

opportunity to do their own trading in

currencies, shares, commodities etc. Fraud is

always lurking around the corner and we have

seen some scandals in the past. The central

banks and regulators clearly have a huge task to

protect the retail market participants from

abuse. This is a challenging task that most of

them have only just started to think about.

In this field, the challenge to us in the financial

industry is clear: continue to add value by

streamlining the costs of operations and

efficiency, while pushing up the profits as

required by our shareholders. But also create a

safe environment that protects the retail

investor from any abuse. Let us continue to

click with our mouse but build in the necessary

safeguards to protect our profession.

Godfried De Vidts

President, ACI

www.fxall.com

Efficiency, control,

compliance – with FXall we get them all.”

“Reconciling our forex positions

used to take a day. It now takes

an hour. FXall delivered a solution

that gives us better control of

exposure and risk. We have fully

automated trading with account

allocation at the touch of a button.

With QuickConnect™, it talks

seamlessly with Oracle Treasury,

making compliance much easier.

Using FXall with Oracle applications

has given us a significant boost

in efficiency.”

Geri Westphal Vice President – Assistant Treasurer Oracle Corporation

“

FXall, QuickConnect and all associated logos, are the trademarks of FX Alliance LLC. FX Alliance Limited, regulated by FSA.


Introduction

Foreign exchange markets are a

remarkable success story. With the rapid

expansion of world trade, increased

cross-border investment flows and the

arrival of newly liquid, tradable

currencies, the world’s largest financial

market is a constantly evolving 24/365

digital network that seamlessly ties

together the global economy.

Since 1989, global foreign exchange

turnover has more than tripled to over $2

trillion per day. According to the October

2005 report of the Foreign Exchange

Committee’s Survey of North American

Foreign Exchange Volume, average daily

volume in that region totaled $440 billion

– a remarkable 31.2% increase over

October 2004.

There have been bumps along the road --

scandals involving unauthorized trading,

fraud, and unprofessional trading

practices. But, despite the fact that

the OTC forex market is essentially

supranational and not proscriptively

regulated the ethical character of the

currency market is as good as or better

than that of any other financial market.

The FX market has withstood the dynamic

changes of modern markets well.

Currency market participants have

provided abounding liquidity to other

markets, have stimulated the emergence

of new technologies, risk approaches,

products and services and have ensured a

smooth market environment for the

greatest boom in cross-border finance

that the world has ever seen.

Volumes have grown exponentially.

Margins are razor-thin. Liquidity is deep

and competition is vigorous. Essentially

every enterprise on earth -- from tiny

factories to global asset managers -- can

obtain the currency they need when and

how they need it at transparent prices.

These are the attributes of a thriving

marketplace.

Impact of electronic trading environment

Electronic trading has done much to make

this possible. The currency arena was

one of the earliest adopters of electronic

messaging and today is arguably the

most digital capital market of all. Much of

the wholesale bank-to-bank market is

entirely electronic, and dealer to client

and retail trading is aggressively

migrating online – either to bilateral

standalone platforms or to multi-party

networks of various types.

This is almost entirely a good thing; in

fact, given today’s exploding currency

volumes, electronic trading is a sine qua

non of a thriving and growing

marketplace. But it does raise issues. The

same qualities that make e-forex such a

success – speed, efficiency, flexibility,

scalability – mean that mistakes or

malfeasance can easily expand and

multiply.

Leaving aside the operational questions

of transactional errors and “fat fingered”

trading, e-forex raises important issues

regarding bad trading practice. For

example, the introduction of autodealing

techniques into the FX interdealer market

and other electronic trading venues,

together with the rise of prime brokerage

services, has raised concerns that

unprofessional trading behavior may take

place under the cloak of anonymity--

undermining the reputation of the foreign

exchange market and impeding its

successful self-policing.

Traditionally, almost all FX transactions

have been manually initiated by an

individual trader. But over the past 18

months or so, the FX market has

witnessed the rapid expansion of

automated program trading strategies

that facilitate complex, high-frequency

trading, risk management, the

aggregation and execution of trades and

algorithmic and arbitrage trading.

Autodealing has had no discernable

impact on overall market liquidity or

pricing. The market is still characterized

by increasing numbers of counterparties,

large numbers of individual quotes and

expanding volume and trades at every

price point in almost all market

conditions.

But concerns have been raised

over participants’ ability to transact

automatically on electronic broker

platforms through prime brokerage

services. In traditional prime brokerage,

clients trade in the name of the prime

broker but execute their transactions

directly with the dealer.

In the electronic prime broker model by

contrast, there is no identification of the

trade as being prime brokered at the time

of execution – so the end user is able to

trade anonymously.

While inappropriate trading techniques

Ethical e-FX: Self-Policingand Supervision versus Regulation

Mark Snyder, Executive Vice PresidentState Street Global Markets

Chairman, the Foreign Exchange Committee

L E A D E R

>>>


can be executed manually, the greater

speed and anonymity of autodealing may

impede the self-policing capacity of the

OTC FX market, with potentially negative

implications for its overall risk profile.

Bearing this in mind, and continuing its

tradition of forthright identification of

potential forex market issues, the Foreign

Exchange Committee has established an

Autodealing Subcommittee which is

reviewing the rise and impact of

autodealing, as well as identifying

potential risks. This review will build

upon earlier work of the Committee which

identified more than 20 best practices for

the prime brokerage sector.

“The same qualities that makee-forex such a success –

speed, efficiency, flexibility,scalability – mean that

mistakes or malfeasance caneasily expand and multiply.”

New FX Market Segments

Today’s FX market is witnessing growing

trade volumes dedicated to FX as an

investable, independent asset class.

Many observers have noted that hedge

funds and other leveraged investors have

introduced new dynamics into the market,

as have banks through their use of

algorithmic trading. But it’s also relevant

to focus on the role of the new retail

aggregators who facilitate electronic FX

trading by thousands of individual

investors.

Retail foreign exchange traders have

gained greater market access through

new trading technologies and

business models that are delivering

price discovery, liquidity, execution,

confirmation, and reporting services in

near real time. In the foreign exchange

distribution channel, transaction services

that were historically bundled together

and offered by a single provider have

been broken out into their components,

with specialized entities providing the

individualized services.

These innovations may have the effect ofseparating foreign exchange dealers fromretail end users - a development that may complicate the dealers’ execution of their responsibilities.

Retail aggregators depend on the majorforeign exchange market makers asliquidity providers. Many are banks orregistered brokers and most are futurescommission merchants regulated in theUnited States by the Commodities FuturesTrading Commission (CFTC). As such theymust have internal controls, know-your-customer policies and procedures, antimoney-laundering programs andindependently audited compliance.However not all retail aggregators areregistered as regulated entities.

Wholesale foreign exchange dealers needto be aware that they may face significantreputational risk if they are linked to a transaction chain that results indissatisfaction, litigation or both. Bearingin mind this apparent blurring of thedemarcation between the wholesale andretail foreign exchange markets, theForeign Exchange Committee publisheda letter to market participants inDecember 2005 that calls for good legal documentation and stresses the importance of know-your-customerobligations and contractual relationships.

Market-Based Discipline + Supervision = a

Healthy FX Marketplace

The foreign exchange market itself is not

regulated. That said, the major participants

in the market are well-supervised by

banking and other authorities. The

currency market is, by definition, a

transnational market in that 100 per cent of

its volume moves across borders.

Imposing a regulatory compliance regime

over the whole market would not be

practicable and would unavoidably lead to

an increased cost of doing business and

higher trading and profitability margins,

with negative consequences for every

other capital market and for the global

economy as a whole.

Self-governance places responsibility for

the integrity of the currency market on the

shoulders of market participants

themselves. In the context of the Basel II

accords, this is doubly important.

If ethical lapses and bad practice were

to raise the risk premium of the FX

market, parent institutions would have

no choice but to increase capital-

adequacy allocations, with unpredictable

consequences.

Ethics matter

Ethics matter – if only in the sense of

enlightened self interest. In a perfect world,

all participants in the OTC FX market would

embrace best practice guidelines, ethical

standards and governance principles so as

to foster the highest possible degrees of

trust and confidence in currency trading.

But this best of all worlds may be some

time in coming.

“In the waning years of thecold war, President RonaldReagan famously describedthe warming relationshipbetween the United States

and the Soviet Union with thephrase “trust but verify”.

In the meanwhile, the foreign exchange

market must do its utmost to maintain the

intangible, difficult-to measure, but

nevertheless very real market value

of trust.

Trust between counterparties, and trust

between supervising bodies and

individual market participants. In the

waning years of the cold war, President

Ronald Reagan famously described the

warming relationship between the United

States and the Soviet Union with the

phrase “trust but verify”.

Given the large number of new entrants

into foreign exchange markets, and the

anonymity given some of these

participants by new trading technologies

and new kinds of intermediation, this may

be difficult.

I believe there needs to be appropriate

confidentiality in the foreign exchange

market that meets participants’

reasonable needs without giving any

participant the ability to run roughshod

over its counterparties.

It has been the rule in the foreign

exchange market to let market

participants impose their own market-

based discipline -- rewarding best

practices with reputational acclaim and

new business and shunning untoward

behavior.

Given the speed with which the foreign

exchange marketplace is evolving – and

given its evident success, there appears to

be little need to change course now. In

the end, market forces provide both

carrots and sticks and are surely the

best enforcers of good behavior and

high standards.


L E A D E R


The New Drivers ofE-Trading Growth:Hedge Funds, Real-MoneyManagers and Retail

Since the inception ofelectronic foreign exchangetrading, companies and largefinancial institutions havedriven the rapid and consistentgrowth in e-trading volumes. In2005, however, the pace ofgrowth among corporationsand large institutions slowedconsiderably relative to thatseen in prior years. Despite thisslowdown, e-trading continuedto boom thanks in part to asomewhat unexpected source:retail customers.

Peter D’Amario is a consultant with Greenwich Associates

EFX trading volumes among large

companies and institutions had been

doubling every 12 months for the past

three or four years and this year’s growth

among the institutional segment was more

in the range of 10%. In many respects the

real action in electronic foreign exchange

last year took place among ‘non-

traditional’ FX traders including hedge

funds and so-called ‘retail aggregators’

operating around the world.

Total electronic foreign exchange volume

among the forex customers interviewed by

Greenwich Associates as part of its annual

global FX Research Study increased from

approximately $15.7 trillion in 2004 to

almost $17 trillion in 2005. The majority of

this growth was generated by financial

institutions, which as a group increased

their annual e-trading volume by about 8%.

Among the financials, fund managers and

pension funds significantly increased their

eFX trading activity, with average volume

increasing some 68%. Only one other class

of financial institution topped this rate of

growth: organizations classified not as

banks, funds, hedge funds, nor insurance

companies. E-trading volumes among these

‘other’ financials increased 70% from 2004

to 2005 — a rate of growth that we would

attribute to the large increases in the

amount of business coming through ‘retail

aggregators’, particularly those in the

United States and Asia.


eFX 2005: Financials Lead the Way

The proportion of large corporate and financial users of foreign

exchange services trading FX online remained stable at about 44%

from 2004 to 2005. Over the past 12 months, however, the

proportion of e-trading holdouts that say they plan to start trading

electronically in the coming 12 months slipped slightly from 14%

to 13% a sign that electronic trading systems might have reached

at least a temporary plateau in terms of number of customers.

Across all geographic regions, more than half of financial

institutions trade FX electronically as compared to only 37% of

corporates. Among all types of FX user, those with the heaviest

foreign exchange trading volumes are also the most likely to trade

electronically. More than 55% of corporates or financial

institutions with more than $10 billion in annual forex trading

volume use electronic trading systems, as compared with 37% of

users with total trading volumes between $1 billion and $10

billion, and just 27% of smaller traders.

E-trading systems last year did manage to attract a significant

number of new customers from one important group: hedge funds.

The proportion of hedge funds interviewed by Greenwich around

the world trading FX electronically increased from 49% in 2004 to

53% in 2005. Over that same period, the total amount of electronic

trading volume generated by hedge funds increased 46%.

Total eFX volume also rose dramatically among fund managers

and pension funds. Although the percentage of these FX users

trading electronically was roughly stable from year to year at just

over 40%, fund managers and pension funds that do trade online

increased the portion of their total FX trading volume done

electronically from 53% in 2004 to 61% in 2005. As a result, the

total amount of electronic trading volume generated by this group

increased nearly 70%. Real-money managers increased their

presence in global FX markets last year due to a pick-up in cross-

border investment activity, as well as the growing proclivity

among fund managers and pension funds to trade foreign

exchange as an independent asset-class. It appears that this pick

up in activity has carried over into electronic trading, leading to an

increase in e-trading volumes second only to the retail-driven

growth among ‘other’ financials.

Seasoned E-Traders Get Busy

The increasing share of total FX trading volumes directed by fund

managers and pension funds to eFX reflects a consistent pattern

revealed by Greenwich Associates’ research over the past several

years: Once an FX user decides to trade online, it usually begins a

gradual increase in the share of its total forex trading business

executed through e-trading systems.

Forex users that trade electronically execute an average of 53% of

their total FX trading volume through eFX systems, up from 48%

in 2004. Currently, the share of total forex trading volume captured

by e-trading systems tops 50% among all e-traders regardless of

size, with the largest FX users (those with more than $10 billion in

annual trading volume) executing 51% of their overall business

electronically, and FX users with smaller annual trading volumes

directing between 52% and 55% of their business to e-trading

systems. eFX users in the United Kingdom execute the highest

proportion of their overall FX volume electronically, at 64%,

followed by users in the United States who direct 60% of their total

volume through electronic trading systems.

Users of e-trading systems around the world tell Greenwich

Associates that they expect electronic trading to account for a full

57% of their FX volume in 12 months time. E-traders in the United

States expect to be doing nearly two thirds of their total trade

volume electronically by this time next year. These expectations

suggest that e-trading volumes will continue to grow for the

foreseeable future, but both the pace and duration of that growth

could be tempered by the fact that eFX platforms will have a

harder time attracting new institutional customers.

E-trading platforms have achieved the highest level of market

penetration in the United States, where 54% of participants in the

Greenwich Associates FX research say they trade electronically.

European FX systems are not far behind, having attracted 48% of

European FX users to online trading.

At the other side of the digital divide, FX usage rates are lowest in

Canada, where 18% of FX users trade online, Latin America (21%)

and Japan (31%). In terms of recent progress, electronic trading

providers in Asia finally achieved some long-awaited gains in their

customer base in 2005.

As providers addressed user concerns about technology and

security, the proportion of Asian FX users (outside Japan)

employing electronic trading systems increased from 30% in 2004

to 45% in 2005.

Looking ahead, however, Latin America might be the region with

the greatest potential for near-term growth in its eFX customer

base. Nearly two-in-10 of the large Latin American financial

institutions and corporations participating the Greenwich

Associates FX study in 2005 say they plan to start trading online in

the coming year.



No matter how muchvolumes grow onderivatives exchanges, it isstill the tip of the icebergwhen it comes to theglobal FX market. FrancesMaguire looks at theadvantages of trading on a regulated exchange.

Frances Maguire

The foreign exchange market that has

grown up in the interbank market is still

proving resistant to attempts by the

derivatives exchanges to woo them with

the numerous advantages they offer --

such as credit efficient, anonymous trading

via central counterparty clearing,

extremely liquid markets and total price

transparency not available on many other

trading platforms.

CME sets record volumes

The volume in FX products traded at the

largest exchange, Chicago Mercantile

Exchange (CME), rose by 49% between

February 2004 and 2005. In December

2005, CME had set several FX volume

records, including a new total FX volume

record of 872,271 contracts, representing

$96 billion in notional value. This

surpassed the previous record of 748,050

futures and options contracts traded

achieved in June 2005.

Rick Sears, managing director of FX at

CME, says: “There is an underlying

demand from buy-side customers for

increased efficiencies in all models. There

are still more efficiencies that can be

gained around the credit model in the

foreign exchange market and this is one of

key benefits that CME offers. It doesn’t

really matter what a platform offers –

whether it is diversified order flow, access

to liquidity, or transparency – if you don’t

Rick Sears

>>>


have access to credit. CME has the largest

clearing house in the world and can

probably offer the most efficiency around

offsets on respective risk positions on

other futures products.”

CME carries out pre-trade netting so that

no matter how many trades you do in one

currency, there is always only one

payment, per currency, per delivery period.

This significantly reduces delivery fees.

But rather than simply promoting the

security of trading on-exchange, the CME

is bending over backwards to mirror the

interbank market. Sears says: “Our goal is

better integrate ourselves in to the cash

foreign exchange market. We are doing

this with joint ventures like CME FX on

Reuters, and by changing our options

contracts exercising and expiration

convention to one that mirrors the cash

market. We are very aware of the fact that

we have a product that is a proxy for the

spot market, and we clearly want to win a

bigger piece of the OTC market.”

Sears claims hedge funds are traditional

customers of CME. Up until a decade ago a

lot of banks did not understand or have a

lot of appetite for hedge fund credit, so

they came to the central counterparty

model. This has changed now, with

increasing numbers of banks having built

prime brokerage desks, but historically

they did not have access, from a credit

perspective, to all lot of counterparties, and

they certainly did not have access to a lot

of electronic matching platforms.

According to Sears, there are already a

tremendous number of FX algorithmic

trading systems in action. He says: “We

can tell from a message traffic perspective.

Algorithmic models may send in hundreds

of messages per second. No human could

do that so we know how many black boxes

are out there. We also register users. It is

important to have algorithmic trading as it

creates liquidity. CME is widely considered

to have the lion’s share of the algorithmic

trading participants because we have the

matching technology that allows us to

process that message traffic.”

NYBOT appealing to a broader audience

The New York Board of Trade (NYBOT),

and its subsidiary FINEX Europe, trades a

total of 29 FX products on its two trading

floors in New York and Dublin, and in

January launched the first ever futures

contract to be based on a Euro index.

Joe O’Neill, vice president of NYBOT

believes that, although it is early days, the

FINEX Euro Index contract will appeal to

hedgers and fund managers but may take

some time to get established.

“The euro index is a completely new

concept and nobody has any real risk that

is denominated exactly in a Euro index, but

after a while we will see take-up as a lot of

the European banks and hedge funds

realising if they want to take a view on the

Euro, this is a better vehicle. The proxy

chosen can be the wrong proxy if you are

trading the euro against another pair,

whereas this is a clean and easy way take a

view on the Euro.”

Joe O’Neill


He is also confident that when NYBOT gets

its electronic platform up and running

towards the end of this year they will be

able to appeal to a broader audience.

NYBOT has an agreement with the Chicago

Board of Trade to host the platform for the

exchange and work has already begun to

enable NYBOT’s currency and equity index

products to be traded electronically side-

by-side with the continued floor trading.

There is also a possibility that NYBOT’s

flagship US dollar index contract may be

re-launched with a half-sized contract, or

mini, to attract new FX traders with the

smaller contract size. He says: “The floor

trading will continue to grow, but the

electronic platform will help us to those

traders, especially FX traders, who like to

trade screen only.”

EUREX US the new entrant

A new entrant into the FX market, Eurex

US, launched its first six major USD

currency pairs and four cross currency

pairs in September 2005. Similar to CME,

Eurex US designed the contracts to mimic

the interbank market as closely as possible.

For this reason, the contract size is 250,000

currency units, which is larger than the

other exchange, and notional and quoting

conventions are consistent with spot

markets. Also, to attract hedge funds,

Eurex US waived surcharges on the

exchange for physical (EFP) trades.

Michael McErlean, director of sales and

marketing at Eurex US, says: “Volumes

and open interest levels have varied, but

we’ve been encouraged by the number of

EFP trades that have driven up open

interest numbers. Our customers are able

to realise significant cost savings with our

EFPs while managing their currency risks

through futures.” He says that Eurex’s FX

products were designed to meet the

growing demand for exchange-traded

foreign exchange contracts, as hedge

funds and other non-traditional market

players explore new asset classes.

“An exchange environment like ours offers

anonymity, central clearing and first-in,

first-out matching that is not available in

over-the-counter markets. Traders and

funds benefit from features like central

clearing, transparency, anonymity and

60/40 tax treatment (in the U.S. market)

that doesn’t exist with the unregulated

cash and OTC markets. Eurex US’s fees are

also extremely competitive with the cash

market, bringing in new participants that

have been previously priced out of

currency futures markets,” says McErlean.

To date, the Euro/U.S. dollar contract has

been the most traded contract on Eurex

US. But because most of the EFP business

has been in the cross currencies, the

exchange recently launched a further eight

FX pairs -- one US dollar pair and seven

cross currencies. Hedge funds and

commodity trading advisors (CTAs) have

spurred growth in the derivatives markets

in general and a big driver of this has been

black box trading methodologies. Says

McErlean: “Our FX product was designed

to meet their needs in several ways. Our

technology is robust and meets the needs

of ‘high message traffic’ trading

methodologies that are often employed in

the hedge fund and CTA community.”

Conclusion

Foreign exchange is the most actively

traded asset class in the world, with over

$1.2 trillion in average value traded every

day, according to the Bank for International

Settlements. Commercial banks are the

single largest segment of the global FX

trading community, representing 56 per

cent of all volume. The FX market has long

resisted developing a central counterparty

for spot foreign exchange as being too

expensive due to the sheer size of the

market. However, if hedge funds are

behind the growing trend of trading FX as

an asset class in its own right, the spot

market alone is unlikely to be able to cater

for them – especially as many hedge funds

do not trade cash products at all. This is

perhaps reflected in the growth the

derivatives exchanges see year after year,

but it will always be the tip of the iceberg.


Michael McErlean

Tight bid/ask spreads, global participation, $48 billion in liquidity

each day, volume growth of 65% over last year and trades backed

by the world’s leading clearing house. Take everything CME FX has

to offer – and make the most of it.

Discover how global access can change your world.

CME® FX

Access more opportunity.

CME, the globe logo and Chicago Mercantile Exchange are trademarks of CME.

cme.com


FX portals have become an everyday part

of life in the FX market, and in the process

have also fundamentally changed the nature

of the foreign exchange businesses. One of

the biggest changes has been transparency,

with clients able to compare quotes across

multiple banks and portals with ease. This

improved visibility has inevitably driven a

contraction in quote spreads. Yet despite

this, banks have been both supporters and

instigators of the multibank portals that have

been primarily responsible for this

compression in dealing spreads.

In fact, one could almost describe banks’

early activity in this space as a rush to

action. For example, 2000 saw a flurry of

“go live” announcements from multibank

portals Currenex, FX Connect (became

multibank) and CFOWeb.com – followed in

2001 by FXall, Atriax, Centradia and

HotSpot. One could argue that the

evolution of Internet technology, reduced

processing costs and buyside pressure

were all significant factors in the

emergence of these multibank portals.

However, without the support of liquidityprovider banks they would never havebeen able to launch.

The multiplication effect

For a bank to commit itself to liquidityprovision on multibank portals is not a trivialstep. Although standardised connectivitysolutions have undoubtedly eased thetechnology burdens, the implementation andmaintenance costs for liquidity providers arestill significant, and for some banks aremultiplied across several third party portals.

Of even greater concern are the liquidityrisk management implications of thismultiplication effect, both for the banks andthe market as a whole. If banks are“quoting blind” by automaticallydistributing immediately dealable prices tomultiple portals then they run the risk ofhaving all those prices simultaneouslytaken (either deliberately or coincidentally).If quoting in “full size” on all those portals,this could result in appreciable lossesduring a major market event, or at least asevere liquidity management headache.

Liquidity provision:an alternative slant on multi-portal strategies

The need to stream quotes across multiple FX portals haspresented banks with a major liquidity managementchallenge. As a result, applying the traditional FX marketmaking model across all client groups and multiple FXportals is now looking an increasingly unattractive option.Andy Webb examines the issues and outlines analternative solution.

By Andy Webb

>>>


The alternative is that they attempt to protect

themselves by quoting in smaller size, with wider

spreads, or not at all - to the detriment of the

marketplace. This challenge has driven banks in some

countries to resort to an alternative approach, by

explicitly advising domestic clients that their direct-to-

client quotations will always be tighter than any they

make on multibank portals. While this may have been

partially successful in damping domestic client activity

on multibank portals, it does not really constitute a

viable ongoing business plan.

This rather begs the question of whether some banks’

multi portal strategies are really feasible as long-term

sources of net revenue generation. While some portals

have obviously fallen by the wayside, the need to

spread available liquidity across the remainder (and

the associated support costs) has started to make this

approach look rather like an expensive exercise in

brand awareness.

Value of flow information

The way in which certain banks attempt to capture FX

volume is starting to beg similar questions. The

conventional wisdom has been that all market making

volume constitutes flow information that in turn

assists the bank with its own proprietary position

taking. In the days when such volume largely

consisted of corporations and real money managers

trading substantial size in order to change their

mid/long-term position on a currency, there was

undoubtedly a considerable amount of truth in this.

But the world has moved on. Today, a significant

proportion of daily FX volumes come from participants

such as hedge funds, who in many cases are not

looking months ahead on the basis of economic/

fundamental analysis. By contrast, their focus is much

shorter term and their activity does not necessarily

comprise large directional trades. Instead, many of

them tend towards high frequency trading based upon

perhaps technical or artificial intelligence models that

trigger a large number of small orders. In many

respects their trading activity profile is similar in

character to that of bank proprietary traders in areas

such as arbitrage.

With some of these participants trading clips of $2m

perhaps five hundred times a day, the flow

information value the market making bank derives

from this sort of business is negligible. In fact it could

actually be seen as deleterious, as it represents noise

that has to be filtered out from other transaction data

in order to derive market intelligence from the residue.

In effect it is “inconvenience business” that provides

no worthwhile flow information, but may nevertheless

be supported by the bank in the interests of the

broader client relationship (prime brokerage etc).

In its place

Some banks are finding that this change in customer

activity leaves them pursuing volume almost for its

own sake, rather than profitability. This is not to say

that volume isn’t worth pursuing for other reasons.

For example, volume in the back office factory

obviously drives processing cost efficiencies.

Furthermore, in these days of FX white labelling, that

volume does not even have to originate in house.

But generating that volume does not justify turning

the front office from a profit centre into something

approaching a loss leader.

“Automated quoting across multi-bank portals to aninformed buyside that is trading at high frequency

exposes banks to the ‘winner’s curse’.”

Liquidity provision: an alternative slant on multi-portal strategies

Avoiding this situation necessitates

discerning between two client groups and

servicing them appropriately. On the one

hand are the clients who appreciate the

value the bank can add and whose business

provides genuine market intelligence. On

the other are the counterparties who have a

purely commoditised approach, and who

thereby raise costs, consume resources and

contribute little P & L or genuine flow

information.

Logical alternative

Automated quoting across multi-bank

portals to an informed buyside that is

trading at high frequency exposes banks to

the “winner’s curse”. The best price for the

customer under these circumstances is

typically also the worst price for the bank.

However, rethinking their FX delivery

channel strategy can allow banks to service

this buyside segment more effectively, as

well as reducing the risks and freeing up

resources that can be dedicated to other

FX clients.

The logical alternative is for banks to offer

fee based direct market access that allows

them to focus on their core areas of

expertise in credit and settlement. Other

markets have already graphically

illustrated the dangers of ignoring this sort

of opportunity and clinging instead to an

obsolete business model. For example,

equity markets have seen the rampant

growth of ECNs in recent years at the

expense of NASDAQ. The natural interest

of professional investors was to access

each other’s liquidity directly rather than

via market makers who charged a spread,

which resulted in ECNs accounting for

more than 30% of the volume traded in

NASDAQ stocks.

To avoid this sort of disintermediation,

banks need a different FX business model

for certain client segments that also offers

tangible benefits to both parties. From the

banks’ perspective, an opportunity to

diversify traditional market making revenue

by adding fee income is desirable in terms of

predictability. For the buyside, an

opportunity for price improvement would be

equally welcome. One possible way of

satisfying both sides of this equation is

some form of prime brokerage model.

Certain categories of client would obtain

direct primary market access on a fee basis,

with their prime broker banks providing the

necessary credit and settlement facilities.

The clients gain access to deep liquidity and

the opportunity for price improvement

through making as well as taking prices. The

bank sheds risk, reduces costs, and acquires

a more predictable revenue stream.

Conclusion

Market structures change just as market

prices do. Therefore assuming that

tomorrow will always be the same as

today is hardly a robust long-term FX

business model.

Clinging to dealing practices that in the

case of certain clients are effectively

increasing proportional cost and risk

makes little sense.

However, some banks are concerned that

adopting the direct access model and

attempting to divert appropriate clients

into this channel will trigger a stampede.

This overlooks the fact that only the

highest frequency and most commoditised

trading operations are likely to see this

alternative route as a match with their

natural interests. The remainder will

regard it as inappropriate for their needs

and will prefer instead to persist with

their existing value added bank FX

relationships.

The crucial point is that quoting a bid/offer

spread on multiple portals was originally

about delivering a service to clients.

However, in certain cases it has more

recently become perilously close to an

outright competition with them. In view of

the costs, the need to distribute prices

across multiple portals, and the nature of

these clients’ trading activity, this is a

competition where the bank is increasingly

likely to end up as the net loser. In which

case, providing selective direct access that

stimulates client trading volumes and fee

income, and allows resources to be

allocated more efficiently to services that

can be explicitly charged for, looks a more

promising solution.


“The crucial point is that quoting a bid/offerspread on multiple portals was originallyabout delivering a service to clients.”


Growing FX eCommerce revenuethrough Wealth Management

product distributionSignificant revenue growth can be achieved by successfullydistributing FX products to High Net Worth (“HNW”) clientsand Family Offices. These client segments have beenoverlooked by many FX eCommerce groups. However, withincreased pressure on eCommerce platforms to contributeto the bottom line the greater the need to serve profitablemarket segments. HNW clients and Family Offices can beextremely profitable if served well.

Dave Clarke, Co-Founder & Director

Technology for Markets Limited

[email protected]

>>>


The key to successfully providing FX products to HNW clients is to

deliver products that help those clients achieve their financial

objectives. Only a minority of HNW clients wish to speculate in FX

through a margin account. The majority of HNW clients are

seeking to achieve a level of return whilst taking sensible risks

with respect to capital preservation.

Many FX desks have failed to penetrate their internal HNW client

groups as a result of pushing inappropriate products and by

failing to convince clients of the need for FX investments. Asset

allocation is the starting point for a relationship with the HNW

clients.

When FX is viewed as an asset class the discussion with HNW

clients and their advisors turns from whether or not a client should

have exposure to FX at all, to a discussion of what percentage of

the clients’ portfolio should be invested in FX in order to reduce

overall portfolio risk through diversification. The discussion then

becomes a process of selecting the appropriate product to provide

this diversification.

Medium Term Notes

Medium Term Notes (“MTN’s”) are the most attractive investment

for clients requiring capital preservation.

The MTN’s that are most successful have coupons that are linked

to a basket of currencies. eCommerce groups can provide

significant benefits to this process by delivering technology that

makes the distribution of MTN’s scalable. Typically, a MTN will be

launched with a defined marketing period.

The financial advisors that deal directly with HNW clients will offer

the product to clients based on a term sheet that explains the

details and performance of the note. The financial advisor with

then notify the issuing desk of any firm orders. If this is done

manually it is a slow and inefficient process.

“eCommerce groups can providesignificant benefits to this process bydelivering technology that makes the

distribution of MTN’s scalable.”

FX eCommerce groups can improve this process by providing an

internal web offering that serves both as an effective advertising

medium and an order taking mechanism.

Dual Currency Deposits

Dual Currency Deposits (“DCD’s”) are widely used by investors to

achieve superior returns over simple deposit products. DCD’s are

particularly popular at the moment due to the relatively low

interest rate environment.

These products have been widely used by HNW clients in Asia for

many years. Part of the reason for this popularity is due to the

tendency of HNW clients in Asia to allocate assets between USD

investments and EUR investments. Whilst not necessarily a 50:50

split it is not unusual to see a 60:40 or 70:30 allocation between

USD and EUR investments. For this reason there is little

incremental risk to a HNW client from a DCD that is denominated

in USD’s but that could be repaid in EUR’s as it would simply alter

the balance of assets.

Simple, High Margin Business Model

From a client’s point of view DCD’s offer the opportunity to

achieve greater returns and a greater degree of diversity of returns

without assets being tied up for a long period. From the

institutions perspective DCD’s offer a simple, high margin

business model. DCD’s are short dated but they are often rolled

over into new DCD’s at maturity.

Growing FX eCommerce revenue through WealthManagement product distribution

“Through the use of appropriatetechnology it is possible to offer highlyvisible incentives to financial advisors

for distributing DCD’s.”

By the nature of the product they are naturally suited to effective joint

ventures between the HNW client group and the FX business unit.

Through the use of appropriate technology it is possible to offer

highly visible incentives to financial advisors for distributing DCD’s.

This is critical in an environment where financial advisors have a

range of products being marketed to them all of which represent

commission generating opportunities.

Significant Revenue Opportunity

As cash trades move increasingly electronic, margins from cash

products are diminishing with all client segments. Derivative

product margins with large clients are being eroded by

competition and the effects of accounting regulation. A significant

new revenue opportunity can be realised very quickly by

distributing DCD’s in high volume.

DCD Distribution Is Not Scalable Without Technology

DCD’s typically require a structurer with a spreadsheet to provide

pricing. This limits the scale on which the product can be

distributed. Structurers are expensive and scarce. Spreadsheets

rely on the knowledge of the structurer to use appropriate logic to

select a suitable option, strike price, or other option contract terms

to construct the DCD. These spreadsheets typically cannot be used

by FX salespeople or non-FX specialists. The structurer therefore

becomes a gatekeeper to the product.

To make significant and stable revenue from DCD’s it is necessary

to distribute in high volume. This also requires the minimum

notional amount of the DCD to be as small as possible in order to

create a larger target market. Small trades are of little interest to a

structurer as the effort outweighs the reward. This is where

eCommerce technology can solve this problem by simplifying the

distribution model.

Making Distribution Simple

FX eCommerce groups can provide high volume distribution of

DCD’s by deploying a simple to use DCD structuring tool such as

the product developed by Technology for Markets (“TfM”) that

makes it possible for non-FX specialists to serve clients with DCD’s.

For example, TfM’s DCD Structuring Tool:

• Automates the structuring logic

• Allows users to model profit scenarios to optimise the revenue

opportunity

• Automates the revenue sharing rules of the JV between

distributor and provider

• Creates a term sheet, including the scenario analysis

• Links to legacy option pricing tools, market data sources, etc

There are several benefits to deploying a simple to use DCD

structuring tool. As the interface is designed to be used by financial

advisors directly, without the intervention of a structurer, it enables

large scale distribution. Ultimately, the interface could be offered

directly to clients. By deploying a tool that can be used by a wide

range of users it does not tie up valuable structuring resources on

small transactions. The technology facilitates revenue

opportunities to both the distribution channel as well as the

options desk and eCommerce group. The interface clearly

highlights the significant incentives to financial advisors,

salespeople and other client facing staff.

Ensuring Success

FX businesses that embark on a strategy to grow revenues from

HNW clients are strongly advised to leverage external expertise

whilst developing and executing their strategy. There are many

questions and objections that need to be considered during this

process. These include:

• How will the component trades be booked in the legacy

systems?

• What currencies should the client have exposure to?

• Can barrier options be used?

• Can the product be called a deposit in all jurisdictions?

• How can the potential risks to the client be demonstrated

sufficiently to meet regulatory requirements?

• What if the client wishes to terminate the deposit early?

• Who should be responsible for determining suitability of the

product?

Summary

Banks and financial institutions are seeking new ways to increase

FX profitability as revenues from cash products decline as a result

of the effects of eCommerce. Significant revenue growth can be

achieved by successfully distributing FX products to HNW clients.

The key to successfully providing FX products to HNW clients is to

deliver products that help those clients achieve their financial

objectives. FX eCommerce groups can provide the platforms that

drive the revenue growth from HNW clients by providing the

infrastructure to efficiently distribute MTN’s and DCD’s. Achieving

significant revenue growth requires distribution on a large scale

which is the natural domain of FX eCommerce technology.

Leveraging external domain expertise will ensure swift

deployment and shorten the time to delivery.


The OTC FX Options market has so far resisted widespread

electronic execution because of a lack of liquidity and volume,

but with BIS-reported trading volumes up 96% in the past three

years and with every fund manager and investor from New York

to Tokyo using FX options, electronic trading of options is

emerging as the next big thing in FX.

Another factor is that banks view FX derivatives as critical to

their customer relationships and have resisted embracing an

electronic channel they view as potentially threatening to the

relationship between the client and their sales desk. Given the

wide range of option types and structures, and the role of bank

sales in helping customers make decisions about the

appropriate and effective use of options, it is clear that e-

commerce platforms can succeed in the options market only if

they:

• explicitly support the relationship between the bank

salesperson and his or her customers,

• support customized structures,

• are not dependent on brokerage fees for commercial

success, since the platform will likely be used for price

discovery that results in phone trades as well as trades

executed electronically,

• provide workflow and straight-through-processing

(STP) advantages to both customer and bank,

• and add value to the trade with integrated pre- and

post-trade analytical tools.

A wider of circle of banks are now building out FX options

offerings on their Web sites. To complement these efforts in a

way that brings added value to banks, third-party platforms

need to provide:

• distribution to a valuable set of customers,

• an effective marketing channel for the bank,

• and a pace technological development that can match or

surpass a bank's in-house capabilities, thus giving banks

faster time to market for product improvements with

lower cost and less risk

New Bloomberg platform

To fully meet the above sets

of needs, Bloomberg has

launched an innovative

platform for banks to

provide executable pricing

and execution services for

FX options directly to their clients. Bank of America and ABN

Amro are currently providing prices and execution to their

global client bases through the Bloomberg platform.

Creating a vendor-based FX options e-commerceplatform


By Philip Brittan Global head of FX, Bloomberg L.P.

This platform is built around a couple of key principles:

supporting the relationships between banks and their

customers; a focus on the full life-cycle of the trade, including

pre- and post-trade analytics and STP; no trading fees to the

bank or customers; and seamless integration of Bloomberg

analytics and execution. These same principles are used as a

foundation for all of Bloomberg's FX electronic trading offerings.

Option Valuation Multi Leg function

Over the past year, Bloomberg has concentrated its FX options

pricing capabilities into its OVML (Option Valuation Multi Leg)

function, which allows users to create single- and multi-leg FX

options strategies, including combinations of Vanilla and exotic

options, using standard pricing models which are transparent

to users and explained in published papers. OVML also

provides graphical scenario analysis and the ability to save and

load options for later revaluation and risk analysis. Our options

e-commerce offering is built right into OVML, so that customers

can use OVML to experiment with various options strategies

and get indicative prices, and then switch to a particular bank

branded "Pricing Source" to see an executable price on their

strategy and execute the strategy, if they wish.

Since Bloomberg does not charge commission fees, there is no

commercial difference to Bloomberg, the bank, or the customer

if OVML is used simply for price discovery that results in a

phone trade, or for an electronic execution. However,

Bloomberg provides a real-time blotter of executed trades and

a flexible STP solution, so that trades electronically executed

through OVML are instantly captured and routed to appropriate

down-stream systems, reducing both re-keying effort and the

potential for human error.

OVML gives banks the ability to define the range of business they

wish to pursue electronically, including which currency pairs to

offer, which range of exotic options to support, whether they will

price unhedged options as well as options with delta-exchange,

and whether they support quoting contract parameters, such as

Strike price for a zero-cost structure, for example.

Bank salespeople can create structures in OVML and send them

through the Bloomberg MSG system to their clients, who can

then call up the structure, run analysis on it (perhaps with the

salesperson on the phone or on the Instant Bloomberg chat

service), see a price from that bank, execute the strategy, and

capture the trade through STP, all in a seamless workflow.

Banks can set up marketing pages and distribute research and

other value-added services, all through the Bloomberg terminal.

Two models

The Bloomberg platform offers two models for banks. For banks

with their own options pricing engine, Bloomberg provides a

FIX API that communicates the specifics of customer inquiries

to the bank pricing engine, which can then return the price,

greeks, and reference market data (spot, forward, interest rates,

and volatility) that the bank is willing to quote that customer at

that time for that structure. Banks have complete control over

all aspects of pricing, spreads, and market data, as well as the

time allowed to execute on a particular quote.

The second model provides a turn-key solution for banks that do

not have an e-commerce-ready pricing engine. In this model, the

bank provides feeds of market data to the Bloomberg e-commerce

engine. The bank can also enter spreads, specifically tailored for

each client and currency-pair, into the Bloomberg engine which

will be factored into the price that Bloomberg calculates and

shows the client on behalf of the bank. The bank salesperson is

notified through their Bloomberg terminal whenever a client

makes a request for an executable quote, and can make a final

decision on whether to show a particular quote. Banks that feed

volatility surfaces to Bloomberg in this second model can finely

control the interpolation of that surface by using the Bloomberg

VCAL function, which allows the bank to determine the "business

time" weights of holidays, week-ends, month-ends, and an

enormous variety of economic release dates (using the

Bloomberg ECO calendar), as well as any other ad-hoc dates.

OVML is supported by an array of market data, news, and

analytical functions, such as WVOL, which gives users a

summary of global implied volatility markets; OVDV, which

allows customers to visualize the volatility surface for any

currency pair; and VOLC, which lets users compare implied vs.

historical volatility, compare risk-reversals and butterflies with

observed skewness and kurtosis in the distribution of exchange

rate movements, or to correlate movements in the underlying

to any of these factors.

The Bloomberg Trade Order Management System (TOMS)

recently released enhanced capabilities to book FX options

trades through OVML and provide on-going position

management, risk reporting, settlement, and option exercise.

Bloomberg is committed to an aggressive product

enhancement schedule, and will be continuously rolling out

support for an expanding set of exotic option types as well as

options strips, streaming 2-way options prices, position-level

scenario analysis, automatic hedge rolling and rebalancing

through the Bloomberg Spot FX execution offering, and a

deeper set of pre-trade decision support tools. Creating a

vendor-based FX options e-commerce platform is not without

risks and requires a more subtle interaction with the market

than other asset classes demand. But Bloomberg is leveraging

its sensitivity to bank/customer FX relationships, its breadth of

capability and content, its terminal business model, its

analytical tool strength, and its buy-side distribution to create

an electronic platform that is appropriate and effective for the

FX options marketplace.

Sponsored Statementapril 2006 e-FOREX 47


Build, buy or partner:eFX strategies for the sell-side

eCommerce FX trading has grown enormously in recent years and isnow integrated into the market – but what are the choices for bankswho wish to enhance or provide new services to their customers,either as a core liquidity provider or through another larger institution?

by Robin Poynder, Global Head of FX Customer

Solutions, Reuters.

The extent to which FX trading via

eCommerce has been adopted by customers

has attracted much comment, with the top ten

banks transacting some 65% of daily turnover1.

Whilst core liquidity may be concentrated within

a few institutions, many banks have a solid

regional customer base to which they provide a

range of services, with foreign exchange being

simply one of many. Often these banks will

redistribute liquidity that is sourced from the

core banks rather than from themselves,

focusing more on how they can provide an e-

trading service that satisfies their customers,

generates income and adds only limited costs.

Regional banks will normally retain some FX

price making capability within the dealing room.

This may be centred on major currencies with

perhaps some additional specialisation around a

regional currency. It is important that whatever

1Annual Euromoney poll 2004

>>>

solution is chosen by the bank allows for the preservation of the

existing skill sets and business alongside additional capabilities,

rather than the wholesale replacement of all FX pricing.

Influencing trends – Prime Brokerage and Hedge Funds

Prime Brokerage is receiving a lot of attention due to growth in

the Hedge Fund sector. At the core of the Prime Brokerage

business is the ability to trade via an algorithmic methodology.

The majority of hedge fund business is directed towards the top

few liquidity providers, but occasionally a regional bank will

enjoy a similar relationship. The ability to control an automatic

price flow to the algorithmic trader may therefore be a factor in

which solution is most appropriate.

Influencing Trends – Liquidity pools

Diversity of flow is an important factor in the profitability of

running an active e-trading service. Each customer sector will

have their own distinct approach to the market, whether hedge

fund or corporate and it is therefore important that the bank has

the capability to spread its risk by distributing prices to a range

of customer types. A diversity of customer type will allow a

more balanced off-set of flows and therefore a better chance of

managing the risk. Analysis of the various sectors’ business

through a detailed MI system should allow profit making

opportunities through intelligent proprietary positioning. The

choice of solution will therefore need to allow different

functionality to satisfy different client types and analysis of their

business.

What features will the system require?

Some customers are specialist traders who concentrate on a

single asset class – or indeed one currency pair, others are

generalists who trade a number of assets, and look for that

ability within an e-trading service. The liquidity providing bank

will aim to provide the service best suited to that customer set,

rather than simply a ‘one size fits all’ box. So what does that

mean in practice? The service should include more than simply

foreign exchange, allowing a price maker the ability to price

across a range of asset classes. It should allow for the

straightforward Request For Quote (RFQ) for regular corporate

needs, as well as Streaming Prices for those more active

traders. It could offer API access to the pricing engine itself so

that algorithmic trading is possible by hedge funds, and cross

asset trading for those FX trades induced by another asset class.

Price control

Clearly the pricing engine is a vital part of the overall service.

Prices that are distributed in the bank’s name must fall within

the bank’s control and risk profile. The system must allow a high

degree of control to the traders managing the resulting flow and

should allow for some pricing to take place within the bank and

for some to be sourced externally. Furthermore the engine

should be capable of quoting automatically for a range of

currencies, amounts and customers for whom a rapid service is

paramount.

BAXTER-Solutions Kft.e-Mail: [email protected] | phone: +36 1 235 06 87

Build, buy or partner: eFX strategies for the sell-side

Build, buy or partner?

The background drivers and considerations that affect the

decision of how to provide an e-trading system will almost answer

the headline ‘buy, build or partner’ question. Why? Because in

understanding the answers to these areas for a given bank, an

approach will already be narrowed down to suit both the existing

business, and the business that it should become. So what are the

options available to a bank in choosing a platform? Essentially

there are three available approaches:

• Design and build a system from scratch

• Buy a complete system, host it, develop it and support it

• Partner with an existing vendor or bank,

forming an ongoing relationship

In deciding which approach

is most appropriate for the

bank a number of key factors

will be considered. Key

elements are: Initial capital

cost, Rental costs, Support

costs, liquidity in-sourcing

possibilities from partner

banks, scalability and

distribution capability.

Build

To design and build a system

from scratch is a major undertaking

and can only realistically be

approached by an organisation with a

large IT infrastructure, preferably with existing

expertise in this area. Even then this would be a major

commitment for any institution. One attraction in this route is that

the resulting platform will almost certainly be different from any

other bank’s offering, and in a market where differentiating service

from competitors is important, this can be a major driver. The self-

build route transfers the commitment to capital, rental and support

costs from a third party to internal responsibility, which can have

budgetary and political advantages.

However in many institutions, experience has shown that this

does not necessarily deliver a greater degree of certainty or

control over total expenditure, and time to market can be seriously

affected. Having built the platform, the planning of future

enhancements needs to be considered.

Experience has also shown that within a three to four year period

any given system will require significant enhancements to

maintain parity with customer demand (and competitor

developments). For instance over the last four years the underlying

model has moved from RFQ to Streaming price delivery, with a

host of other access and control changes. These enhancements

require resource and funding to develop, which will probably fall

outside the scope of any original development budget.

Buy

The purchase of a platform incurs a major capital commitment

and may bring some short term efficiency in price as compared to

a rental model, however in common with the choice of building a

platform, this approach should be considered in light of the future

need to develop the service. As the markets develop and

customers demand new access methods and functionality an

ongoing resource commitment can have a significant impact.

Partner

Partnering with a platform provider delivers the greatest degree of

flexibility. Whilst the ongoing cost may at first appear

less attractive, the ability to forego a large

capital cost while also ensuring a

continuing stream of development is

very attractive. Furthermore the

rental cost stream can be

demonstrated as matching the

forecast customer demand,

therefore being offset by a

budgeted income stream.

As customer demand for

increasingly sophisticated

trading tools grows, the

onus to provide new

functionality falls on the

platform provider rather than

the bank itself – this can be a

significant comfort to the budget

planning process in an environment

where costs are under permanent scrutiny.

Distribution

The choice of technology partner (whether build, buy or partner)

is not simply about the technology, but also the level of price

distribution into a significant potential customer base. Leveraging

the possibilities of a scalable solution into a broad potential

market, allied with a targeted shared marketing plan, delivers

significant benefit to the liquidity providing bank. Essentially the

bank’s brand is distributed to a targeted section of a broad

potential market, enhancing brand awareness while bringing in

new business.

Conclusion

Partnering with an established and reliable provider should

deliver a market-standard platform that will ensure a bank is able

to match customer demand for new technology. When compared

to the choices of build or buy, partnering is normally perceived as

a lower risk strategy, delivering both current and future

functionalities within a cost efficient structure. With the right

partner, the bank wins both ways – the bank’s branding is

strengthened across a broad set of potential customers and

significant new trading flows are established.


In many banks and financial institutions, e-trading systems inplace today are very static, linear and lack a lot of the flexibilityand interoperability initially desired. Particularly, it is difficult fora bank to aggregate its entire tradable liquidity into one singlevirtual market and for traders to have a unique view of theaggregated market depth they can trade on, while controlling thequotes they broadcast to their clients and managing, in return,the auto-crossing conditions of the clients’ orders and interests.

The key is to create a single internal market that can let ordersbe matched against an aggregated liquidity pool, according tocustomizable rules, and that can show a unified market depth forall markets (internal and external). Such a virtual market mustbring a common access layer for all the types of liquidity, beadaptive to the constant changing cartography of liquiditysources, distribution channels, trading modes, messages types,instrument classes, client-facing and order-entry applications,while maintaining a unique and harmonized silo where theliquidity is maintained. In parallel, the core structure andarchitecture of the platform must support the changes that areconstantly carried out on the delivery channels and on thepricing sources.

As a solution to this equation, Smart Trade Technologies hasdeveloped a private order-routing and order-matching platformthat banks and financial institutions can deploy as a softwarewithin their infrastructure.

The Smart Trade platform is composed of one or several inter-connected platforms, able to communicate with various externalliquidity sources, deal with customizable orders types, rules-based routing and execution conditions, message protocols,internal data referentials, client-facing and order-entryapplications, symbology translation issues, externalpermissioning. The Smart Trade platform constitutes eventuallya flexible single sign-on trading network, that the bank controlsfunctionally and technically, integrates within its own IT teamsand that remains stable and evolutionary over time. Itsperformance and throughput are in line with today’s andtomorrow’s requirements emerging from the highly demandingclients and program trading engines.

The design of the Smart Trade platform’s architecture has been

built around a few core concepts:

• extremely robust routing and matching engine

• Gateway Framework to build specific connectors to

external liquidity sources

• exhaustive APIs to support and build multiple types of

client-facing and order entry applications

• independency to the asset class, and the instruments

quoted

• compatibility with any type of order and trading mode

• central order book:

• integration of credit limits:

• integration of customer spread management/ price tiering

• connection to third party data referentials

april 2006 e-FOREX 51Sponsored Statement

The Smart-Trade platform(s):a private virtual market inside the bank

For more information contact

[email protected]/Aix-en-Provence: +33 1 44 50 19 19 New York: +1 212 618 63 83

www.smart-trade.net


Collateralised FX trading- the growing need for real-timeMargin ManagementThe growth in FX trading and particularly online FX tradingover the past 5 years has been mirrored in the growth inmargin trading. With the growth in margin trading, comesthe need for solutions that offers the capability to deliver thetrading functionality, while also providing the riskmanagement and monitoring capability that is required forthis business.

Peter Kelleher, Product Director, SS& Technology, MarginMan Division

Traditionally, margin trading was a niche business offered by

private banks, offering this capability to their High Net Worth

clients, who traded FX in a similar manner to trading Equities, and

typically being margined at relatively high margin levels. The

advancement of technology has opened up this market place to all

levels of customer, which, coupled with financial institutions

seeking new opportunities to generate both FX flow and revenue,

has led to a need for systems that have the functionality to

manage the portfolio on clients’ behalf, while monitoring the risk

from the bank’s perspective.

Growth in Margin Trading

According to the International Swaps and Derivatives Association

(ISDA Margin Survey of 2005, $1.21 Trillion of collateral was in

use, this compares to a figure of $491 Billion is use in 2003, an

increase of almost 60%. Within this increase, Hedge Funds and

Institutional investors are the major contributors to the growth.

From a banks perspective, there has been a significant push

towards collateralised trading, driven by several factors, primarily

the difficulty in processing credit applications within banks, and

the credit worthiness of the prospective clients. Banks are

reluctant to offer credit facilities to the types of client now looking

for FX trading facilities, due to very tight balance sheet

management. Margin trading does not impact on asset allocation,

and potential clients are looking for facilities far in excess of the

potential credit lines that a bank would normally offer.

The second major factor giving rise to the increase in

collateralised agreements is the introduction of new categories of

clients, particularly in FX margin trading. These categories include

Hedge Funds, who traditionally traded in Equities and Fixed

Income, Institutional Investors, who are also relatively new to the

FX world, and Retail clients, who have entered the FX space, due

to the relative stability and lack of volatility in the Equity markets,

and more importantly due to the opening up of the FX markets.

The proliferation of online FX margin trading solutions allows this

range of clients to trade with the simple click of a button, following

the creation of an account online. These online solutions range

from sophisticated products from banks and financial institutions

to the simpler products targeting retail clients, who offer a more

simplified offering.

The third factor which has contributed to the increase in

collateralised trading is Prime Brokerage. A significant number of

banks have recently introduced Prime Broker facilities, either as a

new product offering, or as a result of client demand for such

facilities. Many Prime Brokerage facilities are now put in place

with a collateral requirement, in addition to traditional limit

monitoring facilities.

The chart above, courtesy of the ISDA Margin Survey 2005, shows

the growth in Collateral Agreements in place, showing a 6 fold

increase from 2000 to 2005.

>>>

Solution Requirements

Collateralised trading within banks has grown from a niche

offering to a small number of clients, to a significant business with

clients demanding portfolio and market information on an intra-

day if not real-time basis. Whereas the niche offering was often a

business managed on internally grown systems, including

spreadsheets and Access database, today’s solution requires a

greater degree of sophistication, not only as a result of the growth

in the business, but also as a result of sophisticated clients

requiring real-time information, to allow them to maximise their

collateral and profits. The growth in FX margin trading, in

particular, has resulted in a requirement to offer a solution that not

only performs real-time valuations, but also allows for

sophisticated netting and margining techniques. These

requirements cannot be met through simple solutions, and

increasingly the Credit/Risk functions within a bank are not

prepared to allow for the growth of this business without a

solution that can meet the client requirements, while also meeting

internal control needs.

A solution to allow a bank to grow the FX margin trading business

in line with both internal and external requirements, needs to

include the following functionality as standard:

• Pricing Engine to deliver real-time pricing

• Netting Engine to allow for various netting techniques, based

on the client type

• Collateral Module to actively manage the various collateral

types and methods being demanded by clients,

• Interfacing because virtually all banks now only permit one

point of entry with the data being fed to trading, collateral, risk

management, limit and settlement systems.

“FX Margin Trading, as opposed toother margin trading product offerings,

require real-time risk management, due to the continually

active 24x7 marketplace”The growing FX margin trading business does not allow for

multiple systems, both 3rd party and internal attempting to

manage this business.

A recent trend which is once again gaining momentum is the

requirement to have functionality to allow for Cross Product

margining solutions; clients are typically trading multiple

instruments or asset classes, and are not prepared to post

collateral across several systems to meet internal bank

shortcomings.

FX margin trading is a business requiring real-time information,

both from an internal and client perspective. The table below,

courtesy of the ISDA Margin Survey 2005, shows the growth in FX

derivative trading, showing a growth in volume of 50% over the 3

years and the growth in Exposure of 20%.


Collateralised FX trading - the growingneed for real-time Margin Management

Risk Management

The rapid growth in FX Margin Trading has required the Risk

Management function within banks to completely re-appraise

their management of client portfolios. FX Margin Trading, as

opposed to other margin trading product offerings, require

real-time risk management, due to the continually active 24x7

marketplace.

Clients typically require the ability to trade on this basis, and

also require the ability to view and monitor their portfolio. With

the entry to the marketplace of more sophisticated clients, e.g.

Hedge Funds and Institutional clients, the requirement to offer

margining and netting techniques that meet their requirements

is essential to maintaining these clients. Netting techniques

today include FX and FX Option netting, netting on a single

currency basis, netting across value dates. Margin techniques

have graduated from a simple % based margin requirement to

Delta and VaR margining.

As the level of sophistication in margin trading has grown, so

also has the risk management requirement also grown. Risk

management requires the constant monitoring of client

portfolios, from both a margin and limit perspective, while also

ensuring that the margining rules agreed with a client are

supported by the solution that the bank has in place. Many

banks will only offer collateral agreements based on ISDA

support agreements, and the solution required must support

the ability to define, manage and monitor these agreements,

while also monitoring the clients’ portfolios.

Risk managers, in most institutions have benefited from the

growth in FX margin trading, as this growth has required banks

to invest in technology and solutions that actively manage and

monitor the risk. Real time solutions, while initially based on

client requirements, has allowed risk managers to specify

requirements, to allow for the real-time monitoring, which is

essential as the client requires more sophistication in the

margining of their complex FX and FX option portfolios.

Conclusion

Collateralised FX trading has seen significant growth and

change, including the introduction of new categories of clients,

the requirement to offer additional product offerings,

particularly in FX Option coverage, and the continual need to

margin these complex portfolios in an aggressive manner,

allowing the client to maximise their collateral, while ensuring

that the bank is actively managing the risk inherent in these

portfolios. The most important component of this continually

growing business from both a client and a risk management

perspective is a comprehensive solution that meets the client

requirements, while allowing the risk manager to control the

risk factor in this growing business.

Trading Power

SS&C Technologies

Ireland Ltd

7 Richview Office Park

Clonskeagh, Dublin 14

Ireland

Tel: +353 1 206 6644

Fax: +353 1 206 6641

SS&C Technologies Inc.

World Headquarters

80 Lamberton Road

Windsor, CT 06095

Tel: +1-800-234-0556

+1-860-298-4500

Fax: +1-860-298-4900

The de facto industry standard for margin trading...

www.ssctech.com

Copyright © 2006 SS&C Technologies, Inc. All rights reserved.

• Sophisticated margining and netting techniques

• Caters to ALL end-customer profiles

• Leading the way in multi-product, cross-asset class development

• Over 60 customers worldwide

• One of the largest and fastest growing financial software firms in the world today

Interested to hear more? Please contact:Paraic CosgraveTel. +353 1 206 [email protected]


Foreign Exchange ECNs:The Limit Order Book model gains traction

Harrel Smith is Manager, Securities and Investments at Celent

The global FX markets are already huge,

and growing at healthy rates. The most

recent global market survey, conducted by

the Bank for International Settlements (BIS),

indicates that foreign exchange trades

approximately US$2 trillion each day. As

volumes surge and firms become more

comfortable trading on electronic platforms,

the buy-side and sell-side communities

are rapidly increasing their use of

e-trading services.

Celent expects that over 90 percent of all

inter-dealer volumes will be traded

electronically by the end of 2007. The buy-

side community, which includes both

traditional assets managers, corporates,

hedge funds and CTAs, is also increasing its

use of e-trading platforms. Over the next

two years, we expect to see dealer-to-client

electronic FX trading increase from

approximately 43 percent to over 70 percent

of all volumes.

>>>

Hedge Funds and CTAs take centre stage

It is not surprising that the fastest-growing

segments of electronic FX market are

hedge funds and CTAs. Both customer

segments are comfortable trading on

electronic platforms, and both trade FX

speculatively to a greater extent than any

other type of buy-side institution. Indeed,

the impact of hedge funds on the FX

market can be seen everywhere. Seeking

to capture a slice of hedge fund order

flows, EBS opened up its inter-dealer

platform last year to a select group of

funds on a sponsored basis.

The resulting increase in quote traffic was

significant to say the least, and forced EBS

to rapidly upgrade their underlying

technology platform. Prime brokers,

hoping to secure market share in what

remains a very lucrative business, have

made FX trading and settlement support a

priority. Leading ISVs such as Traiana

continue to work with banks to help

streamline their client-driven FX trade

processing. Clearly, hedge funds are

playing an increasingly important role in

today’s electronic marketplace, and firms

are doing whatever it takes to serve them.

New FX Trading Models: Taking a cue from

the world of Equities

EBS’ experiment with their Prime

Professional service notwithstanding, most

hedge funds trade FX electronically on one

or more multidealer-to-client platforms.

The leaders in this space remain Currenex,

FX Connect, FXAll, and Hotspot FXi. Of all

these firms, however, Hotspot FXi remains

most closely associated with the hedge

fund community.

FXAll and Currenex maintain healthy

rosters of hedge fund clients, and both

firms would argue that their platforms’

strengths – particularly with respect to

their back-end services – make them

appealing to a diverse client base. Still,

Hotspot continues to stand out. Currently,

over 75% of Hotspot’s clients are hedge

funds. While Hotspot would not disclose

the total number of clients using its

platform, growth over the past 18 months

has been impressive.

What, then, makes Hotspot so attractive to

hedge funds and CTAs, and a preferred

execution venue for those with active

trading strategies? The answer lies with a

model that is perhaps more closely linked

to equities than to FX – electronic

communication networks, or ECNs.

Hotspot’s ECN Model

Hotspot FXi was the first (and, until the

launch of Lava FX, the only) ECN trading

platform in the dealer-to-client spot forex

markets. Launched in 2002, Hotspot FX also

offers a separate retail-oriented platform

(targeting the highly sophisticated end of

the retail spectrum, e.g., FX professionals

trading for their own personal accounts).

• Business strategy. Hotspot envisions its

platform as one leg in a four-legged

stool, with the other legs being liquidity-

providing banks, prime brokers, and

clients. All legs must be satisfied or the

stool tips over. All aspects of the

business model take this mission into

account. For example, Hotspot charges

both counterparties to a trade, which

departs from the revenue models

of the other multi-dealer platforms.

But to charge both sides, Hotspot must

be valuable to both banks and

institutions. Platform features are geared

toward institutions who trade forex as an

asset class, rather than to facilitate their

core businesses, and Hotspot claims that

many of its customers come to it from

other electronic platforms after seeing its

superior prices.

• Key Platform Facts. The platform

executes 5,000–10,000 trades per day.

Hedge funds and CTAs account for

approximately 80 percent of Hotspot's

volumes. The balance is composed of

asset managers, large-volume

corporates, and small, non–market

maker banks. All trades are cleared

through a network of approximately a

dozen clearing banks and prime brokers.

The platform trades only forex spot, and

supports 24 currency pairs.

• Trading Features. As an ECN, the Hotspot

platform brings in liquidity in two forms:

banks stream executable prices into the

system, and buy-side clients submit

market and limit orders. All quotes and

orders are displayed anonymously in a

central order book. Counterparty

information is given up to the prime

broker after execution. Both sides can

engage in passive trading (i.e. posting a

bid or offer) and active trading (i.e. hitting

a bid or offer).

• But banks may only hit bids and offers

from institutions; they may not execute

against other banks’ quote streams.

Therefore, customers can trade with other

customers, but banks cannot trade with

other banks. Hotspot estimates that

nearly half its trading volume is through

passive trading, in which clients were

dealt on their bids and offers.

Foreign Exchange ECNs: The Limit Order Book model gains traction


• Centralized Credit. Another aspect of the ECN

model is centralized credit. All customers are

cleared to trade with all banks through a prime

broker. Hotspot pioneered the fully optimized

multilateral network, in which customers are

offered full transparency and have access to the

same prices.

• Buy-side to buy-side trading. As liquidity has

increased on Hotspot, buy-side to buy-side

trading as a percentage of all trade volumes has

grown considerably. On high volume days, this

type of trading accounts for approximately 45% of

all trade volumes.

Hotspot’s ECN model is well suited to serve its

hedge fund and CTA clients, which are comfortable

trading in limit order books (this is particularly true

of hedge funds in the equities markets)..

Other Platforms take notice

It is not the purpose of this article to focus

exclusively on Hotspot FXi. Indeed, in spite of

Hotspot’s success with the hedge fund community,

the platform remains the smallest of the four

leading multi-dealer systems. The FX market and e-

trading adoption rates are growing fast enough that

there is room for not only these four firms, but

additional participants as well. All other platforms

currently operating in the multi-dealer space have

experienced tremendous growth rates, and have

developed trading models specific to their target

audiences.

Nonetheless, the growing importance of the ECN

model in electronic FX trading cannot be

overlooked, and firms are beginning to take notice.

Lava was the first to throw its hat into the ring,

rolling out Lava FX in October 2004. Lava

represents the most direct threat to Hotspot, as both

firms actively target the hedge fund and CTA

markets and both offer anonymous buy-side to buy-

side trading.

In addition, there are rumors that other multi-dealer

systems may be developing central order books in

the model of Hotspot and Lava. Both firms’ success

in attracting such an active client segment is forcing

the rest of the e-trading industry to re-examine their

existing business models.

Where appropriate, these firms may make

investments in new technology to bolster their

roster of hedge fund and CTA clients, and ultimately

drive up transaction volumes at an even faster clip

that before.

Liquidity,Effi ciency, Reliability

e-tradingat Société Générale!

Société Générale,Société Générale, your partner in Foreign Exchangeyour partner in Foreign Exchange


Beyond STP:The next generation of eFX integration

By Harpal S. SandhuCEO Integral Dev. Corp

Introduction

Over the last several years, even casual

industry observers have taken notice of the

evolution and change in the FX industry,

brought on by overall volume growth,

technology and shifting market dynamics. And

if the first several months of 2006 are any

indication, then we can safely say that the pace

of change is rapidly increasing.

Notable events that have recently shocked the

industry include the sale or pending sales of

some of the largest multi-bank portals: Hotspot,

FXall, and EBS. Industry change will no doubt

increase as the global liquidity providers evolve

their approaches to the market.

To successfully manage and grow FX

businesses in this new environment, industry

experts recommend even more emphasis on

technology and risk management. Flexibility

to adapt is critical, and underlying systems

must be efficient and nimble, allowing rapid

connectivity with trading counterparties as

industry players and markets change.

However, even with advancements in

technology, integration of the many internal

and external systems between these

counterparties remains a huge challenge.

Integration – the $64 billion question

Think of the many steps of data exchanges in

negotiating, executing and processing an FX

transaction. By many accounts, this is a very

complex and messy integration problem,

compounded by rates that are updated literally

thousands of times per second.

To manage these processes, intensive

integration with APIs and system feeds from

multiple sources are required. The problem?

Some feeds are up, some are down, and do

you know which ones have problems and how

often? Prices arrive in diverse methods and

formats, such as multi-tier, request for quote,

request for stream, and executable streaming.

Some venues are order driven, while others

are quote driven. Stale, latent or bad prices

can throw off order books for entire currency

pairs. The list of integration challenges is long

and constantly changing.

Even if a financial institution has invested

heavily and solved these integration issues,

costly resources must be dedicated on an

ongoing basis to manage the various systems

and changes that arise as trading relationships,

APIs, and technology platforms evolve over

time. Also, if there is a need to change or

connect to new liquidity providers, portals or

customers, investments in further integration

such as writing to and managing new APIs is

required. For most institutions, this type of IT

resource and expertise is not in their core

competency and is no longer feasible.

Enter “The Grid”

One answer to this integration-intensive

problem for the FX industry is to leverage an

emerging technology: market specific data

grids, to deliver business value quickly and

reliably by pooling resources into a

single set of shared services amongst

trading relationships. Ultimately, turning an

integration-intensive need into an on-demand

“service.”

While other industries have spent billions of

dollars building this type of core infrastructure

(telecom, travel, electricity, etc.), the

opportunity to do the same for FX is the

next frontier.


The next generation of FX connectivity and

integration, beyond STP, is enabled through

the use of an intelligent data grid that

facilitates the transaction and information

needs of multiple organizations directly

linked from origination to the end customer,

i.e. the FX trading value chain.

This type of technology supports the FX

trading value chain by integrating in real

time the many types of data flows that

exist and must be handled, such as:

• Streaming prices from multiple liquidity

providers to a liquidity taker

• Execution requests and orders from the

liquidity taker to the corresponding

liquidity providers

• Verification messages received from one

or more liquidity providers to the

liquidity taker

• Confirms to and from both liquidity

provider and liquidity taker

• Various algorithms applied to blend,

split, and spread liquidity to participants’

internal traders, sales dealers or end

customers

• The STP of executed deals to the

participant’s other internal systems

This “end-to-end” integration also

provides for robust monitoring and

performance information to better manage

quality of service issues such as rejection

rates, latency and exception handling.

Through simple and dynamic provisioning,

a financial institution gains direct market

access (DMA) and Grid services that

provide high performance, low latency,

scalability, and high quality of service.

“Virtualization” of services provides out-

of-the-box integration with existing

liquidity providers and customers who are

already connected to the Grid. Risk is

lowered by using a “pay as you go” and

“use what you need” approach enabling

FX participants to scale up or down rapidly

as the business environment changes

without having to invest in large, upfront

development costs.

By leveraging on-demand data and service

grid technology, FX market participants

will be able to better manage their

businesses by outsourcing the costly and

complex integration-intensive needs of

their FX trading desks.

Operational efficiencies and business

performance management will readily be

at hand, providing flexibility to adapt to the

constantly changing market environment.

About the author

Harpal S. Sandhu is CEO of Integral DevelopmentCorp, a leading provider of innovative, end-to-endsolutions to automate FX trading. Partnering with leading banks, Integral has developed FX Grid, which is a global inter-institutionalcommunication network linking 9 of the world’slargest market making banks to over 100 bankand institutional fund customers’ processingsystems using a common protocol andmessaging standard. Founded by Sandhu andViral Tolat in 1993, Integral employs more than 170 professionals and maintainsdevelopment, support and sales offices in SiliconValley, Chicago, New York, London, Tokyo, and Bangalore.

FX Grid supports the multiple, back and forth data flows amongst FX trading relationships, enabling system integration as an on-demand service


Improving the eFXvalue proposition forReal-Money managers

Real Money is a broad term covering self-

managed pension funds and increasingly hedge

funds. However, investment managers are

probably what most people think of as real money

managers. They manage pools of regulated funds

that invest in mostly regulated securities although

they can invest in alternative assets such as real

estate, private equity and even hedge funds. By Chip Lowry

>>>


These pools - or more commonly funds - are

themselves individual legal entities each with their

own accounts and credit lines. An investment manager

may trade in large blocks of equity/fixed income/foreign

exchange but there will almost always be associated

allocations down to the individual fund level which can

number into the thousands. Investment managers

have by far the most complex workflows.

eFX within the investment process

Before we consider how we improve the eFX value

proposition, we need to understand where eFX sits

within the investment process. I like to separate the

investment process into three stages: the Idea Factory,

Idea Implementation, and Idea Measurement. The Idea

Factory consists of research, strategy formation and

security selection.. This is really where managers earn

their pay. The Idea Implementation stage is when the

idea is put into action through trading, confirmation

and settlement. Finally, Idea Measurement is where

we analyse our decisions and their implementation.

This information then feeds back into the start of the

Idea Factory stage again. If all goes well, this becomes

a virtuous circle.

The eFX value proposition fits within the Idea

Implementation phase, so improving the value

proposition means improving the trading,

confirmation and settlement workflows.

“For traditional investmentmanagers, enhancing eFX on thetrading side means aggregation,

aggregation, aggregation”

Using a workflows solution based approach, let’s looks

at how we could enhance eFX in trading, confirmation,

and settlement.

Trading

For traditional investment managers, enhancing eFX

on the trading side means aggregation, aggregation,

aggregation. Investment managers handle individual

investment funds numbering from the tens into the

thousands. These may be split by asset class such as

equity or fixed income. Within an asset class they may

be further split into classes such as sector specific,

value, growth, or region. Each of these funds could

produce FX requirements for securities settlement or

even hedging purposes. A typical investment manager

could have all the FX done by a specific sub-group and

executed by an associated FX desk. For example, there

might be an equity desk that performs all FX

associated with equity-based funds, a fixed income

desk that does all the bond-based funds, and a hedging

desk that does currency overlay-based trades.

The structure could be even more complicated. Given

the history and continuing trend of consolidation in

investment management, there may be different FX

desks associated with previous organisational

structures. In one large investment manager, I once

counted six different sources of FX being generated

and traded by six unrelated desks. The potential for

loss of performance due to this structure is vast.

Without the ability to net buys and sells, investment

managers are paying the bid-ask spread over and over.

Also, without the ability to portfolio trade a basket of

trades, investment managers are missing out on

opportunities to cross-net different currencies pairs

which in turn also leads to higher trading costs. The

problem, of course, is that this loss of performance and

associated trading costs are invisible. This remains the

single biggest area where enhancements to the eFX

process should occur.

Improving the eFX value proposition for Real-Money managers

“We see new systems emerging (execution

management systems) to handle the specific

requirements of FX orders.”

We do however also see positive things happening in

the trading area. Firstly, many order management

systems are finally starting to take the currency

workflow seriously. Better currency blotters are

beginning to appear in OMSs along with the ability to

transact currency trades via the FIX protocol. There is

still much work to be done however. Many of the

current OMS FX workflows simply piggy back on

ingrained equity workflows which severely limits FX

trading abilities. In some cases, this even pushes

investment managers to use business processes which

are clearly not optimal.

Arrival of execution management systems

But perhaps more interesting is that we see new

systems emerging to handle the specific requirements

of FX orders. These ‘execution management systems’

(EMS is the new industry term) can offer deep

functionality beyond the original order management

system. They can also serve as a central aggregation

point for the many OMSs an investment manager

may have.

Once FX trade requirements are in the EMS, the trader

can choose from multiple tools available for execution.

For example, perhaps portfolio trading a group of

orders is most beneficial. Or maybe it is better to

compete a specific block. Then again, possibly using an

algorithm is preferable. Add to all of those the options

to execute by streaming, benchmark, limit or some

other method and you can see the power the EMS

brings to the trading part of Idea Implementation.

Returning to the investment manager with six sources

of foreign exchange requirements; I can only wonder

how much money they potentially would have saved

and how many basis points of additional performance

they potentially could have realised, had they installed

a robust EMS specifically catering to the unique

requirements of trading foreign exchange.

Of course, the next obvious question is how easy is it to

aggregate those systems into an EMS? Here again, FIX

may provide the answer. Most OMSs can send and

receive FIX messages. Also, FIX Protocol Ltd, the

association which oversees the protocol’s specification,

is hard at work standardising FIX for the FX market.

Having a FIX-enabled execution management system is

an ideal way to use industry standards to integrate

multiple systems.

Confirmation and settlement process

There are also enhancement opportunities in the

confirmation and settlement process. Standard

settlement instructions continue to be an issue for the

industry. Settlement instructions are simply the payee

details for an investment manager’s counterparties.

Currently, investment managers must maintain their

own settlement databases of their counterparties’

payee details. Sometimes investment managers

outsource the task to reluctant custodians. The

problem is that ABC Bank’s payment details for EUR are

usually the same for all their counterparties. As a result,

the same instruction for ABC Bank is stored in a myriad

of databases scattered across the industry. Any change

to ABC Bank’s details needs to flow through to all these

databases. There is no accepted formal way of doing

this today. This lack of STP and suboptimal directory

structure can lead to costly settlement mistakes if even

just one database does not get updated.

Luckily, there are industry efforts underway by

companies like SSiSearch to address this problem by

creating centralised industry-supported databases for

all to use. In this model, banks list their own

instructions in a central database. If that instruction

changes, everyone knows where to get the new

instruction. This eliminates the need for everyone to

keep a copy of other organisations’ payee details.

Simply look up the payee’s details in an authenticated

database and watch the payment error rate decline

dramatically.

Those efforts and the continued adoption of CLS for

trade settlement will lower industry costs and further

enhance the eFX value proposition. CLS was originally

set up to decrease settlement risk among inter-banks in

the FX markets. But as CLS adoption has grown, banks

have seen trade costs decrease. CLS is now extending

its facilities to other market participants such as

corporates and investment managers. Eventually,

widespread adoption of CLS will decrease settlement

risk, improve transaction quality and make the whole

industry more efficient.

Conclusions

We are almost 10 years into the eFX revolution. And

although we have seen massive changes in how

business processes are used, there is still room for

further improvement. The more models that exist to

transact foreign exchange, the more room there is to

improve the value proposition. Many of these

opportunities for improvement involve the workflows

within the investment manager and the workflows

between investment managers and their

counterparties. The emergence of EMSs for trade

aggregation together with confirmation/settlement

initiatives like those of SSiSearch and CLS are helping

to sharpen the focus on the eFX value proposition.


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“An e-platform is an incredible event

that’s happened over the last 20 years,”

Peter Panholzer, chief executive officer at

Dynex Corporation, states. “It’s the

difference between having a car and

having to travel by foot. I do not believe I

could trade the volume I do, without an

eFX platform.”

Clients benefit from The Boston Company

trading FX electronically as the company

is able to put its FX trades out into a more

competitive environment, Larry Peruzzi,

head of international equity trading at The

Boston Company, says. The positives for

clients are enormous, he comments: “Our

clients receive a more competitive rate,

better execution, and if everything goes

smoothly, a cleaner settlement. We get

the ability to trade quickly, efficiently and

have exposure to more currencies.”

Adding value for clients

Mikkel Thorup, founding partner and

trading director at Capricorn Asset

Management, adds: “Where trading

electronically really adds value for the

client is through better execution. There’s

less slippage, which is better for the client

in the end. Also, we can see prices from

five independent services at once, so we

know when someone’s off the market. For

us, it’s important the price is correct, so

when we execute we get what we want.”

Paul Phelan, a director at Quay Capital,

comments on what Quay Capital wants

from electronic FX platforms: “For us, it’s

about speed of execution and delivery of

price. In terms of how we operate as an

asset management company, we’re intra-

day and very active, so having as many

prices available on our desks and as much

speed of delivery as possible is vital. The

critical matter on what we choose is depth

of price, depth of liquidity on price, ease

of execution to get that price and middle

and back office function, so we can

monitor our trades and positions on the

platforms.”

The Russell Investment Group uses

multibank platforms, single banks and the

telephone for broader liquidity.

“Primarily, eFX technology gives us better

execution,” says Ian Battye, director of

currency implementation at The Russell

Investment Group. “This is defined by

reduced bid offer spreads and reduced

market impact, and from a risk

management perspective, reduced issues.

Our platforms mean we can do more

trades, more quickly, with fewer errors.

This reduces the operational risk for us as

well, which is very key for our clients.”

Trading electronically has greatly reduced

the chance of human errors, Panholzer

states, which in turn improves customer

Real money managers are using electronic trading to getahead in the foreign exchange market. This group of tradersare working with cash in one of the most complex marketsaround. To do well, real money managers have to have theirfingers on the pulse of the market and they need to do theirwork quickly. And eFX technology is helping them succeed.

Peter Panholzer

Real-MoneyManagers talkDigital FX

“an e-platform is the differencebetween having a car and having

to travel by foot”

Heather McLean is a freelance writer.

service all round. He comments: “Online

trading is automatically linked to STP.

That’s an immediate relief for the back

office, with a 70% reduction in time.

Added to that is the independence from

the floor broker, who in the past executed

trades in the best way he could. Now, we

have nowhere near the amount of

complaints we used to get, in execution

for instance, as human error has been

greatly reduced throughout the

company.”

Stuart Simmons, head trader at Principal

Global Investors, is thrilled by the new

electronic environment his company is

working in. “I think the development of e-

trading platforms and eFX is pretty

exciting. Everything’s moving in the right

direction, particularly for traders. There’s

more transparency in the market overall

and control over the costs of trading.”

E-order books are increasing

transparency internally for C-View, Paul

Chappell, chief executive of firm, states:

“One particular area we’ve found the

development of electronic execution and

tools to be of maximum benefit is through

the rolling out by banks of e-order boards.

This is a major benefit for us as we can

see what we’re doing internally. It adds

transparency and allows us to manage

our positions with that ability. It aids STP

of our orders as well as trading activities

during the day.”

FX technology facilitating Research

Real money managers need to have done

their homework well before they execute;

there is no room to cut corners in this

market. FX technology and e-commerce is

aiding research activities at Dynex,

says Panholzer: “eFX technology allows

systematic trading to be executed more

accurately and also generates a data

stream that is an important research

material for us. We store it for future

reference.”

On research, Battye states his company

does not require the real time data that he

says is more for the algorithmic trading

crowd. Rather, his company prefers data

that will allow it to show customers how

well it is doing. “We don’t want real time

streaming downloads. We want access to

historical tick data for benchmarking, so

we can give feedback to our clients. This

ability, to show your average transaction

cost, is almost completely absent in the

FX market. We think clients should

demand to know. The client should know

how well we’re doing on their behalf, so

they judge our execution service.”

Phelan agrees: “What’s important for us is

past data. We research it and crunch

numbers on it. The advent of e-platforms

means the creation of better data sets for

us. The data is cleaner. At times in the

past, data was far more ambiguous.

Today it’s easier to collect and more

defined.”

Yet in terms of research, FX e-trading

platforms are set to have a big effect,

Simmons says. He says this is particularly

in the case of independent platforms

where business is not attributable to any

one counterparty. “We need to maintain

strong trading relationships with

counterparties, as well as balancing out

the efficiency benefits of online

anonymous trading,” Simmons explains.

“This is because our research material

from the banks is paid for by the volume

of trades we do with them. If trading is

done on a single direct market portal, the

only counterparty to those trades is the

price broker, so we get no research

material out of it as the banks don’t see

any direct flow. This will become a bigger

issue for discretionary traders in

particular.”

Thorup agrees: “If you’re looking for

excellent research, I believe you won’t get

that from online trading. You get that

through your relationship with your prime

broker.”

The Russell Investment Group is

embracing many of today’s FX trading

platforms, including FX Connect, FXall,

Currenex, Hotspot FX and Lava Trading.

One issue associated with working with

all these platforms is integrating the

company’s trade order management

systems to those internal platforms,

Battye says. “The issues for us are the


Larry Peruzzi

“Our clients receive a morecompetitive rate, better execution,and if everything goes smoothly, a

cleaner settlement.”

Mikkel Thorup

“Where trading electronically reallyadds value for the client is through

better execution.”

>>>

Paul Phelan

“For us, it’s about speed of execution and delivery of price”


integration, and how to utilise our

existing systems most effectively,” he

comments. Vendors of FX platforms for

real money managers should focus less

on the fancy bells and whistles and more

on the core functionality of the platform,

Battye states. “We’re running before we

can walk. What about back office

compatibility? Potential users aren’t

necessarily ready for a lot of the stuff

these platforms can do yet.”

Error handling

While e-trading on FX is improving

business, Peruzzi finds the complexities

of fixing errors on electronic systems

awkward. He comments: “Right now

we’re fully automated on exchange

trading, but our ability to tweak on errors

is difficult. If there’s an incorrect value

date or exchange rate, it’s a bit of a

manual process to correct it. Basically we

have to cancel everything, whereas

before, we could just get it sorted out over

the phone. But the positives of eFX

trading by far outweigh the negatives.”

On deal size, Battye finds eFX platforms

better for doing larger numbers of smaller

deals. The Russell Investment Group

tends to use more traditional methods of

execution, such as the phone, for large

single deals. Battye adds: “This isn’t a

shortcoming of the platforms though; you

use the existing bank relationships

you have.”

If real money managers want to trade in

high volume without resorting to the

phone, they can do so anonymously, as

one trader who did not want to be named

explains: “On my eFX platform I can

execute deals of $100 million to $150

million easily, by clicking the top mark of

75 several times to get there. I can move

up to $300 million without moving the

market too much, just a few pips. My top

trade area though is around $100 million

to $120 million.”

Liquidity concerns

Simmons says eFX trading is taking real

money managers to a more comfortable

place, given more participation by the

buy-side: “With greater participation of

the buy-side customers, eFX trading

platforms may help to ease fears of a

liquidity mirage.” He explains that one of

the fears of these trading platforms is that

they feed from each other, so the same

price can appear on many systems thus

giving an illusion of many prices. If these

seemingly multiple prices were all hit at

the same time, there would be liquidity

issues. With more work from the buy-

side, this issue could be resolved,

Simmons claims.

C-View is also concerned about the effect of

eFX trading on liquidity in the market, as

Chappell explains: “We do have a mild

concern on the bunching of liquidity in a

liquidity mirage over a number of trading

mechanisms at once. But the more e-tools

are available for us on the buy-side to

express our interests, the less concern we

have about the bunching of liquidity in what

is relatively a small number of banks.”

On how technology is impacting the FX

market as a whole, Panholzer sums up:

“Technology can only improve the

market. It has been said that technology

will make robots trade against robots, and

I don’t see a problem with that because

behind every robot is a human

programmer; the robot that wins has the

superior programme. Whilst in chess, a

chess master can beat a robot, in this

game the robots beat the traders. So the

robots will become increasingly

important for FX real money managers.”

Real-Money Managers talk Digital FX

Ian Battye

“We don’t want real time streaming downloads. We wantaccess to historical tick data forbenchmarking, so we can give

feedback to our clients.”

Stuart Simmons

“With greater participation of thebuy-side customers, eFX tradingplatforms may help to ease fears

of a liquidity mirage.”

Paul Chappell

“We do have a mild concern on thebunching of liquidity in a liquiditymirage over a number of trading

mechanisms at once”

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Christopher L.Cruden, CEO ofInsch CapitalManagement AG Christopher L. Cruden

Christopher, it’s been 4 years since you last

contributed an article in e-Forex, when you were

Managing Director of Tamiso & Co LLC, a New

York based Currency Manager. You’ve recently

decided to devote all of your energy to the

development of your own company, Insch

Capital Management AG, based in Switzerland.

What’s taken you in this direction?

Having specialized in currency management

within the Alternative Investment Industry for 20

years, I rather think I may have learned a thing or

two. Crucially, I’m still motivated to learn and

package the product of my (occasionally)

expensive education for the benefit of clients.

Bob Tamiso was, and is, a role model for me. In

terms of trading, he used to say “sometimes a

diamond, sometimes a stone” and that trading

was how he defined himself. That’s true for me.

Sometimes it’s hard and sometimes it’s

rewarding. Either way, I can’t think of anything

I’d rather be doing. Basically, I like the business.

I like the people and I like the challenge.

In your 2002 article for us you made some very

interesting observations about who provides the

best FX execution, commenting that:

• Brokers are better than banks for third party

allocations

• Banks are always best for “prop desk” trading

accounts

• Banks are always worst for trading allocations

from their own in-house allocators.

Has the rapid development of the e-trading

environment over the last few years changed

your opinions in any way?

I am even more right today in that it is even more

difficult for a bank or broker to pretend that they

have special access or a better “price” than their

competitors. This is because the provision of

price has become a commodity in abundant

supply via platforms and the internet. So, what

has happened is that they have been forced to

slash spreads and hope to make it up on volume.

To an extent, their business model continues to

work because volumes continue to increase.

These days, most managers and investors can

easily gain direct access to markets, news

services and a whole raft of analysis for

themselves. They don’t need to pay pips to a guy

to tell them “funds are buying / selling” and

guessing what the next “number” is going to be.

Let’s talk about Insch Capital. The firm is a

crossover between a private investment bank

and a professional services firm. Can you

elaborate on what that means and what benefits

it provides to clients?

We find that the domicile is attractive to clients.

People like doing business in Switzerland with

Swiss institutions. On the other hand, while the

Swiss system has its obvious advantages, the

perception exists that it can be expensive for

certain services. We offer a competitive

advantage by being in Switzerland, but not

Swiss. In addition to acting as a discretionary

asset manager (in the same way that any US or

UK domiciled HFM or CTA does), Insch can also

form and administer Swiss based structures and

companies. - Effectively acting as a trust services

company. To assist in this, we have established

excellent relationships with local legal, tax and

accountancy firms.



What core products and services does Insch Capital

currently offer?

Kintillo, our Forex trading system, is our flagship product.

That is the focus of the company. However, we have

recently restructured a rather substantial technology &

solutions company. Previously, they had various parts of

their business in the EU, the usual Caribbean locations

and China. At the top, they now have an entirely Swiss

based structure. This has significantly simplified their

operation.

The business is now more transparent to potential

outside investors and their tax burden has been reduced

substantially. We are doing the same for an established

US company who wish to set up an EU distribution

business. What we are finding is that these sorts of

clients become interested in our other services.

As Forex is at the core of Insch, they may start using the

trading platform, make an outright allocation to Kintillo

or opt for the currency overlay program (of which the

trading strategy and parameters are derivative of the

Kintillo program). Our overall strategy for Insch is that

each business area fuels the others and it seems to be

paying off. “Synergy” is a bit like the Yeti: People know

it exists but no one has actually seen it. At Insch, there is

synergy. We have a Yeti.

What types of client are you targeting?

In terms of our currency program, Kintillo, we seem to

have done quite well from a network of independent

Swiss trustees. There is also substantial interest from

desk brokers who need to re-establish some “alpha” to

the client / broker relationship: If it’s no longer in price or

market access, perhaps it could be in skill access? Very

soon we will go to the bank / corporate treasurer market

with the Kintillo program. While with Tamiso, I was

successful in getting prop desk allocations from that

market because our system was empirically measurable.

In terms of historical metrics, risk management and

position tracking, Kintillo is several generations on from

what we were able to show. Going forward, we are

confident of being able to demonstrate that Kintillo

would be the best Forex trader they ever hired.

Insch has now launched its own on-line Foreign

Exchange trading platform called Insch Perfect – which is

reviewed elsewhere in this edition. What key features

does it offer that will particularly appeal to clients and

might also differentiate the platform from others?

Anonymity and pricing are the two main ones. Also, the

platform is directly fed by Swiss based Advanced

Currency Markets in Geneva.

>>>

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10,000 clients and seeing volumes of

around $40bil a month. It is robust and

stable and they own the technology as it

was developed entirely in-house.

Insch will shortly be launching its

own in-house systematic trend-following

currency program Kintillo. Can you tell us

something about that and what approach

it will be employing?

We have, in fact, already begun trading

Kintillo. It is entirely systematic and trend

following in nature.

We trade a matrix of 6 currencies and their

15 crosses. It trades through an API direct

into our own platform, InschPerfect.

You’ve set out to become a leading asset

manager in the Alternative Investment

Industry. How important is e-trading

technology likely to be and in what

ways can you leverage it, in helping you

achieve that?

Generally speaking, technology must be

an enabler that helps drive business.

Otherwise, it’s useless. Specifically at

Insch, everything we do is systematic and

measurable. Everything.

So technology is vital to us for those reasons

but here are two other important ones:

Firstly, technology has made our business

“scaleable” in a way that was

unimaginable 10 years ago. When I think

back to how we ran the original currency

program – calling trading desks, sending

faxes, chasing desks for the fills etc, - it

(almost) makes me blush. Today, we have

technology; not people.

Secondly, capacity constraints within a

market are a major concern for any money

manager. The Forex markets were always

the deepest and most liquid in the world

but over the last few years, technology has

multiplied the practicable size that can be

managed.

This increase in liquidity has led to

narrower spreads. Narrower spreads

means less slippage. Less slippage means

a higher NAV. A higher NAV means higher

fee income. In other words, technology

has made the game better, bigger and

more rewarding for at least two of the

three main participants: Not quite a

virtuous circle but certainly beneficial to

investors and managers. The banks and

brokers? They just need to hope that

volumes keep rising.


e-Forex talks with Christopher L. Cruden, CEO of Insch Capital Management AG


At the dawn of e-FX, some

banks invested heavily in

technology to produce robust

and reliable proprietary portals.

Some banks stayed on the

touchline, watching to see if e-FX

was just another unprofitable

fad, but it is clear that clients

want to access liquidity through

the electronic medium. This was

clearly shown in the 2005

Euromoney Survey results

where those who embraced

electronic distribution saw their

market share soar.

There is certainly room for both

single bank and multi bank portals,

but each must be able to bring

something to the table. The multi

bank portals that will flourish will

be those that compliment and

enhance the relationship between

liquidity provider and liquidity

taker. The single bank portals that

succeed will be those that are able

to produce true value-add to their

clients. Growing competition

means clients can expect to

receive liquidity at tight spreads

for the foreseeable future and

advances in risk systems will

ensure it remains a viable

business for the liquidity providers

Multi bank portals can indeed add

a lot of value for some of our

clients. They can standardize

access to liquidity in both front-

end and back-end systems, they

can produce consolidated reports,

Ian O’Flaherty Managing Director, Global Head

of Spot Foreign Exchange,Deutsche Bank

Value-added services– the key to differentiatingamongst single bank portals?

Rumours of the demise of Single Bank portalsare unfounded. In 2005 Deutsche Bank’sgreatest increase in e-FX volumes came throughour proprietary portal autobahnFX. FX does not work like an Exchange and to date webelieve only a small percentage of volumes aretruly client to client. In 2006, FX remains a relationship based service industry buttechnology is putting it to the test.

Viewpoint is a column in e-Forex where we invite organisations, companies and individuals to comment on eFX

and FX trading issues. Please feel free to write to us with your own views on these contributions as well as suggestions for other topics.


save desktop real estate and they

can service client fiduciary

responsibilities. But, there are

some negatives. The bank/client

relationship can fade and the

banks’ obligation to be the provider

of liquidity may not be as strong.

The client may not receive the

same spreads or depth of liquidity,

in many cases there are inherent

fees to be paid and in some

instances clients find they can have

significant business risk if they are

too reliant on a portal. History

tells us that the banks have been

there for their clients through thick

and thin but many a portal has

fallen by the wayside in the pursuit

for profitability.

Multi bank portals can also add

value to the banks by achieving

better connectivity with their

clients. They can also act as a

technology provider enhancing the

banks’ electronic capabilities and

of course they can add value by

furnishing them with profitable

client flow.

Single bank portals add value in

different ways. They can offer

clients the banks’ full suite of

functionality and liquidity and in

some cases the banks’ best

spreads. They provide dependable

liquidity, “uptime” reliability and

bespoke flexibility. Clients look at

all of these factors when choosing

to take on a bank’s portal.

As price becomes even more of a

commodity it is important that DB’s

portal continues to evolve with new

and enhanced functionality to

achieve true stickiness with our

clients. Features such as Pre and

Post Trade functionality, access to

DB Research, STP and Analytics are

all part and parcel of a successful

portal.

Clients want to see more advisory

research, they want the ability to

place orders “at the market”, they

want more products and they want

better sales support.

The challenge for the banks is to

provide all this and more to a

professional standard whilst

realising that, due to decreased

spreads in the market, it has to be

done in a “low-cost” environment.

At Deutsche Bank we continue to

work on projects that we believe

will enhance our proprietary portal

which in turn will help strengthen

relationships with our clients.

With this in mind, we recently

launched a new version of

autobahnFX with a suite of

new features. Amongst other

enhancements we have introduced

Laddered Pricing, which allows

each user to customise the

amounts they see streamed to

them via “rungs”. We have also

introduced streaming DB FX

Indices such as Trade Weighted

Indices (TWI) and Regional

Currency Baskets, which allows

our clients to trade or hedge a

portfolio of currencies via a single

benchmark instrument.

In the electronic world of FX, value

for the sell side and the buy side

has to be fairly balanced. In the

distant past the pendulum of value

swung heavily towards the sell

side.

Technology and the race for market

share forced that value pendulum

to swing strongly in favour of the

buy side but both situations were

unsustainable and a fair

equilibrium has eventually been

found. Clients receive good

liquidity and functionality at tight

spreads and the banks receive flow

that is profitable overall.

The future for the single bank

portal continues to look bright as

long as the “value pendulum”

does not swing too wildly.

The above information does not constitute the

provision of investment advice. Any views

expressed reflect the current views of the author,

which do not necessarily correspond to the

opinions of Deutsche Bank AG. Opinions expressed

may change without notice. Opinions expressed

may differ from views set out in other documents,

including research, published by Deutsche Bank

AG. No warranty or representation is made as to the

correctness, completeness and accuracy of the

information given or the assessments made. ©

Deutsche Bank AG 2006.


Technology: Fuelling the growth

of FX Prime Brokerage

Devin Graham,Head of FX Prime Brokerage, UBS

Traditional role of FX Prime Brokerage Provider

FX prime brokerage began as a centralised clearing, margin and

settlement service for investors. The client would place collateral

with their prime broker and that provider would extend credit lines

for the client to utilise with various trading partners in the market.

All the client’s trades would be given up to the prime broker and

the client would have a single repository of their positions which

resulted in more efficient use of margin and streamlined

reconciliations. By partnering with a single provider, the client

would increase their operational and collateral efficiency and

effectively outsource their back office functions. But that is just the

start.

A full service prime broker leverages their experience and market

standing to bring additional services to the client. For example,

transparent position rolls, position reports, portfolio analytics, and

support for a wide variety of client, bank and administrator

connections are services that can be offered. Increasingly, these

services are delivered by sophisticated prime brokerage platforms.

Evolution of Technology

During the early stages of FX prime brokerage at the beginning of

the 1990s, it was a completely manual process for clients, executing

banks and prime brokers. The process of capturing, matching and

booking transactions could take hours, if not days, and was prone

to errors. As the FX market rapidly expanded, it became obvious

that a new approach to FX prime brokerage was needed.

Evolution happened in early 2002 with the launch of the first web-

based FX prime brokerage platform. Participants were connected

online for banks to enter trades, clients to accept them and

ultimately view their positions in real-time. Even at this early

evolutionary stage, this first use of technology reduced clients’

operational risk and increased position transparency, encouraging

new clients to consider a prime brokerage offering. Since these

early days, the FX prime brokerage market continues to evolve and

the necessity for robust technology solutions is not only a

requirement but also a facilitator for growth.

As FX prime brokerage websites have become a standard service

offering, additional strides have been made to bring additional

client services online and to further reduce operational risk for

participants.

In 2004, banks began to automate the trade notification process by

partnering with Harmony to develop an electronic trade

notification network. On an average day, over 4,500 trade details

are processed in real-time between the participating banks over

The FX market remains one of the most liquid and deepest marketsin the world and continues to attract investors at a growing pace.According to the Bank of International Settlements Survey in 2004,the average daily turnover rose from $1.38 trillion in 2001 to over$1.88 trillion by the end of 2004. Similar to the expansion of the FXmarket, the number of hedge funds that trade FX as an asset classhas also increased significantly over the past couple of years. Manyfactors have contributed to this growth, including increased interestfrom the investor community in alternative strategies and reducedhurdles to entry. However, it is the role technology has played thatdeserves recognition as a significant contributor to client growth andas an essential requirement for banks to manage operational risk.


this network. Depending on the level of

automation of the prime broker, these

trades can be routed to the client in real-

time for them to accept and update their

position. At UBS, we electronically receive

and book a client or bank transaction every

15 seconds without manual intervention.

Clients that have connected electronically

to their prime broker benefit from a near

real-time update of their position, allowing

them to instantaneously manage the risk in

their portfolio. Whether clients have an

electronic connection or not, all clients

benefit from bank automation by reducing

the potential for trade entry errors,

improving trade reconciliations and

enabling clients to better manage their

portfolio and focus on market activity.

Additional Services and Benefits

Automation of the give-up process has not

only benefited the client by reducing risk, it

also has made the trading process and

clearing exercise more efficient. No longer

do clients have to spend time, money and

resources to chase down trades and

reconcile positions. With the help of

technology, they can concentrate on

their core business of trading and

position management.

Clients have online access to their entire

portfolio of trades, whether done directly

with their prime broker or with another

executing bank. Through their prime

broker’s website, they are able to access

a variety of features such as trade

allocation adjustments all the way through

the spectrum to very sophisticated

portfolio analytics.

Expanding Demand for FX Prime Brokerage

As prime brokerage matures, new types of

clients are taking advantage of the services

that were traditionally specific for hedge

funds. Fund of fund managers can view

real-time performance on all their

allocations and have their trades

automatically cleared through their

administrator. Banks can increase their

liquidity sources without managing

multiple credit relationships and asset

managers can centralise account splits and

reduce settlement risk. The benefits of

prime brokerage are recognized and

realized by an increasingly broad client

base.

Banks continue to invest heavily in

technology and develop creative solutions

to service a variety of client needs.

Technology solutions need to be robust,

but flexible, to meet these unique

requirements for clients today and for

tomorrow. There is a continued drive to

increase the connectivity between banks,

clients and administrators to further

reduce operational risk and the integration

of technology across asset classes.

While the future success of FX prime

brokerage relies heavily on technological

advances, only those institutions with a

proven commitment to a significant

investment in technology will be poised to

meet the ever-changing requirements of

prime brokerage clients.

© UBS 2006. All rights reserved.


The cross-asset platform environment:

overcoming a siloed history

Change is most certainly in the air. It now seems the market isdriving the belief that cross-asset trading can deliver realbenefits, both strategically and in terms of cost savings. Theneed for consolidation would seem, to many, to be obvious.Many banks support multiple silo systems catering fordifferent asset classes (FX, MM, IRD, Repo, Equities, FixedIncome, exchange-traded futures), and even within asset class(e.g. trading, risk management, P&L, back office).Inefficiencies are inherently built in as soon as you introducemultiple database models, pricing, modelling, interfacing etc.

Paul Hodgson, Product Manager,SunGard FRONT ARENA

>>>

The cross-asset platform environment: overcoming a siloed history

A convergence of recognised functional and technology

benefits is proving to be a hard mix to ignore. On the trading

side the appetite for cross-product capabilities is now

arguably as strong on both the buy and sell side of the

market. That said, it is for notably differing reasons.

Sell-side considerations

The sell side is particularly attracted by cross asset

functionality providing greater efficiencies of scale and a

wish to drive down their total cost of ownership. Banks are

increasingly becoming aware of the inherent advantages of

having a single platform for sales and trading across asset

classes. It allows for more effective position keeping, more

accurate risk management, more timely single point of

reference reporting, less duplication of effort and more

efficient use of trader resources - all of which combine to

reduce transaction costs. Global trading of instruments in

different risk currencies is naturally boosting volume in the

$2-trillion (US) FX market, while at the same time driving the

need for effective dual or multi-product trading platforms

that can deliver improved functionality, and again, crucially,

lower costs.

“On the trading side the appetite forcross-product capabilities is now

arguably as strong on both the buyand sell side of the market.”

Buy-side considerations

The buy side’s reasons are more strategic. Although, they

too are attracted by the efficiencies of silo-busting cross

asset platforms, their motives are largely market-driven. The

multi-asset trading revolution has predictably been led by

hedge funds, especially global macro hedge funds. As

natural innovators in the market they apply increasingly

complex strategies across equities, fixed income, futures,

options and FX. They are looking to a consolidated solution

for market data, direct-market-access trading and risk

management through a single front end.

However, as the traditional asset management community

moves away from plain vanilla and into the more complex

trading strategies normally associated with hedge funds, so

too will their need for single platform, cross-asset trading

increase. The larger, more established funds have

historically spent heavily on acquiring or building single silo

trading systems. Many are now beginning to rue that

decision as they attempt to shoe-horn other asset classes

into their core offering.

In addition to the total cost of ownership savings outlined

above, banks are also being driven by a desire to match the

profile of their clients more closely – again, the influence of

hedge funds is

increasingly being felt in

this respect too. This is

particularly true in the

structured products market, where

cross-asset functionality allows

banks to adapt to changing market

conditions by allowing innovation in

product structuring, responding to the needs

of retail investors. Hedge funds trading across

the asset spectrum would rather call a single point

of contact for packaged structures, than work with

several different traders at their preferred bank.

Value added benefits

These factors previously mentioned coupled with the market

desire is not enough on its own, as cross-asset platform

vendors have to demonstrate to end users that they have

enough value-added benefit to overcome the inherent

advantages of having a dedicated silo solution. Vendors

need to combat the inertia that traditionally besets many

within the financial services industry. Cross-asset’s ability to

package, price and manage risk across asset classes for

structures and hybrids – both on the sell side, where they

may be broken down into individual risk elements, and buy

side where they will be maintained as a single instrument -

needs to overcome the benefit of the specialism of the

traditional platform. For example, cross-asset technology is

already bringing greater liquidity to the FX market thanks to

an increased volume of instruments that involve an FX

component. This brings with it an improved FX exposure

and interest rate risk management across asset classes.

Technology will inevitably follow the needs of the market – if

a hedge fund demands a single platform to trade both oil

futures and weather derivatives, then a solution will be found

– but technology can be a driver for strategy too. Last April,


>>>

The cross-asset platform environment: overcoming a siloed history


newly launched Peloton Partners LLP was in

the market for a software partner to manage its

pricing, deal capture, position keeping, P&L,

risk management and processing. The cross-

asset nature of FRONT ARENA was a key

criteria behind Peloton Partner’s decision to

purchase the system, which once

implemented, created an optimal environment

for Peloton Partners to benefit from cross-

asset revenue opportunities and consolidated

risk management. Once FRONT ARENA’s

infrastructure and systems are in place, the

beauty for any client is that it’s simply a matter

of ‘permissioning’ users to trade new

instruments - the pricing, deal capture,

position keeping, P&L, risk management and

processing functionality is all there. FRONT

ARENA has customers that have entered new

markets, such as credit default swaps, with as

little as 1 week’s preparation to enable the

platform. This is not an isolated case, and

given the dynamic nature of the hedge fund

market, is a trend that is set to continue.

There are a number of ways of providing a

solution to the cross-asset conundrum, each

appropriate for different needs. These

encompass the following:

• a modular system, with a single, front-

end wrapper for users;

• a single system used independently

by silos, but with enterprise reporting;

• a single system that also allows rigid

fixed cross asset usage;

• a truly single system that allows full

structuring capabilities across all

assets.

What all of these solutions have a common

need for is to allow user innovation – offering

flexibility through extensibility, scalability, and

a continued response from the vendor to

market needs.

Traditional technology methods are

facilitating the development of these

bespoke and flexible platforms. Grid

computing is an obvious solution to help

meet the increased processing demands of a

multi-asset type platform but, Service

Orientated Architecture (SOA) is increasingly

gaining more favour in the market.

SunGard’s Common Service Architecture

(CSA) is one example of this.

Firstly, it is a collaborative

development process—a way of

creating software that allows product

development teams around the world to

share, contribute to, and leverage, each

other's work. Second, it is a technology

framework—a vendor-agnostic service

oriented architecture (SOA), based on

mainstream open standards, that enables

discrete components from SunGard's product

portfolio to be plugged together to form

configurable, composite applications.

There are four levels through which SunGard,

as well as user and other supplier's,

applications can conform to the CSA

framework:

- components that can be wrapped as a Web

Service;

- structural standards for common services

and calls for the presentation layer to be

standardized ;

- focus on the underlying data structure,

normalized and defined using CSA's

database-agnostic XML schema definition;

- a complete reference implementation of a

Service Oriented Architecture to make

collaboration as efficient as possible and

simplify the runtime environment, also

makes product integration much more

seamless.

There remain many hurdles to overcome -

inertia and resistance to change on both the

user and technology sides being two of the

main ones. Sometimes the sheer size of the

problem makes it difficult to even contemplate

change for some buy-side institutions, but

there is no doubt that we are well on the road

towards successfully trading across asset

classes, thanks to a surge in interest both on

the buy and sell side. We have come a long

way, but the opportunities exist to go a lot

further.

Managing limit orders has traditionally been

administratively time consuming and complex, leaving

clients uncertain of their order status. By listening to their

clients, Brown Brothers Harriman (BBH) found a growing

need for a system that simplifies the entire limit order

management process. In 2001, BBH launched its online

limit order management system, FX OrderView, to help

clients streamline the order process and manage their limit

orders more efficiently - place, submit and track the status

of orders in real-time around the clock.

BBH has worked continuously with their clients to respond to their risk management and

operational needs. FX OrderView provides clients with an overall reduction in intraday

and overnight risk by knowing at all times exactly what orders BBH is watching for them.

A major upgrade in April 2006 allows clients who do not have a 24-hour trading desk to

watch their own orders during the day and submit them to BBH to manage their

overnight risk.

All limit orders submitted to BBH are watched by their traders located in New York

operating 24-hours a day beginning at the Monday market open in New Zealand until

Friday market close in New York. With FX OrderView, clients are able to monitor and

manage their order book real-time, anytime and anywhere. Clients may also elect to

receive e-mail notification for multiple recipients when an order has been filled.


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FX OrderView®:Taking control of thelimit order process


Product highlights:

With FX OrderView, clients can:

• Monitor orders easily and securely from office

and home workstations with no software

installation required

• Receive automatic e-mail notification with trade

details at order execution

• Place orders through any channel (telephone,

Reuters, Bloomberg, e-mail, FTP, chat facility

and web) and view all orders on client’s web

blotter

• Import orders automatically from a spreadsheet

via e-mail or FTP

• Use standard order entry screens that make

placing every type of limit order simple

• Deactivate orders to take back at start of day

and reactivate at end of day

• Link conditional (OCO) or dependent (DEP)

orders easily

• Replicate previously placed orders all in a

single keystroke

• Specify an expiration date and time based on

client’s time zone

• View execution rate, date and time

• Customize views to allow efficient monitoring

• Access BBH WorldView portal securely using

password protection and digital certificates for

data encryption

Upcoming Features:

The April 2006 release includes the following

features:

• Closeness to Market - Displays the client’s

orders according to the percentage off market

based on BBH’s composite FX rates. Very close

orders will be highlighted in yellow. Clients will

be able to monitor relative closeness to market

for orders that have not yet been submitted to

BBH to watch. This gives clients the facility to

watch their own orders during their business

day, pass them to BBH to watch overnight and

take them back in the morning.

• Input Only Users – Allows branch offices and

clients to input orders, but prevents them from

submitting to BBH. The client/trader has the

control to watch all orders and submit to BBH to

watch.

• Multiple funds – Allows investment advisors to

place orders for various funds in their portfolio.

• Execute Now – Enables the client to request that

an order be filled now “at best” market rate.

• Precious Metals – Gives clients the ability to

watch their own precious metals orders against

the BBH supplied precious metal rates

• Order Logic Checks – Validates that orders are

logical according to price, type and market rate

combination, and prompts the client

immediately for correction if the order is

illogical.

• Modify – Enables the client to modify order rate

and amount on current active orders

• Search – Allows clients to search active orders

and archived executed orders.

As an industry leading FX provider, one of BBH’s

key strategies is offering tailored solutions to help

clients achieve better executions and risk

management. BBH FX continues to collaborate

with IT&E Global, Inc., a financial services

software company providing custom application

development to the global markets trading

community. This synergy delivers a product that

offers the best combination of STP efficiencies

and client control of the limit order process.

FX OrderView is a registered product of Brown Brothers Harriman & Co.

� We are a bank with no proprietary electronic distributionchannel for FX Options. What’s your general impressionon whether FX Options are ready to be traded online andwhich existing channels could we use for distribution?

First of all, yes, FX Options prove ready for online trading.Especially the more vanilla types which are seen increasinglyin common use by the buy side and will become more so inthe near future. A growing commoditisation and frequency ofdemand for FX Options, a steep general learning curve ineCommerce undertaken by both buy and sell side over thepast few years, as well as a sufficient level of technicalsophistication, are a solid basis for taking an instrument likeFX Options online. Based on clients’ positive experiences withtrading FX Options electronically via single bank platforms,there is now an increasing demand for taking online FX Optiontrading into the Multibank arena. Given the high costs andlimited life cycle of adding new instruments to yourproprietary sales channel, you could consider providing FX

Options online and deliver quality service to your clients viaa Multibank Portal like 360T where you may already beproviding liquidity in other instruments.

� We are a large corporate treasury interested inunderstanding the benefits of trading FX Options online.Can you illustrate some of these and allay some of ourconcerns that e-trading might increase the chance ofmaking mistakes, for example, data entry errors at thedealing stage of our option strategy?

One of the key drivers in e-trading is to reduce operational riskspecifically by preventing errors at the dealing stage of OTCtransactions as they frequently happen in telephone trading.The growing online trading of highly commoditized products inFX and Money Markets has clearly demonstrated that the errormargins in dealing are significantly reduced through single dataentry, automation and straight through processing. Theintroduction of Multibank Portals has added a maximum level


Thee-Forex SurgeryTrading FX Options online:the Multibank Portal perspective

With Mathew Kuppe, CTO at 360T

[email protected]


of transparency and speed in price discovery and executionacross your relationship banks. A great benefit from tradingthe majority of your standard transactions with all yourproviders via one single portal is the detailed documentationand audit trail you generate. e-trading will help you tofacilitate audit requirements, like FAS 133 and IAS 39, byreferencing hedge accounts and seamlessly processing theminto your legacy system. It also gives you the possibility toelectronically initiate post trade automation such as dealcapture and confirmation matching.

� As a large fund management house we trade the majorityof our FX spot and forwards online. We are happy withthe high efficiency and transparency and would like toextend this to our frequent FX Option trading. Whatoption types make sense to trade online?

Some single-bank online offerings are providing an extensiverange of FX Option types, a few even including relativelycomplex structures. From a Multibank Portal perspective, wesee standard plain vanilla option types most successful in e-trading, since they are relatively easy to define and do notrequire individual advisory. This applies to plain vanillaEuropean and American puts or calls and Spread options.Risk Reversals and Zero Cost Options are particularly provingto be increasingly popular in the short term. In the mediumterm, it’s expected that more complex structures, such asCalendar Spreads, Straddles and Strangles are brought intothe picture as acceptance by market participants grows.Generally, the variety of option types available via Portals willcontinue to grow in line with buy side requirements. This willcome along with increasing liquidity and commoditisation ofthe more sophisticated instruments.

� Whilst we expect to focus mainly on vanilla structures suchas Risk Reversals and Calendar Spreads etc, we mightconsider using more exotic structures in the future. Are alltypes of FX Options supported online and if not what typesof more complex products might become available? Whatsort of advanced development do you see coming withregards to online FX Options trading in the future?

More complex structures, like Knock-ins and Knock-outs,could follow as popularity of product and sophistication ofall counterparties come to a more mature stage. What wedon’t see short or mid term are highly complex structuressuch as Asian styles. Online FX Option trading of the futurewill bring automated pricing of even more complex optiontypes across all providers.

� Is the buy side prepared to trade FX Options online andwhat are the requirements?

The only real requirement for the buy side is a genuine needand understanding for the instrument. Since online trading isgenerally meant to facilitate trading of standard transactions,it really only applies where both counterparties have a clearagreement on the traded product. All preliminary action,such as general introduction and training in option trading,as well as definition of strategy and instrument selection,need to be subject to the buy sides individual initiative, toolsand quality advisory of their relationship banks. Technically,clients’ treasury or portfolio management systems are oftenprepared for STP of FX Options.

So it’s rather the question of whether the respective electronictrading channel can provide an interface. In this case it isimportant for a Multibank Portal to be able to support througha public interface the notification of all products that areexecutable on the platform. For example, 360T supports theintegration to any front-office system in exactly the same waythat it successfully manages all online FX trade notification.

� Is the infrastructure of the sell side ready to provide FXOptions to a Multibank Portal?

It seems that not all banks are ready. This is currently still thebiggest hurdle in building liquidity over an e-trading channel.Several banks are neither prepared, nor committed, to providemanual pricing using an online FX Option trading solution.Even fewer are prepared to support automated price feeds. Wecertainly see many developments that are constantlyincreasing the pressure on banks to price options online, mostsignificantly, the ever increasing demand from the buy side todrive efficiencies and reduce operational risk. Of course it isimportant that the channels used for online FX Option tradinghave the necessary technology in place to be able to supportthe automated pricing feeds from banks.

� Is your own Multibank Portal ready to provide theunderlying technology?

At 360T we already offer online FX Option trading throughour TEX Multibank Portal. Our public APIs support theintegration of both buy and sell side to automate the tradingprocess in pricing and trade notification. No bank cancurrently offer us an interface to write to for automated FXOption pricing and execution, but we are working closelywith a number of our sell-side customers to realize thisintegration in the near future.

� Which buy-side segments are driving the main demandfor online FX Options trading?

We see the current demand for online FX Option tradingbeing strongly driven by institutionals, in particular the assetand fund management community. There is currently onlylimited demand by corporates, but we see their interestgrowing substantially as corporate risk managementmeasures become ever more sophisticated. In addition, weanticipate increasing interest from market user banks ontheir own behalf, or for their high net-worth clients.

� How does the 360T approach to online FX Option tradingdiffer from other Multibank Portals?

While other Portals concentrate on covering the major flowbusiness of the banks, most obviously FX Spot and Outright,360T takes a different approach. We look more generally atfacilitating and streamlining the entire OTC tradingprocesses of our clients, which usually embraces thefrequent usage of a broader set of OTC products. This rangecertainly includes FX Options, Money Market transactionsand even interest rate derivatives. These asset classes maynot yet be required in such high frequency, but by tradingthem over the same channel across all of your relationshipbanks, and through the same STP solution, it’s possible toscale the benefits of high efficiency, transparency andauditability across your trading activities.


Improving FX connectivity –Harnessing a new generation of technology

As a market, we have made great strides over the last few years in onlineforeign exchange trading. Participants can trade more quickly andefficiently, and with greater price transparency than ever before. But asonline FX trading volume continues to increase, it’s becoming apparentthat the connectivity between all parts of a trade’s life cycle is not quitethere. The systems responsible for RFQs, credit, execution, riskmanagement, and back office processing are themselves maturing, butthey don’t talk to each other the way we now need them to. In our privatelives, we expect our banking transactions to flow instantly through thenecessary systems, with real-time transparency online. Until now, wehave not demanded the same capabilities from our FX trading.

Roger Bright, CTO Aspen Hedge,

FNX Solutions. [email protected]

Why not? The answer is pretty simple: until now most

technology investment has concentrated on the pre-trade

(RFQ, credit utilization) and execution parts of the trade life cycle. And

there’s no question that customers are benefiting from this

investment! The ability to see multiple real-time quotes from different

providers enables traders to take advantage of rapidly shifting market

opportunities. But the new participants in the FX electronic trading

space fully expect real-time connectivity between their trading venues

and everything else. By “everything else,” I mean necessary give-ups

to a prime broker, updates to a real-time position and risk blotter, trade

allocation, and position rolling, to name a few.

Drivers for better connectivity

In my experience, it is fairly common to see a trader dealing

electronically on a dozen platforms at once – while scribbling notes

on a piece of paper to keep track of his overall position! This is

especially true of new entrants to the market, who often lack the

required infrastructure to collect real-time trade and rate data from

disparate sources. Without STP connectivity, it’s hard to derive full

benefit from modern trading methodologies. Also, risk managers

realize the serious vulnerability here: aggressive trading strategies

(algorithmic, black box, white box, etc.) combined with lack of

consolidated position and P&L monitoring can expose a firm to

>>>


significant losses very quickly.

Investors realize this and are pushing

for greater risk controls; at the same

time, regulatory bodies are pushing for

better transparency. The combination of these

is elevating post-trade connectivity to a mandatory

prerequisite among electronic FX market participants.

The API explosion

As attention turns toward the post-trade components of the

trading life cycle, the current limitations of the connectivity

landscape become clearer. The most obvious hurdle is the

multiplicity of APIs across different trading platforms, credit

utilization systems, and prime brokers. In the old days, the

architects of each system would create a new API and expect

everyone else to write to it. As a result, it is common today for a

trading institution to have to write to dozens of different APIs for

all their systems to talk to each other.

“Anyone whohas ever written to

an external API can tell you that themodel of “one proprietary API per

system” is inefficient and expensive.”

Smaller firms, however, have neither the technology budget nor

infrastructure to accomplish this and have turned to outsourcing

connectivity, especially because many APIs are quite complex --

for example, it’s pretty common to see hundreds of fields on a

single trade message.

Anyone who has ever written to an external API can tell you that

the model of “one proprietary API per system” is inefficient and

expensive. Inefficient because every system ends up having to

develop a separate interface to every other system’s API, often

with little commonality in message formats. Expensive because as

each system’s API evolves and changes, all other interfaces to that

system must change to match it. Often a system’s documentation

is not up to date with the API itself, and this multiplies the

development and maintenance expenses on both sides.

The Solution

How do we get past the API explosion of recent years? The answer

is as easy to visualize as it is hard to achieve: standardization on a

universally accepted messaging protocol. A decade ago, the

closest thing we had to a standard was Reuters TOF over a serial

Improving FX connectivity – Harnessing a new generation of technology

interface. A number of factors prevented TOF from becoming the

universal post-trade API, not the least being that the TOF

specification was not public domain. The days of one API per

provider are not yet over, but to a certain extent, the industry is

now starting to converge on the FIX protocol.

The benefits of standardization are obvious: quicker development,

easier integration, fewer software glitches, and decreased downtime.

It is true that any standard message format will continue to evolve

as business needs change, but it’s much easier for a system

provider to maintain one API than a dozen.

The hallmarks of a universally acceptable messaging protocol are

flexibility, extensibility, ease of development, and ease of

deployment. By “flexibility” I mean that the API must be agile

enough to respond to changing market needs, and this is far easier

with an “open standard” protocol that does not have a single

owner. “Extensibility” means that a good protocol will allow each

system to define its own fields where necessary, while providing a

sufficiently robust framework to generally obviate such a need. So

far, FIX seems to fit this bill, but it will likely be years before any

system designer can hope to ignore the hundreds of proprietary

APIs out there today (with more created every week).

Hardware and infrastructure obstacles to connectivity

Another hurdle to seamless electronic FX connectivity is the

hardware infrastructure required. I’m referring not just to the

server rooms and IT staff, but to the various types of connections

each external system may require.

Some larger system providers still have policies disallowing

transmission of data over the Internet, and this translates to

installation of leased lines at each trading institution’s site. A

typical STP setup today can require a substantial amount of

connectivity hardware: T1 lines, serial lines, firewalls, specialized

routers for establishing VPN connections, and so on.

“The hallmarks of a universallyacceptable messaging protocol are

flexibility, extensibility, ease ofdevelopment, and ease of deployment.”

And, when the connectivity installation costs end, the maintenance

costs are often just beginning. A few examples: each individual

connection must be monitored continuously, with automated alerts

for error conditions. Technical staff must be available 24x7 to

diagnose and repair any connection failures. Also, domain experts

must be available to deal with any exceptions from any of the

vendor systems. It’s pretty easy to see why this model is not

scalable – it’s unrealistic to expect every hedge fund and prop

trading shop to invest in its own full-scale connectivity center. This

is especially true when the cost of installing and maintaining hard

connection lines and VPN tunnels can eventually dwarf the cost of

the servers themselves.

Looking ahead

It’s clear that full STP connectivity is still a pretty daunting task for

any trading institution. One approach many firms now take is to

choose a hosted system provider whose data centers already

maintain connections with their various trading platforms, market

data providers, and prime brokers, such as our own Aspen Hedge

and Sierra ASP services. Trading firms with larger technology

budgets may choose to set up and maintain their own data and

connectivity centers.

As liquidity continues to spread out through the electronic

marketplace, we will see a greater volume of trades. This increased

volume will require both trading institutions and their providers to

invest more heavily in post-trade connectivity. As a result, we’re

naturally going to see a reversal of the balkanization of system

APIs, and a convergence upon open standard protocols such as

FIX. At the same time, larger providers will join the smaller ones in

offering secure Internet-based connectivity, and this will eliminate

the need for hard-wired T1 and serial lines. The end result will be

lower priced connectivity for all FX traders, because of easier API

integration and lower physical line costs.

The current round of post-trade connectivity innovation will bring us

closer to true STP, with the attendant benefits of lower operational

risk and increased operating efficiency. Traders will see fully

consolidated real-time position and P&L allowing them to make

quick, informed decisions. Risk managers will be able to run more

accurate analytics and what-if scenarios. Back office personnel will

enjoy easier and more accurate reconciliation with prime brokers

and account managers. Firms will be able to provide their customers

more efficient and accurate reports. And the resulting efficiencies in

hardware and software will make the electronic FX market even

more cost efficient and more easily accessible than it is now. In

today’s low margin, high volume online trading environment, this is

what the market needs to continue to grow.



At first glance, one might be forgiven

for believing that Canada was some

way from the forefront in electronic FX.

Greenwich Associates’ April 2005 report

("Global Treasury Management: Volatility

and New Entrants Trigger Wave of FX

Growth"), revealed that 21% of top tier FX

users in Canada were trading FX online

in 2004, versus 55% in the US and 50%

in Europe.

However, things appear to be changing

according to Mark Warms, global head of

sales and Marketing at FXall. “I think that

the trend towards online trading in Canada

has increased quite sharply since 2004,” he

says. “For example, while we have had two

Canadian banks on FXall since we opened

for business, a further three joined in 2005.”

Jeff Boyko, CEO of Castle Currency

Management, which provides FX hedging

services to Canadian and US corporates,

takes a similar line. “By and large

Canadian corporates do not seem to have

conceptual reservations about electronic

FX,” says Boyko. “We do still have a few

clients who do not like us to trade their

business electronically, but they are

definitely declining in number.”

For many market participants, the major FX news in Canada since late2002 has been the loonie’s phenomenal run against the US dollar.While that may be the most obvious feature on its FX landscape,Canada has also being undergoing a quiet revolution in terms ofelectronic FX trading. Adoption levels still lag those of the US andEurope, but among certain market segments there is evidence ofstrong growth accompanied by increasing sophistication.

Mark Warms

Canadian FX –bucking the trend

“I think that the trend towardsonline trading in Canada has

increased quite sharply since 2004”

R E G I O N A L e F X P E R S P E C T I V E

Andy Webb

By Andy Webb

The corporate market – slower…

While adoption of eFX by the Canadian

market as a whole may be on the increase,

there are some segments that display

interesting anomalies - with corporates

being a case in point. In many countries

the general assumption in FX is that large

corporates (with their larger budgets,

emphasis on STP and desire to improve

controls for regulatory reasons) are

usually in the vanguard of eFX adoption,

while smaller corporations catch up later.

However, larger corporates in Canada

appear to have been moving at a more

leisurely pace.

As managing director for corporate &

institutional FX Sales at BMO Nesbitt

Burns, CJ Gavsie is well placed to make

the comparison across client segments.

“We find that our Canadian large

corporate clients really value our

consultative element to the FX

relationship” says Gavsie. “Advisors can

provide information that goes beyond the

executional aspects of a trade. If a client

is calling us for information, they will

logically stay on the phone and deal or

give us orders at the same time. For that

reason, we haven’t seen the high

adoption rates for electronic FX trading

that are associated with smaller

companies who aren’t necessarily looking

for advice.”

There is also a suspicion in some quarters

that personnel in certain larger corporate

treasuries feel that they can better justify

their role if they are phoning multiple

banks for competitive quotes and

gathering market intelligence at the same

time. Simply executing trades on a single

bank portal (even at the best price) might

be seen as rather less value added.

Another possible reason for slower eFX

adoption by large Canadian corporates

suggested by some commentators is the

number of internal processes and steps

that have to be completed before online

execution can be authorised. If the decision

has to be cleared by treasury and/or audit

committees that are conservative in nature

and meet comparatively infrequently, any

obstacle that defers a decision to a later

meeting can make the authorisation

process very protracted.

Among larger corporations there alsoappears to be a strong correlationbetween their exposure to commodityrisks and their willingness to trade FXonline. Perhaps understandably, acorporation that has to hedge majorcommodity positions in addition FX maywell have transaction volumes that makethe electronic value propositioncompelling just in terms of STP alone.

…and faster

By contrast smaller corporates in Canadaappear to be moving ahead of their largerbrethren. According to Jamie Barton, whoheads FX sales to commercials for RBCCapital Markets, this client segment hasbeen quick to switch to eFX.

“The commercials are well up thelearning curve as regards trading FXelectronically,” he says. “They are bothwell-established in online trading andwell-adapted to it. We have been offeringeFX to this segment since 1998 and haveseen strong and consistent growth fromthem throughout.”

One possible explanation for this is thenumber of banking relationships thatsmaller corporations have. While a largeCanadian corporate may have four or fiverelationship banks, those further down themarket may only have one or two. Thelogistics of hooking up to the relevant singlebank portals are therefore less protracted.More importantly, lower corporate treasurystaffing levels /resources may make thephone based consultative approachpreferred by larger corporates impracticalfor smaller businesses.


CJ Gavsie

“We find that our Canadian large corporate clients really value

our consultative element to the FX relationship”

Jamie Barton

“The commercials are well up thelearning curve as regards trading

FX electronically”

>>>

Source: Greenwich Associates’ April 2005 report ("Global Treasury Management: Volatility and New Entrants Trigger Wave of FX Growth")


Furthermore, for smaller corporates, FX is

usually something that needs to be done

as quickly as possible, as it is not seen as

a core activity that will add much value.

The primary focus will be cash

management or perhaps trade finance,

with any related FX element more likely to

be seen as a lower priority.

The concept of a one stop shop also holds

a lot of appeal for smaller Canadian

companies.

“I think smaller clients might be more

willing to adopt electronic trading, partly

because of their more limited resources,

but also because of the ability to effect all

their related transactions online via the

same interface,” says Laura Isidean, head

of Scotia Capital’s Toronto FX sales desk.

Carrie Denton, Scotia Capital’s managing

director of ScotiaFX/E-Commerce,

elaborates. “For this size of company, FX

is very much something that is integrated

with other areas such as cash

management and trade finance,” she

says. “Combining that with their more

limited resources means that they are

looking for an FX solution that will allow

them to address their other requirements

at the same time as efficiently as possible.

Tying these together in a single portal

therefore makes a lot of sense”.

Fund managers

In view of its strong trending performance

in recent years, global hedge fund interest

in the Canadian dollar as a tradable has

been substantial. However, in comparison

with Europe and the US, the domestic

hedge fund industry in Canada is very

small. Therefore, for most banks, traditional

investment managers represent the bulk of

their non-corporate eFX business.

In comparison with their corporate

counterparts, institutional fund managers

in Canada have been quick to adopt eFX.

As in other countries, a major driver for

this has been the need to makes splits and

allocations across multiple investment

accounts when making a bulk FX trade.

The costs and risks involved in doing this

manually are clearly unacceptable.

As elsewhere, an important factor behind

the increasing volume of eFX activity

among Canadian investment managers

has been growing interest in foreign

exchange as a tradable in its own right.

“This has been particularly obvious as

regards currency overlay,” says Scotia

Capital’s Isidean. “This new interest has

also been apparent from pension fund

sponsors. Many have started out hedging

their currency risks in house, but are now

looking to introduce a more active

element to those programs.”

One asset manager with a focus that

encompasses all these permutations is

Russell. The company specialises in

developing multi-manager investment

products for both retail and institutional

investors, which results in a mix of FX

exposures and strategies.

“We have very broad currency interests -

from currency as an asset class, to overlay,

to hedging,” says Ian Battye, Russell’s

director of currency implementation.

“Across all these areas we have a very

strong emphasis on minimising execution

costs both for our own portfolios as well as

those managed on behalf of clients.”

Russell deliberately diversifies the ways

in which it accesses liquidity. Though it

still uses the phone for dealing under

certain circumstances, it is a long

standing user of FXConnect and a regular

user of FXall. However, over the past six

to nine months Russell has started to

embrace some of the newer trading

platforms. “We are also very interested in

platforms that provide direct market

access, such as Hotspot and Lava,” says

Battye. “I think a lot of these new

electronic crossing networks are a good

fit for us and so as a preparatory step we

have now completed the process of

obtaining a prime broker.”

More specialised managers, such as equity

arbitrage, are also a notable feature in

Canadian eFX. With many Canadian stocks

having a listing in the US as well, cross

border equity arbitrage is relatively

commonplace. Hedging the FX risk on

these small margin equity arbitrage trades

requires rapid execution and tight spreads,

as well as the ability to trade odd lots.

Carrie Denton

“Over the past six years we have put a great deal of effort

into the platform.”

Laura Isidean

“Many pension fund sponsors havestarted out hedging their currency

risks in house, but are now lookingto introduce a more active element

to those programs.”

“These arbitrage players are typically

more active than most managers; we may

see them using our platform ten or twenty

times a day,” says BMO Nesbitt Burns’s

Gavsie. “By contrast, more conventional

fund managers will perhaps use the

platform once or twice a day, but in

considerable size. Their focus is less on

speed of execution and much more on

functionality relating to splits and

allocations.”

A significant recent structural change for

Canadian pension fund managers has

been the removal of the Foreign Property

Rule, whereby managers were previously

only allowed to invest a maximum of 30%

of assets outside Canada. A Greenwich

Associates 2005 survey of large Canadian

pension funds and institutional fixed-

income investors seemed to indicate a

rather muted response to this. 75% of

those polled stated that they did not

expect to increase their allocation to

foreign assets as a result of the rule’s

abolition.

Nevertheless, several Canadian banks

expected an appreciable rise in FX

hedging activity on the back of this

change, and by implication a rise in online

FX trading. Though the evidence is

anecdotal rather than empirical, it

appears that these investors may be

following a third way. While their total

online FX activity does not appear to have

risen appreciably, several banks report a

notable rise in the range of currencies

these investors are trading, which may

imply that they are simply further

diversifying the spread of their existing

overseas assets.

Some Canadian asset managers have

also taken to automated trading. These

model based funds are active traders, but

do not as yet appear to have made a large

scale move into high frequency

autotrading. Interestingly, and in contrast

with many other parts of the FX world, the

managers trading in this fashion mostly

appear to be of the real money rather than

leveraged variety.

Retail

The retail FX market in Canada has

parallels with the small corporate market

in that it has been quick to adopt online

trading and appears very comfortable

with the technology. However, as regards

speculative trading, users do not as yet

appear especially demanding in terms of

currency pairs or instruments, with spot

trading of major pairs the main focus.

According to Peter Gustavson, President

and CEO of Custom House, a global non-

bank provider of FX payment services for

retail and corporate markets, non-

speculative retail activity has also been

very strong. “We have seen a strong

migration from telephone to online

execution,” he says. “For example, activity

on our online tool for the retail market has

of late been growing at 15% per month.”

According to Edward Kholodenko, CEO of

online retail trading platform Questrade,

retail FX traders in Canada have taken to

online trading with ease. “We are

targeting the more active Canadian FX

trader, so our audience is probably more

comfortable with transacting online than

other categories of retail user,” he says.

“They certainly have no problem with a

self-service Web environment.”

One area where Canada slightly lags is in

regulation of speculative retail FX trading,

in that unregulated providers can still

access the domestic market. However,

with or without regulation, Canadian

traders appear to be becoming more

aware of this issue. Offshore bucket shops

of dubious provenance are finding it

increasingly difficult to snare retail users

in the face of competition from regulated

onshore providers, such as Questrade.

Long term, Kholodenko thinks this

problem will continue to diminish. “I think

that as in other countries we're going to

see increasing official scrutiny of

unregulated foreign exchange dealing

sites and services in Canada,” he says.

“Potential customers certainly seem

aware of this issue, and we have found

that our membership of the Investment

Dealers Association of Canada and the

Canadian Investor Protection Fund has

been a point of competitive advantage.”

Portals – single bank versus multibank

While online FX trading is growing in

Canada, much of the activity in the

corporate segment is currently directed at

the single bank portals.


Peter Gustavson

“We have seen a strong migrationfrom telephone to online execution”

>>>Canadian FX – bucking the trend

Ian Battye

“We have a very strong emphasis onminimising execution costs both forour own portfolios as well as those

managed on behalf of clients”


Castle Currency Management connects to

multiple single bank portals to execute its

corporate clients’ FX exposure

management. “From our perspective,

using multibank portals would make a

great deal of sense, but Canadian

corporates have been a little bit slower to

accept these than corporates in some

other countries,” says Jeff Boyko. “I think

this preference for single bank portals has

a lot to do with existing bank relationships

and credit considerations. Having said

that, the strength of the Canadian dollar

against the US dollar has compelled

exporters that were previously unhedged

to reconsider that strategy and this may

provide a boost for multibank portals.”

Canadian banks have also observed

relatively slow adoption of multibank

portals among corporates. “I think most

Canadian corporates looking for a multiple

quoting mechanism, use the phone,” says

BMO Nesbit Burns’s Gavsie. “Nevertheless,

we are present on FXall, and that has

definitely been the multibank portal where

we have seen the strongest demand.”

Unlike corporates, Canadian investment

managers appear to be rather more

agnostic in their approach. With CADUSD

being their primary concern, much of

their execution strategy inevitably

revolves around that pair’s intraday

liquidity. “CADUSD liquidity is very much

concentrated in the US time zone and that

is probably the optimum time to be using

a multibank platform or ECN,” says

Russell’s Battye. “By contrast, it is

particularly difficult to move any size in

the Asian time zone using those venues,

so we might fall back on a single bank

portal or more probably one of our

relationship banks.”

Buy or build?

When it comes to their online offerings,

Canadian FX providers have adopted a

variety of strategies, ranging along the

spectrum from outside purchase to

internal development, or both. RBC Capital

Markets has favoured the evolutionary

approacch. “Our initial online FX trading

functionality was purchased, but has been

adapted over time to meet client needs,”

says RBC Capital Markets’ Barton.

Scotia Capital has taken a similar approach

- starting with a vendor platform and then

adding its own functionality thereafter.

“Over the past six years we have put a

great deal of effort into the platform,”

says Scotia’s Denton. “That process will

continue, as we look to enhance our

capability in various areas, such as STP.”

BMO Nesbit Burns has two FX trading

platforms and has adopted a different

strategy for each. Its portal for mid sized

and smaller corporates was built in house

to ensure tight integration with its cash

management services for this client

segment. Clients can therefore manage

their cash and FX positions via a single

interface. The bank’s other platform,

which is purely FX, is intended for larger

corporates and institutional investors.

This system was white-labelled from a

vendor, though the bank is also adding in

house functionality to it.

Custom House offers two execution

services online – a multiple payment

platform for the mid to large corporate

and institutional market and a single

payment platform which is targeted at

retail and smaller businesses. The

company has always undertaken its own

in house development for both platforms

and runs an R & D department of more

than thirty developers.

Custom House differs from the banks in

that its platforms are not intended for

speculative trading or large scale hedging

of risk. Instead, the company’s focus is

foreign currency payments, so if needed,

clients can execute very large volumes of

relatively small “nuisance” payments.

“We have some large corporates who will

be sending hundreds of individual

payments, distributed across perhaps fifty

different currencies,” says Custom

House’s Gustavson. “This has different

implications for functionality from a

position taking or treasury hedging

platform. More specifically, it means we

have a strong emphasis on very close

integration with client accounting and

ERP systems.”

Interestingly when it comes to hedging its

own FX exposures, Custom House

doesn’t use multibank portals at all. It

makes some use of single bank portals,

but much of its hedging is conducted

using listed currency futures.

Jeff Boyko

“I think this preference for singlebank portals has a lot to do withexisting bank relationships and

credit considerations”

Instruments and functionality

At present, Canadian banks mostly focus

on spot and forwards as regards the FX

instruments they offer for online dealing.

When it comes to FX options, the phone

still predominates. To some extent, this is

client-driven, as clients wish to consult

before buying. This also facilitates the

banks’ obligations as regards ensuring

client understanding and suitability for a

particular derivative product.

BMO quotes volatility on its large

corporate/institutional platform, but not

executable online option prices. “I don’t

think there is currently client demand for

that,” says BMO’s Gavsie. “While our

clients generally have a good

understanding of FX options, they still

prefer to discuss and deal them on the

phone.” RBC Capital Markets’ Barton

takes a similar line. “We offer clients spot,

forwards and swaps, which covers their

current needs, so we have no immediate

plans for options,” he says.

Though Custom House’s target market is

rather different, Gustavson reports a

similarly conservative attitude from his

client base. “I would say that Canadian

client activity splits approximately 70%

spot and 30% forwards,” he says. “Having

said that, by dint of the type of business

they transact with us, our clients probably

wouldn’t find options relevant for their

purposes, whether they traded them on or

off line.”

That viewpoint is also supported by the

buyside. At present Russell also doesn’t

use FX options at all. “Our electronic

FX trading is purely in spot and

forwards,” says Russell’s Battye. “We can

achieve what we need to achieve with just

these.”

However, when it comes to functionality,

the Canadian buyside has been becoming

more demanding. Electronic research is a

common expectation, as is the ability to

execute wires online. On the ergonomic

front, the competition for screen real

estate has seen the emergence of

functionality such as “tear off” mini ticker

windows, so the user can track a dealable

spot rate in real time without having to

keep a whole browser window open.

While some banks claim that STP isn’t a

major issue for their clients as yet, some

non-banks such as Custom House have

made STP a major part of their online

offering and feel they have benefited as a

result. “It has also allowed us to go after a

much larger group of customers in

Canada than we originally anticipated,”

says Custom House’s Gustavson. Custom

House’s technology is built using

Microsoft’s .NET, which in Gustavson’s

view has made it generically easy to

interface with corporate accounting

systems. However, the company has also

written purpose built interfaces for the

most popular accounting systems in its

target corporate market.

Despite increasing buyside interest in

functionality, some buyside users don’t

feel that this has as yet put much pressure

on banks to raise their game. “We still do

a lot of trading by phone because some of

the banks have limitations on things like

hours of operation, trading size or the fact

that you can't change orders once you put

them in,” says Castle Currency

Management’s Boyko. “I don’t think portal

functionality has yet become a major

competitive issue in Canada and so still

lags a little behind that available in

Europe and the US.”

Innovation and the way ahead

Looking to the future, there is an intriguing

consensus across market segments about

certain forthcoming market trends.

Canadian FX – bucking the trend


Edward Kholodenko

“I think we're going to see increasingofficial scrutiny of unregulated

foreign exchange dealing sites andservices in Canada”

>>>

Source: Greenwich Associates’ April 2005 report ("Global Treasury Management: Volatility and New Entrants Trigger Wave of FX Growth")

BMO’s Gavsie regards electronic orderbooks as a major potential area of growth. “Ithink clients would definitely respond to the opportunity to display their own indications of interest electronically,” hesays. Questrade’s Kholodenko anticipates asimilar situation in the retail space. “I believewe will see online FX moving towards adirect access model, where commissionswill replace the bid offer spread thatremunerates brokers today,” he says.

Finally, the recent strength of the

Canadian dollar has also prompted many

corporates previously unconcerned about

hedging to reconsider their approach.

Apart from a shift in the online trading

demographic, this may further drive STP

demands, as these corporates look to

integrate their new hedging activity with

their accounting and ERP systems.

Canadian FX – bucking the trend


With far smaller domestic markets thantheir neighbours to the south, Canadiancorporates of all sizes have historicallytended to adopt an outward lookingapproach in their trading activities. Thishas applied to corporates across theentire size spectrum, with some smallercorporates being particularly forward-looking in their attitude to eFX.

Toronto-based Identica Corp is a goodexample of this. The company is aninternational distributor of biometricidentity devices that are used by banksand others to ensure highly securecontrolled access to sensitive locations.

As regards purchasing, Identica currentlybuys its biometric devices from theKorean manufacturer priced in USdollars. However, this arrangement iseffectively introducing an additionalcurrency exposure, as Identica could of

course purchase the units with Wonhedged against the Canadian dollar. It isalso implicitly paying a hedging cost overwhich it has no control.

“As our sales volumes rise, we will wantto purchase in Won,” says Identica’sPresident David Clayden. “However, onthe receivables side, our hedgingrequirements are far more complex.While the US is our major market, we arealso selling into regions such as SouthAmerica and the Caribbean. We certainlydon’t want to be paying a premium forphone dealing if we can see and trade offcompetitive comparative pricing frommultiple banks online.”

Clayden has no doubts that Identica willhave to hedge these exposures. “In thepast, US companies in particular havetended to take a ‘take it or leave it’attitude to currency in regions such asLatin America,” he says. “Customers inthose regions could buy products in USdollars or not at all. Circumstances havenow changed and North Americancorporates now find themselvescompeting against European and Chinesecompanies who are prepared to be moreflexible about pricing their products inlocal currency.”

When it comes to selecting online FXtrading platforms, an additionalconsideration for Identica is the range ofFX instruments that can be dealt. Some ofthe countries into which the companysells have exchange controls or othercurrency restrictions, so Identica wouldultimately like online access toinstruments such as non-deliverableforwards. “Looking further ahead, wewould also be interested in using

instruments, such as options, that allowus a greater degree of flexibility in ourhedging strategy,” says Clayden.“Therefore, apart from electronic tradingof FX options we would be attracted bysources that could provide additionalfunctionality, such as pricing models.”

Identica is planning a US listing onNASDAQ, so it is inevitably consideringthe implications of Sarbanes-Oxley. “Inview of that, we simply cannot afford theluxury of unnecessary manual processes,”says Clayden. “High levels of automationand STP will ease the compliance burdenas regards segregation of duties anddocumentation of processes. It thereforemakes sense for us to be hedging our FXexposures electronically from day one,rather than starting out with costly manualprocesses and finding ourselvescompelled to switch later.”

Case Study: Identica Corp

David Clayden

“We certainly don’t want to bepaying a premium for phone

dealing if we can see and trade offcompetitive comparative pricing

from multiple banks online”


Is qualifying as a full service FX provider

just about achieving a wide spread and

depth of product and service offering or

are there other additional attributes that

are important?

Leclercq: This is important, but tailoring a

service to the needs of individual

customers for their day to day business is

key and is part of being a full service FX

provider. This must include research, flow

information, market spreads, full range of

trading products, orders, system reliability,

STP and ongoing customer service.

Spurr: I feel that a full FX service should

combine spread and depth of the product

offering. There is a high complexity in

multiple provider relationships; it includes

banking and clearing services in addition

to traditional FX. Within the FX product

offering this should be tailored to specific

requirements such as 24/7 trading,

complete STP services for pre-trade, trade

and post-trade services as well as the

more structured hedging business. The

successful full service provider (FSP) should

be able to offer “modular” type service

depending on the client’s location and needs.

Smith: Supporting a wide range of

currencies and providing liquidity at all

times are prerequisites to being a full

service provider. In addition, supporting a

client’s decision making process is

important for those clients that use

research, market analytics and receive

market commentary. Risk management

support and business consultancy are also

valuable services for specific client types.

Probably the most important characteristic

relates to supporting client choice. For

example, banks must support a full range

of trading channels including the

telephone, bilateral eFX platforms, third

party eFX platforms and API connections.

By ignoring some of these channels a bank

risks losing some or all of an individual

client’s business. The consistency of

spreads is important, as is supporting

different trading styles, whilst making a

market at times of reduced liquidity can be

the most significant attribute to some

clients. Post-trade support services that

have value to clients include the straight

though processing of trades.

Kidd: The definition of a FSP is much

broader than just the spread and depth of

product offering. The geographical reach

of the provider is imperative for a first-rate

global service. As is the spread of clients.

Currently though, the major requirement is

the increasing use of technology in every

facet of the workflow to create an efficient

and scaleable business. ABN AMRO is one

of the few providers possessing a truly

global Network with local staff on the

ground - from Columbia to China and the

Netherlands to New Zealand - that are able

to deal with local FX issues. We have

27 different local Treasuries globally

with hubbed liquidity centres in every

region, each with their own individual

characteristics. FX provision is not a one-

size-fits-all service.

The e-Forex RoundtableWhat does it take to be a full service FX provider?With Vincent Leclercq, Deputy Head of Foreign Exchange at Calyon, Martin Spurr, Head of Integrated TreasurySolutions – eCommerce at The Royal Bank of Scotland, Jake Smith, Global Manager, e-Commerce, Global Marketsat HSBC, Andrew Kidd, Head of e-client development, Europe at ABN AMRO and Roger Lee, Vice President, FixedIncome eCommerce Sales, Citigroup Corporate and Investment Banking.

Martin Spurr

Vincent Leclercq

Jake Smith


Lee: The penetration of e-forex as a

proportion of overall forex flow will

undoubtedly continue to grow significantly

in 2006 and beyond. For a leading global

provider of e-forex solutions such as

Citigroup, the ability to cater to the ever

growing and divergent needs of clients is

of paramount importance. We believe

that continual focus on solving clients’

problems will lead to greater levels of

client satisfaction, which will increase our

market share and lead to long-term

revenue growth. E-commerce is just one

aspect of our complete service offering.

In what ways do you think the bar has now

been raised with regard to what it takes to

achieve full service provider status?

Spurr: The bar has been raised over the

last few years. This is because of clients

employing better and faster technology,

investing in hardware and technology in a

way that has forced banks to either do the

same or simply loose the game. Clients are

now looking at a holistic offering – coupled

with strong technology. This is

complemented by teams that have an in-

depth understanding and that can actively

and aggressively lead the way in providing

the clients with new and better ways of FX

dealing. They can then choose and overlay

the products with the best information,

trade and hedging ideas, structures and

risk management.

Smith: Significant investment is required

in all areas to support a full service

proposition. In recent years investment in

technology seems to have been

highlighted as banks have reacted to the

compression of margins with a focus on

efficiency. Improved technology allows

faster connectivity and the ability for

clients to trade in larger sizes and in a

variety of ways, including trading

automatically using black box technology.

As the top tier banks attract an increasing

amount of flow business it is essential

to continually stream correct prices,

irrespective of currencies and market

liquidity. Both client-facing and internal

bank systems require regular investment,

supporting multiple channels and an

increasing number of trades. Full service

providers have also invested in the

integration of bank services with client

systems in an effort to secure additional

business. Provided the pricing is

acceptable to clients, it is the integration of

bank services that increases usage.

Kidd: The bar has been raised most

fundamentally in the area of technology

and its application to the FSP offering. The

increased use of technology in the FX

arena, by the major international banks in

particular, has improved client product

awareness, increased price transparency

and added to fee compression pressures.

The sheer amount of capital invested by

the leading banks in creating ever more

efficient FSP ‘engines’, is a bar to entry to

the FSP market in itself. The traditional,

regional, second tier banks are among the

biggest losers in this respect. The big

international banks are increasing their

market share of a growing market as the

regional banks get squeezed. Some

regional banks that thought they could

compete on the international stage have

already made a ‘U-turn’ and returned to a

concentration on their local market. The

bar is being raised, indirectly, by the

concentration of market share in the FSP

business among fewer, quoted, players.

The focus of the main providers on

satisfying shareholders’ desires for higher

Returns on Capital, leads to a handful of

providers - those with the biggest wallets –

with a global FSP offering that is used as a

conduit to providing other related services.

Lee: Nowadays it is not just a question of

participating against your peers on a multi-

dealer portals and ECN’s. It is a question of

tailoring the glove to fit the hand. For

example we created the CitiFX Benchmark

system, a platform that allows clients to net

currency flows and execute spot, forward

and swaps, automatically at multiple fixing

times throughout the day, against

transparent and independently audited

rates. This is incredibly popular as a

solution, especially to our corporate client

base. Alternative solutions such as

providing White label solutions to our bank

clients, which in turn deliver liquidity further

down the line, through either proprietary

offerings or via ECNs, have also proven to

grow in significance over the last few years.

>>>

Roger Lee

Andrew Kidd


What factors place pressure on banks to

expand their FX capabilities with a view to

meeting the criteria of full service

provision?

Leclercq: Client expectations will always

drive Banks to offer additional services.

This will also lead to an increase in overall

business with the customer and thus lead

to an increase in market share, another

driving factor. Revenue potential will

always be a contributing factor.

Spurr: I think that the most important

factors driving the market at present

are technological innovation, client

distribution and client sophistication.

Technology will continue to play an

important role as it becomes freely

available to both banks and our clients. It

allows banks to build even more complex

and advanced products and tailor them in

such a way that they can be delivered to

targeted audience through the same

mediums (delivery channels). Client

distribution and sophistication also places

pressure on banks by forcing them to think

harder about what additional products

they want to offer and how to deliver them.

Smith: Cost drivers are important to both

banks and clients, as clearly there are cost

implications to extending services.

Probably the main drivers come from client

feedback and the ability to successfully

compete for a client’s business. Recent

examples include clients trading on the

newer eFX platforms like Bloomberg

FX<Go> and Reuters RTFX. If a platform

provider can demonstrate that clients are

requesting a bank’s liquidity via that

channel then that is a significant reason for

the bank to extend trading to that particular

channel. Also, industry standards have

become significant factors as banks

connect liquidity to multiple end points,

and both banks and clients are seeking

standardisation, for example the

increasing use of FIX protocol.

Kidd: The pressure on all quoted

companies to improve shareholder returns

is an obvious reason behind attempts by

the biggest players to dominate FSP.

The biggest profits are available from

global FX provision rather than provision

at a local level.

Purely local providers are unlikely to meet

FSP criteria in full and need to find their

own areas of specific expertise. The

biggest banks want to build global,

competitive FSP, operations with efficient

‘factories’. These factories create the

economies of scale achievable through the

massive FX flows available from truly

global operations. The aim is to build

integrated service offerings across FX,

Treasury and related areas and generate

additional cross-selling opportunities

across the bank. We have found this has

been effective at leveraging Transaction

Banking relationships into additional client

mandates in corporate loan, derivatives

and other areas.

Lee: Our clients are increasingly growing

more sophisticated and efficient, so we

constantly strive to meet their needs

through innovation and lateral thinking

in order to optimise our service.

Understanding our clients’ demands in

detail is crucial. Our eCommerce teams

work closely with clients to optimise

access to liquidity, whilst eradicating

internal inefficiencies. As part of this

process, we take client surveys very

seriously. Although we spend as much

focus on our clients requirements through

our proprietary platforms we closely

monitor our market share on all ECNs.

Thankfully ECNs have been a strong

positive for us throughout 2005, and we

have consistently ranked as one of the

top providers.

What issues are likely to deter many banks

from trying to become a full service FX

provider?

Leclercq: Cost is prohibitive to many -

technology limitations may also weigh on

this decision.

Spurr: Full service implies a “layering” of

costs as well and if the bank is unable to

deliver across all aspects of the

relationship in a profitable way, then

serious consideration has to be given to

the sustainability of the FSP and its product

focus. This should be a conscious decision

and must reflect the type of client base

some of the banks have and the target

client base they are after. In addition, the

possibility of becoming a full service

provider requires a strong commitment in

technology investment, both internal and

external. Some banks have found

themselves not being able to serve their

increasing client base because their

internal systems cannot cope with

larger trade volumes and geographic

requirements.

Smith: There are four main deterrents,

these being cost, geographical coverage,

market profitability and technology

barriers. A significant investment is

required to build a full service proposition

both in terms of staff and technology.

The e-Forex Roundtable

Market profitability must demonstrate that

this cost can be justified. As a full service

provider it is vital that a bank has the

geographical coverage and expertise to

support clients trading globally: e-

commerce can support trading with more

clients but it cannot be seen as a full

service proposition without currency

coverage and local staff. Technology

barriers are also issues, as the investment

in market data, pricing engines and e-

commerce platforms is considerable.

Kidd: Quite clearly the focus of the largest

banks on investing considerable sums in

technology is a key barrier, and perhaps the

only real barrier, to new entrants. Any

potential new entrants face enormous up-

front costs. The demands for increased

transparency is a huge challenge, especially

for the mid and small market participants.

Banks are having to cope with the

unbundling of FX products, with services

such as research being paid for separately.

The FSP world can be compared with

custody services, where a handful of

international names dominate. The leading

players enjoy massive volumes and are

efficient ‘flow factories’. Other custody

providers know they cannot hope to

compete at supplying the full suite of

custody services across the globe. Instead,

the mid-market and smaller custody

providers aim to satisfy niches in the market.

Lee: In addition to making a commitment

to continually invest in the technology to

be a full-service provider, firms will also

have to innovate. Innovation is not

something one picks up at the corner store.

This means that the top providers will also

invest in their people to increase their

intellectual capital. The issue then

becomes twofold: are you willing to invest

in both your technology and your people?

As a full service provider, one is not a

substitute for the other.

How important is the application of FX

technology and the delivery of e-services

going to be as a differentiator between full

service providers?

Leclercq: The decision on who offers the

best services always rests with the

customer. What is important is to be able

to offer clients what they need when they

need it. Technology can only provide part

of the solution, but banks need to ensure

they invest enough in technology to ensure

they deliver an accurate and reliable

service. At Calyon we ensure that we have

an understanding of each client as a

priority, in order to be able to offer a tailor-

made service.

Spurr: The flexibility and connectivity of

system integration to proprietary systems

such as order management systems and

trade management systems will dictate to

a large extend the success of one bank

provider to the other. Technology can and

will offer the opportunity to banks to

provide even better products. In addition,

new protocols will allow for greater

interchangability between tools and

standardisation among the different

product offerings serving the clients better.

Technology allows us to process low value

transactions in the most cost efficient

manner, freeing up time to help clients on

the high value requirements clients have.

Smith: The simple answer is that

technology is no longer a differentiator.

Rather, it is the standard for all full service

providers. Whilst banks continue to roll

out new platforms and capabilities, all

follow some simple rules. Basic rules

include ensuring their technology sources

and supports good prices 24 hours a day,

and keeping the functionality simple. For

example, no minimum or maximum

amounts and supporting the trading of

spot, forward and swap FX. Differentiators

can be seen in the detail of the offering, for

example the support of a full range of

currencies including NDFs, and the clarity

of charging. Integration capabilities are

also differentiators, as is a one-stop-shop

to all their banking needs. HSBCnet

(HSBC’s website for clients of the

Corporate, Investment Banking and

Markets division) provides an example of

this as it is a portal that allows access

to a range of global markets, cash

management, securities and trade

modules, using only one user name

and password.

Kidd: However it is defined, technology in

its various forms is changing the nature of

FX and banking more generally. The

commoditisation of the business through

the influx of technological ‘solutions’ has

allowed costs to be driven down to their

lowest level. At the same time, banks are

able to redeploy their human resources to

more advisory and structured product

roles, where the returns available tend to

be greater. Additionally, as more investors

use the internet and other similar vehicles

to carry out transactions more efficiently,

so providers need to adapt to the needs of

clients. As a side point, the rise of internet-

only finance houses is increasing the

appeal of FX as an asset class, creating

fresh flows.


>>>

Lee: In a word, it is ‘crucial’. We see the

provision of research, analytics, trading

solutions, and STP integration as lynch

pins when it comes to distributing our

package to an ever widening client base

globally, but through the beauty of the

internet we get there at the speed of fiber

optic cables.!

What role will be played by full service

providers in meeting the product and FX

technology needs of the next generation of

more active trading and sophisticated

clients?

Spurr: FSP will have to work closer with

actively trading clients to meet their

demands as well as allow banks to better

manage their liquidity and risk. At the

moment some banks provide clients with

an Application Protocol Interface (API)

without spending time to understand the

core business of this client, his real

requirements and needs. This sometimes

results in frustration for both banks and

clients. We therefore see a strong effort

by banks to better understand the

requirements of those clients who are

more interested in pure liquidity provision

(price and speed) versus the more “value”

client base which have a different

relationship with the bank spanning across

the product offering such as prime

brokerage, origination et al.

Smith: The next generation of active traders

expect banks to build solutions that focus

on the needs of the client’s FX business.

Requirements vary but as a minimum these

traders require the provision of liquidity,

either via a platform or via an API, which

connects to their own internal systems.

Other traders require banks to integrate the

services with their front and back office.

Some require the banks to build software

that supports their specific trading

requirements, whilst others recognise that

the banks have connected to a range of

platforms and can act as consultants who

provide advice on the suitability of

platforms for that specific client.

Kidd: Risk management support is a critical

area in which technology has an important

role to play, both for second tier banks and

FSPs. There continues to be a lively debate

over whether or not clients outsource such

services. In general, though, outsourcing

has become more acceptable among

smaller banks and similar clients,

especially for services like liquidity

management and operations. Many clients

decide to trade through a larger bank, or

FSP, after realising the full cost of trying to

provide FSP themselves via an IT vendor. I

suspect there will be closer relationships

between banks and IT providers in the

future, whether through joint

collaborations or other forms of venture. It

is doubtful whether banks will want to fully

acquire such services and also become IT

houses, but closer collaboration is a

certainty: We are in the middle of what has

been an IT ‘arms race’ over recent years.

Lee: This is where intelligent pricing enters

into the equation, Everyone knows the

expression ‘algorithmic trading’, but

exactly what it means from a development

perspective can vary widely in the sell side

community depending upon who you are

speaking with at the time. We believe that

trading algorithms are about processing

information, which is the key to success.

The market-making firms that process

information the smartest will be the ones

that service over the long-term.

Are the numbers of full service FX

providers always likely to be limited and

are there any potential threats to the FX

market as a whole in having so many

resources and risk management

responsibilities concentrated in the hands

of a relatively few financial institutions?

Leclercq: The big players in the electronic

FX market are always likely to be limited to

the banks with big budgets however; there

will always be banks willing to buy market

share and competing for the same flows

and client business. The FX market and its

participants are constantly changing and

therefore the supply and demand evolves

accordingly. The banks with the largest e-

forex market share have set out with a goal

to increase electronic market share

regardless of 'quality' of flow - recently

even those institutions, with the aid of

advanced MIS systems, have started to

perform a 'quality control' check on the

flows they are receiving and amending

accordingly. There is no threat to the FX

market as a 'whole' though customers

could find their outlet choices limited and

consequently their pricing less competitive.

Spurr: Any limitations to the FSP market are

due to the high costs of competing with

excellence (driven by the focus of non- FSP)

on all fronts. FSP’s are big players who have

internalised large market shares which

inevitably can impact upon market liquidity

and volumes at times of market stress. This

phenomena has been more apparent in the

equities market than FX, which is a much

deeper and efficient market. In reality the

converse happens in that the relationship

driven FSPs have a much stronger propensity

and obligation to provide continuous liquidity

in size, and maintain consistency through all

market conditions. This is the opposite than

pure play providers that maybe lack the

capacity and appetite to do so.

Smith: With the high cost of entry in terms of

staff, technology and support it is likely that

there will always be a limited number of full

service FX banks. The market for FX is

broadly split into the larger banks that depend

upon flow business and the niche providers.

There is a place for both, but only relatively

few can compete for market share. White

labelling, or liquidity provision has effectively

increased the offerings of some niche

providers by extending currencies or system

availability without increasing overhead. This

is likely to develop further, but will not

increase the number of full service providers,

as ultimately the liquidity is being provided

by the larger sell-side banks.

Kidd: Most definitely yes! The FSP sector is

similar to custody provision, where a few

players dominate. In different industries –

for instance food and oil – customers have

long-been used to having the market

dominated by a handful of powerful

companies with the risks associated with it.

However much the largest players may

want to control the market, it remains one

where clients and regulators will want FSP

providers that can offer competitive

pricing, geographical reach, a strong brand

and balance sheet, and an ability to deliver

innovative solutions for clients.

Lee: Darwin springs to mind here: when he

talks of the survival of the fittest. In the

world of ecommerce, only those providers

with sufficient resources and intellectual

capital will successfully deliver cross

product e-solutions to solve client

problems. We believe that this is a core

strength of Citigroup.

The e-Forex Roundtable


How are full service providers likely to

shape the future evolution of the FX

market? Is it going to be their liquidity

distribution and channel management

activities that have the biggest impact or

other things?

Leclercq: There needs to be a healthy

market in order to maintain liquidity, but

there are many other market forces outside

the FX market that effect FX liquidity, such

as political and economic stability. This will

always dominate.

Spurr: I would like to think that this is a

combination of multi product and cross

asset distribution strategy such as the

delivery channel, the client geography,

their sophistication and the product

strategy, i.e. the type of service and

product depth and breadth. The FSP's will

be shaping the future by being the big

investors in infrastructure. Commitment to

liquidity and stability of the liquidity, active

involvement in the shaping of market

platforms and protocols and finally

driving the multi-product debate from cash

management to FX, rates, FI and MM

Smith: The FX market will continue to be

formed of both large full service banks and

the niche providers. Liquidity provision

will result in clients accessing more

currencies, and 24 hour trading with their

relationship banks. The larger banks will

drive increased efficiencies, supported by

economies of scale and industry

standards. Combined with tighter

integration with clients and lower costs,

the cost per trade will be lessened and thus

the relative value of flow increased. There

are other factors to consider, not least the

economy, liquidity and volatility. Also the

entry of new market participants including

hedge funds, retail clients, CTAs and

automated/algorithmic traders will impact

the market. These client types have their

own trading methods and specific

requirements. As a result it is likely that

the FX market will evolve as much by client

requirements as those of the larger full

service banks.

Kidd: FSPs might think they can control the

future, but the FX market prides itself on

being a self-regulating environment. In all

the conversations I have with people in the

industry everyone wants the main basic

principles safeguarded. Hence, it is unlikely

that any one FSP will dominate the market.

The continued squeeze on the mid-market

providers from both the largest players

and niche on-line providers is likely to

intensify. The largest providers will

continue to invest heavily in technology

and make it increasingly cheaper for clients

to obtain FSP services from them. The key

for mid-market providers is to preserve

their client relationships and core

competencies rather than providing a full

service solution.

There continues to be much debate on the

pros and cons of moving to a single FX

exchange. While improvements in

technology have made this more of an

option, the debate remains inconclusive.

And, I think it is unlikely to resolve itself in

the short or medium term. Moves by banks

such to tap into the burgeoning Asian

market, especially China, highlight the

importance this region will play on FX

flows and banking more generally going

forward. Growth of these markets is

dependent on both effective channel

management and liquidity distribution. We

benefit in this environment from having a

strong reputation on the ground in Asia –

for instance, ABN AMRO began its banking

operations in Hong Kong in March 1906 -

on the one hand with a growing footprint

in the more developed European and

American markets: satisfying both sides of

the Asian FX equation.

Lee: Liquidity management and delivering

the right price down the right channels is

only part of the equation. Full service

providers will be experts in these areas by

default. On top of this, they will add value

to clients via risk advisory services, market

research, multi-product offerings and

efficiency solutions. Advanced FX

derivatives capabilities, both on-line and

bespoke solutions will also be a

differentiating factor for successful FX

service providers.



Big Wednesday -Current challenges to FX price engine capability and performance

Being in the FX market for the last 10 yearsallows one to “feel” more than to see thewave of change coming to a beach near you.First you saw them paddle, a bit upset thatthe water was flat. They disappeared in thedistance and even you, the maker of theirgear – the best surfboards ever made –couldn't help losing focus and thinking aboutthe other action on the beach.

Greg Surman, Head of Business Development,

Asia Pacific, at Baxter Solutions

Pricing: fuelling the FX technology arms race

>>>


New players are beginning to roll onto our beach: hedge

funds, real money and professional multi asset prop trading

shops are suddenly breaking everywhere. In general, this crowd

is more hi-tech than our local surfers. Worse, they know other

beaches and have access to them all at the same time (even to

your private secret spot that you thought was only for you and

your friends!). They are seeking to change the rules, allow

customers to trade with other customers. Like they do in other

markets where they are coming from; and they want better prices!

The “market” is showing the way ahead for spreads. One day you

think that FX Market Makers have the upper hand and control them,

next you see small firms taking the lead with algorithms and high

frequency strategies. You say that FX is different. Who else but the

Market Makers would quote so many products, 24h? True, but the

small Algo-trading firms are eating margins on major currencies,

leaving the AUD-$ for a consolation prize. And are the customers

thankful for your impeccable service, your unflinching availability on

lesser currencies? No, they shop around for 1/10th of pips.

Accelerated market evolution

Suddenly one could distinguish a ripple, then a swell, seemingly

bringing hope and yet creating a few jitters among the little dots

scattered on the horizon.

“Much of the current Price Enginetechnology has grown in the “old

market” where every customer wasdifferent and treated that way.”

In an instant, a few of them (the most switched on probably)

jumped on that wave called “opportunity” and started riding. The

arrival of mega players in FX is forcing market evolution at an

accelerated pace. They who have already brought competition to

other notoriously reluctant Clubs – equities, fixed income – are

here to do it again. They have seen it all before, they know where

the inefficiencies are.

The more nimble new entrants bring with them the knowledge

and experience gained from other markets, enabling them to

explore and take advantage of the weaknesses in current systems.

Off market pricing in the volumes these mega players are doing

leads to very quick end games.

Obviously most of these users are dismissive of the nice Web User

Interface you have been working on for years. API's and Gateways

are the only things they are interested in, and you don't feel on

your territory. Your business knowledge is challenged to rapidly

reproduce the service quality and sophistication that you have

built previously. Arcane fix messages and API's make you feel a bit

out of control.

Predictive pricing the way ahead

In no time, the first riders take the lead: you see one, no, two.

Three riders leading the pack with an apparently unrecoverable

advantage. Now the scene is exciting, you are joined by passers-

by who are in awe at the style and control these riders display. You

cannot feel but proud that some of them are using your custom

made boards – the best ever made ! - but soon...

The challenge for Price Engine users is to stay ahead of the break,

cutting in and out constantly to extend the ride and avoid the

dump. Much of the current Price Engine technology has grown in

the “old market” where every customer was different and treated

that way. The goal was maximising value from every single deal,

with an underlying “copy-paste” of EBS prices strategy with

added spread.

The arrival of high frequency trading has created problems for

Market Makers who can not adapt their pricing fast enough. At the

same time Arb firms are doing address-arbitrage (moving a few

blocs closer to Exchanges to gain the latency advantage) there are

still banks using pricing infrastructure that barely qualifies for

“sub second”. The challenge is now beyond pricing fast, many

high tech users have the same source as Market Makers. Price

Engine providers must now be thinking in low double digit

millisecond increments when looking at end to end pricing

throughput. Yet even this is not enough. Predictive pricing seems

the only way ahead.

Big Wednesday - Current challenges to FX price engine capability and performance

Lessons from algo trading will increasingly influence Price Engine

developers. Market Makers will require their Engines to adapt to a

wider range of inputs rather than slavishly following a single

source up and down and constantly being just that little bit behind.

Use of feedback/predictive models for price generation are fast

becoming a key requirement. The many tiers the FX markets were

displaying for years are merging fast. Thanks to Prime Brokerage

and platform competition Banks are being pushed to implement a

one price fits - nearly - all (only take a look at the spreads for retail

users) pricing structure.

Two types of users

Now you can see them closer, the control you thought they had is

not so stable. The wave is growing enormous, you are wondering

what will happen next: will it curl nicely and let them ride elegantly

into the tube? Or will it crash violently and smash them (and their

boards!) on the hard sand of the beach. In fact the world of users

seems to be separating in half. The high-tech users want basic – but

reliable – service, most probably Spot only and in very high trade

quantity. The other half need sophisticated - and reliable – service,

most often Forwards with bells and whistles on post trade services

like custom STP and allocation.

It may seem the dual requirements of increased speed and feature

diversification are at odds with the need for simplification that pure

performance requires. There lies the toughest challenge the

industry is facing. Market Makers have a lot of business overhead

on custom price creation: multi pricing for client tiers, limits

checking etc. High-tech Price Takers on the other hand have none of

the above and can concentrate completely on Trading performance.

While business requirements limit how quickly Market Makers can

move in any direction, the reduction of non essential overheads is

an imperative. Some systems have grown too complex to be

configured and managed efficiently, in some cases to such a

degree that few people in the Bank have a complete view of the

pricing profile of all of their customers. Like in many other

industries, specialisation is a tempting strategy for the Banks with

smaller budgets. One can retreat towards servicing only low

volume/higher margin Corporates, would that not be easy?

From where you are sitting the real danger to these surfers is

suddenly obvious: the shadow of the squalls behind them in the

wave. Technology has to play a far greater role to help Market

Makers quickly perform more analysis. Help identify when they are

- and are not - making money. Adapt to take advantage of

opportunities and protect oneself from arb models and other

aggressive Customer behaviour. As the landscape starts to clear up

– 2006 seems to be the year of consolidation – coming back to basics

is a good way to deal with your FX business model. Market Making

profits are greater with high speed two-way flow than with rich

margin on occasional trades. But for a Bank with the right budget

and resolve, it is still viable to follow both these routes profitably.

The future

These challenges need to be faced and dealt with in the short term,

but what of the future?

For the high-tech customer segment, it seems that the best way to

cancel the latency arbitrage would be to put these players at the

same “distance” from the goal post. Electing a central marketplace

could be a benefit even for Market Makers, as real matching in a

neutral environment favours no one.

Higher volumes and more frequent trades have changed the way a

portfolio can be managed. Traders used to react to the changes in

their positions by changing their voice pricing appetite. Today, one

needs advanced systems to do the same by accurately following

exposure, updating sub-second to reflect all trades. Profitable

Market Making needs to tightly integrate Position Management with

Electronic Pricing to transpose information into profitable quotes.

The demand for Price Engine solutions is evolving from "more

features" towards a mix of "raw performance” and “more analysis”.

Maximum speed, but fair play and selection of users. These new

Price Engine solutions open up the usage of new trading outlets that

could aid Market Makers to operate “liquidity-refinancing” when

they need it. This could accelerate the creation of an order routing

model as in equities or help the setup of new matching services for

Market Makers only. This time the surfers got off lightly. But they

announce that a big sea is coming, tomorrow is Wednesday...



The overall growth in the Foreign

Exchange market, as measured by the

latest figures from the BIS triennial survey,

support this hypothesis by attributing

much of the increased volume to the

participation of many new buy-side hedge

funds in the marketplace. Moreover,

technological advances such as Internet

trading are significant because they

change the structure of the market. A

different market structure influences

information aggregation capabilities,

incentives for interaction between

participants and different aspects of

market quality, such as efficiency (price

discovery), liquidity and transaction costs.

In order to support additional client types and

to grow the overall number of clients served,

an institution requires an “always” available

workflow-processing engine that automates

all aspects of the electronic dealing process.

This process begins with an FX pricing and

rate engine where prices are formed.

Internal market

Many global banks grew through

acquisitions and inherited disparate

business practices and systems, which

resulted in fragmentation of liquidity. Time

differences between international offices

only added to this fragmentation.

Institutions are now looking for ways to

consolidate liquidity across the

organization. One of the ways to

consolidate liquidity is to create an

“internal market”. In the equity world an

internal market is defined as “filling an

order from a broker’s own inventory”.

An internal market in the world of FX is one

where orders originating in disparate

geographical areas, from different

departments and divisions in the


Pricing IQs - developingmore intelligent rate enginesTo be a leader in the world of electronic Foreign Exchange (eFX), institutions are facedwith the challenge of meeting increased demand for deal flow, lowering the cost ofacquiring the business and maintaining the level profitability. Advances in technology arefacilitating these challenges by enabling the development of more intelligent FX pricingand rate engine solutions.

Yaacov Heidingsfeld, COO of TraderTools LLC



institution, are brought together to form a single book in an

attempt to create more liquidity by internally crossing buy and

sell orders. The greater an institutions order flow, the more

successful the internal market.

Enhanced order flow, in addition to being more profitable (by

enabling the capture of the bid/offer spread), is also used to feed

advanced pricing engines information about the flow.

Information gleaned from the order flow provides more than

anecdotal evidence of the true direction of the market. James

Surowiecki, in his article, “The Wisdom of Crowds”, suggests that

“…under the right circumstances, groups are remarkably

intelligent, and are often smarter than the smartest people

in them.”

Surowiecki, together with Francis Galton and J. Scott Armstrong, all

quote studies that show that experts are no better at forecasting

than laypeople. This practice should not be confused with polling,

but is rather the statistical mean of all the “guesses”. These

guesses, collected from information residing in a global hierarchical

order book, are used to shape price.

Once the price is shaped and quoted, the most cost effective way

of executing trades is to cross them internally. Apart from

minimizing the usage of credit lines, internal crossing minimizes

the impact cost, and opportunity cost, of trades. The availability of

a liquid internal marketplace enables a larger part of order flow to

be internalized. Liquidity, in turn, can be enhanced by directing

organization-wide order flow into the internal marketplace and by

providing features like market-making and auto-quoting from

inventory. An internal marketplace ensures quicker, more efficient

execution and, therefore, increased liquidity.

FX transaction costs are at least partially determined by the

difference in the bid/ask spread, corresponding to the loss incurred

by simultaneous buy and sell transactions. In order to keep up with

market growth, an institution would want to adopt a flexible,

hierarchical, enterprise-wide platform for managing foreign

exchange orders, where the top layer of management is

responsible for the entire inventory of orders; to wit a Global Order

Book for the enterprise.

Global Order Book requirements

The first requirement for a Global Order Book is for it to have a

hierarchical structure. Hierarchical order management is a policy-

based system that uses the natural organizational structure in the

shape of a pyramid, with each row of dealing entities linked to

entities directly beneath them. Each unit of the hierarchy must be

able to perform its tasks without any interference from other units

(on parallel, higher or lower levels).

Figure 1

Hierarchical order management prioritizes trading entities

based on a pyramidal structure.

Secondly the Global Order Book requires flexibility. The platform

must allow for the widest set of business practices so that each unit

within the hierarchy can tailor the system according to how it does

business. The system must also allow for changes to processes,

requirements and asset-class support as business needs change.

Figure 2

The system should be flexible enough to support different hierarchies and

business practices at different locations.

The third requirement for a Global Order Book is performance.

Everyone in the hierarchy (dealers as well as customers) should be

able to receive updates from the system in real time. The system

should have a flexible security policy that is defined and enforced

top-down and includes the ability to restrict access from one entity

to another.

Finally a Global Order Book must have clearly defined integration

points to front-, middle-and back-office systems at each level of the

hierarchy and have the ability to interface “out-of-the-box” with

any system.

As noted by Lyons in his 2001 book, The Microstructure Approach

to Exchange Rates, order flow “is a variant of, rather than a

synonym for, net demand because, in equilibrium, order flow does

not necessarily equal zero. More efficient crossing – the ability to

buy and sell against two orders while capturing all or part of the

spread – means that there is less need for what is commonly known

in the FX market as ‘hot potato trading’ as a means of sharing risk.”

>>>

Figure 3

Crossing captures the spread, increasing liquidity and, therefore, revenues.

Increased order flow leads to increased deal flow – the amount of

liquidity traded at a particular price – without impacting the overall

amount of liquidity available to the market via traditional credit

lines. Increased deal flow enables an institution to serve a larger

customer base by increasing the capacity of orders captured online.

Further research by Lyons in 2002 suggests that the technological

changes in the FX market with regard to the bank/customer

relationship will most likely result in banks giving customers more

favorable terms in order to keep the competition away from non-

bank sites. Banks would be willing to offer such terms because they

would profit from the information derived from customer order

flows. (They would rather keep their customers’ order flow

information private than share it.) So banks quote tight spreads to

customers, keep the non-bank sites at a low level and gain by their

informational advantage. This further underscores the importance

of more intelligent FX pricing and rate engine solutions.

Global management of orders enables a clear view and

assignment of responsibility. If each center, at each level of the

hierarchy, is able to focus on their particular area of responsibility

or expertise, the business grows faster and more efficiently than

that of a competitor using a flat or local order management system.

Additional benefits of a Global Order Book are the streamlining of

costs as a result of reduced effort required to manage orders.

This leads indirectly to increased liquidity (and revenues) by

capturing the spread on a larger quantity of orders at an improved

execution price. Another result is increased liquidity now available

to the institution’s customers.

Conclusions

The path forward seems clear. Banks that are currently in the first

tier of providing liquidity to the market are in the position where

they need to develop more intelligent FX pricing and rate engines

must advance technologically in order to retain their premier

positions. These technological innovations must include the ability

to provide prices to a larger client base and, at the same time,

reduce associated transaction costs. To accomplish these goals,

the pool of available liquidity to the market must be increased.

A Global Order Book – which optimizes internal order flow in order

to capture the spread on maximum deal flow – would facilitate

increased profit margins and reduced transaction costs. Smaller

institutions with smaller capital bases would also be empowered to

compete, by adding order flow, as a method of participation as

opposed to “hot potato trading”. Incremental transaction volume

can truly contribute to an institution’s ability to offset risk.

The approach outlined in this article demonstrates a method

whereby institutions can license readily available technology,

integrate into existing infrastructure, grow transaction volume and

increase profitability – all without a commensurate increase of risk.

All institutions aspiring to these goals should examine the benefits

of implementing a commercially-available Global Order Book today.



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First rateBuilding FX business throughintelligent pricing technologyTo build or maintain a successful foreign exchange business, banks need two things – first-class service and a state-of-the-art rate engine. The advance of buy-side technology,together with increasingly complex foreign exchange requirements, has created a highlysophisticated institutional customer base that demands fast, competitive and consistentpricing across a wide range of currency pairs.

Carl Martin, Group Technical Director atEurobase International


Hedge funds and other active

traders, who typically trade at high

frequency using powerful algorithmic

trading models, have been particularly

instrumental in driving demand for faster,

more accurate streaming prices. The

growing popularity of multibank portals,

where speed and quality of pricing can

make the difference between winning or

losing business, have also highlighted the

importance of effective pricing technology.

During 2005, the most successful banks

were those who have invested in enhanced

rate engines to meet customer demands.

On the other hand, many providers are still

using the same pricing engines as they

were in the late 1990s – before the explosion

of FX trading by hedge funds and the

mainstream adoption of multibank portals.

These institutions are now realizing that, in

order to remain competitive and take

advantage of new opportunities, they need

to raise their game.

“During 2005, the mostsuccessful banks were those

who have invested inenhanced rate engines tomeet customer demands.”

Fortunately, there are now many tools and

services on the market that can help banks

to upgrade their pricing capabilities quickly

and cost-effectively.

The cornerstones of good pricing – speed,

quality and service

How can banks ensure that they deliver

competitive pricing? At Eurobase, we

believe that there are three elements to a

good price – speed, quality and service.

North American Sales:+1 516 627 [email protected]

European Sales:+44 (0)20 7796 [email protected]

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“It is important to select a rateengine that can work in concert

with other pricing solutions to deliver a richer experience

to clients.”

While it is up to the bank or portal to deliver high quality service,

speed and quality can both be achieved by selecting the right

rate engine.

Speed

Over the last few years, the bar for speed of execution has been

raised time and time again. Two years ago the best engines were

claiming sub-second response times; one year ago the average

response time was 400 milliseconds. Today Eurobase’s price

engine is producing response times between six and, for the most

complex instruments, 60 milliseconds.

Speed of execution depends on a number of factors. High-speed

connectivity between the bank’s internal rate engine and its

trading venues – both proprietary dealing interfaces and

multibank portals such as FXall – is crucial. This can be ensured

through a connectivity solution like Eurobase’s Siena XML

Gateway. Credit checking is another area that can slow up the

trade process if a credit system does not work in real time.

Quality

On many multibank platforms the range of prices is extremely

narrow, so many clients will deal on the first good price they get

back. For this reason, the ability to respond quickly to client

requests with a competitive market price is key. A good price

engine will be able to accept multiple price feeds in order to

generate accurate, executable rates for trading in various amounts

for output to multiple applications.

Enhancing pricing through manual tools

It is important to select a rate engine that can work in concert with

other pricing solutions to deliver a richer experience to clients. A

good example is Eurobase’s Siena rate engine, which can be used

alongside FXall’s suite of pricing tools, Treasury Center. The rate

engine is used for auto-quoting while, for more complex transactions

or clients that require a more personalized service, the bank can use

Treasury Center to deliver a customized rate for every transaction.

The latest generation of pricing tools delivers all these benefits

without sacrificing speed of execution. On Treasury Center, for

example, traders can use the streaming rate feed from their

pricing engine as a base, users can intervene manually to create a

customized streaming rate for any trade, skewing or spreading the

price according to trade size, client type or market conditions.

Deals are completed much more quickly than over a traditional

manual request-for-quote system.

Operating effectively in the global foreign exchange business

increasingly depends on the ability to be able to stream prices

for clients across a wide range of regions, time zones and

currency pairs.

Tools like Treasury Center offer banks a simple way to make prices

in currency pairs, times or trade sizes that they would not usually

trade – outsourcing the liquidity function on a selective, deal-by-

deal prices. Using Treasury Center, banks can cover client trades

by executing with another provider, before passing the price on to

the customer.

Conclusion

Banks now have a wide range of services at their disposal to help

them deliver fast, competitive prices while better controlling their

levels of risk. Advances in rate engine technology, and the

development of sophisticated manual pricing tools, have levelled

the playing field, enabling banks of all sizes to reach a diverse

range of customers and compete on equal terms for their

business.

With the right rate engine, pricing tool and trading venue,

every provider can deliver the levels of speed, quality and

service they need to build and maintain a successful foreign

exchange business.

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Editorial highlights in the April 2006edition include:PLUGGING IN, SWITCHING ON: How automation made all the difference for Robbins World Cuptrading champion John Holsinger.

MISSION CRITICAL: Refining and testing automated trading models in the EBS Lab.

AT ROUNDTABLE: Credit Suisse First Boston, Merrill Lynch, Morgan Stanley, Goldman Sachs, HSBC and JP Morgan discuss:“Auto/Algorithmic Trading – business driver or footnote?”

APOCALYPSE TOMORROW?: Is there a volatility tipping point approaching with increasedautomated trading activity?

MOVING MORE DATA FASTER, BETTER AND CHEAPER: As message volumes continue to rise onthe back of automated trading activity, are carrier Ethernet services the only logical network solution?

SQUEEZED FROM BOTH ENDS: How is automated trading affecting banks’ FX liquidity management strategies?

HOW FAST IS FAST?: Profiling the new FIX FAST initiative.

DATA EVOLUTION: How the CBOT’s Market Data Products & Information department is respondingto the growth in automated trading activity on the exchange.

AT FORUM: Algorithmic Trading – EdgeTrade, FlexTrade, Progress Software, Reuters, Orc Softwareand Eze Castle discuss the challenges of a rapidly expanding marketplace.

YOU’RE USING WHAT?!: Choosing and using the right programming language for automated models.

This coverage will be extended across all asset classes and will provide all categories of market participant, both buy-side and sell-side, with comprehensive analysis of:

• Buyside/sellside/vendor business strategies• Development and simulation of automated/algorithmic trading strategies• Exchanges and markets• Advanced networking technologies• Hardware selection and deployment• Software – core technologies, including databases and programming

languages/environments• STP and standards• Risk management – operations, liquidity, market, credit• Regulation and compliance• Case studies, interviews, product reviews• Industry news and events

For more information please contact:Sales & Subscriptions Tel: +44 (0)1225 868948 Editorial - [email protected]

www.automatedtrader.net


Over stretched pricing enginesfeeling the painOver the last ten years the

foreign exchange market

has evolved to the extent

where many banks’

pricing engines are no

longer adequate for them

to remain competitive.

Upgrading and adapting

pricing engines to meet

the demands of the

marketplace is currently

a priority for many

financial institutions

By John Brennan, Head of Innovation at Cognotec


In the current environment of profit

generation across a wide and disparate

range of clients, new and more segmented

markets the old bank/corporate/retail

internal division of pricing is no longer

appropriate. Multi-bank portals, the growth

of margin trading and the opportunities

offered by white labelling are compelling

reasons for banks to start to invest in

pricing capabilities and to integrate these

horizontally and vertically through out the

organisation.

Black boxes

The attack on banks’ competitiveness is

happening on a number of fronts. These

include: speed of distribution, accuracy of

pricing, integration strategies and meeting

the needs of new and emerging customers.

First and most important, there is a need

for speed. Banks need to be able to provide

executable prices quickly to a variety of

trading channels if they are to attract and

retain business via online platforms.

Allied to this, is the need for accurate pricing:

black-box driven algorithmic trading models

enable margin traders to take advantage of

arbitrage opportunities created by ‘off-

market’ prices in seconds. A robust ‘bank

rate’ which is constantly changing to reflect

market conditions is a banks’ best defence

against opportunist traders.

In fact, professional traders and in

particular margin traders are a rapidly-

growing market for banks, however few

banks have harnessed technology to

efficiently meet the specific needs of

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different client groups, especially those that

are newly emerging and whose demands

are still evolving. Many banks currently

have a variety of disparate systems with

which to service corporate, retail and

internal customers. Now, new solutions

enable all a bank’s clients to be serviced

from a single platform and prices can be

tailored automatically. This is financially

advantageous as well as offering efficiency

benefits. In addition, the ability to produce

a single, reliable ‘bank rate’ enhances the

bank’s market risk management.

Finally, banks need the capacity to deal

with increased volumes. The competitive

advantage leading-edge pricing engines

offer banks who have been early adopters

has led to increased volumes from new

clients as well as those who have been

serviced by other areas of the bank – for

instance Wealth Management, Treasury or

Prime Brokerage. Again, a consolidated

bank-wide pricing engine should enable

this business to be serviced from a single

electronic platform. However, this platform

needs to be highly scalable if it is to cope

with vastly increased transaction volumes.

A step back in time

A brief consideration of the historical

development of pricing engines

demonstrates that banks haven’t

traditionally changed their technology in

order to deal with the forward movement

of the market. A decade ago, dealing via

telephone was widely replaced by online

trading. However automation of the front

end wasn’t matched by an upgrade in the

automation of price discovery. Both

systems have largely been based on

Request for Quote (RFQ) technology where

a price is generated on a demand basis,

and then held for a period time before a

new price is generated in response to a

customer enquiry.

The advent of online portals such as FXall,

created a demand for streaming prices

however most banks responded to this by

creating what appeared to be a stream

from the dealer side based on RFQ

information. In doing this, RFQ price

engines have become stretched beyond

the task for which they were intended.

Pain in the market

The fall out from this situation has been that

banks have experienced pain in the open

market – either resulting from the

distribution of ‘off-market’ prices, or

because they have been slow in comparison

to true streaming rates and have lost out on

business. On top of this, banks have found

that the cost of dealing with its own

customers has increased in line with the

number of available dealing channels.

The answer to this conundrum is the

development of true streaming models

which distribute live, executable prices

from the beginning of the trading process.

For the dealing desk, the true depth of the

market can be observed, while safety

features such as hit protection mechanisms

can be employed automatically. Further,

changes in market conditions are reflected

in the prices distributed by every one of the

bank’s dealing channels – with next to zero

latency.

Opportunities and threats

However, while true streaming prices are

essential for the safe and efficient servicing

of clients, it is important to state that the

RFQ model is still highly relevant to many

customers. But it must also be said that

adapting a true streaming model for RFQ

use is easier and more secure for the bank

than continuing to use an RFQ engine to

provide a customer-facing veneer of

‘streaming’ prices which isn’t backed up by

sophisticated protective tools, ie the ability

to automatically pull out of date prices in

volatile trading conditions.

Investment will also pay dividends as the

forward march of the non-fx markets

demands greater automation, as pricing

non-fx instruments becomes easier and

quicker to achieve. In addition, white label

models have placed the downstream bank at

a disadvantage in terms of being dependent

on a single liquidity provider. Using a true

streaming model enables a number of banks

to become liquidity providers as well as the

downstream bank itself feeding liquidity into

the system e.g. local currency.

In summary, the current competitive

situation for banks is one which is

comprised of opportunities and threats.

The example of margin trading is a good

illustration of this. As noted above, the rise

in opportunistic margin-trading offers a

good business opportunity for banks.

However, the irony is that banks have to

simultaneously protect their own desks

against margin trading activities in the

marketplace while offering sophisticated

enough tools to attract this high-ticket

business. The new generation of pricing

engines enable this situation to become a

win-win for banks that are far-sighted

enough to invest now. It becomes

increasingly dangerous for those who

do not.

What factors are behind the spread of

Algorithmic trading from the equities

market across to other asset classes?

Bates: In general, the demand foralgorithmic trading is due to: – Increasedcompetition in the trading space,requiring more innovative intra-daytrading 1) The need for low latencyresponse to trading opportunities madeavailable due to market volume andvolatility 2) The need to rapidly identify the opportunities and execute the trading response quickly enough andcircumspectly enough to be opportunisticwhile masking ones intentions 3) Theavailability of real-time market data andaccess to liquidity through high speedAPIs. In FX this includes banks directly, aswell as other liquidity pools, such asHotspot and EBS.

Ratner: There are several main factors.Traders are not seeing the same returnsthey used to see. The spreadopportunities in equities have reallytightened over the last few years, becauseof the continued uptake of algorithms.Equities traders have begun to move overto FX in search of better spreadopportunities. This is driven both by theneed to make more of a profit in eachsecurities class, as well as the need tosettle the increasing number ofinternational trades with currency tradesat competitive rates. Also, the traditionalinternational equities traders, who havetypically let their custodians trade forthem, are now under best executionguidance, and that is not something their

custodians will necessarily do for them.These traders are taking the control of FXtrading in-house.

Yao: The spread of algorithmic trading to

other asset classes is due in large part to

the increasing number of electronically

tradeable markets. As more markets

become electronic, they become more

efficient to trade and associated trading

costs go down. Any reasonably liquid

market with low transaction costs in terms

of the spread and commissions lends

itself to be traded algorithmically.

Typically, this will increase the frequency

of transactions in that market if the costs

are low enough. Trading those markets

algorithmically enables a trader to make

more bets, thereby increasing their

opportunity to win.

Montgomery: Algos have spread from the

equities market for a number of reasons.

Primarily, these are the growth in demand


Meeting the demand forFX Algorithmic Trading

T H E e - F O R E X F O R U M

With Dr John Bates, Vice President of Apama Products, Progress

Software, Lee Ratner, Global Head FX sales at FlexTrade,

Andrew Yao, Product Manager, Portware FX, Mark Montgomery,

Global Business Development Director at Latent Zero, David

Ogg, Chief Executive Officer, LavaFX and Peter Sibirzeff,

Managing Director of Orc Software in New York.

John Bates

“FX is a natural for algorithmic trading”


for best execution across the board and

the need to spread risk by segmenting

fills across a number of different

execution destinations and crossing

networks. Since e-trading in general, and

algos in particular, provide verifiable audit

trails and support the increased number

of trades being carried out, their use has

spread from the equities market.

However, technological capability is also

a factor: it has both responded to the

demand for algorithmic trading, as well as

being an active driver in its development.

Finally, algorithmic trading has become

habitual among equities traders. Since e-

trading has been fully embraced among

the wider trading community, it is

therefore not that surprising that other

asset classes would move to a similar,

more automated work flow.

Ogg: The equities market is now highly

saturated with many mature players. Both

buy-side and sell-side are naturally looking

to other asset classes which may have

lagged the technology curve and may offer

opportunities for algorithmic models. Also,

FX has steadily been moving toward an

interest-based electronic marketplace,

which is conducive to algorithmic trading.

Sibirzeff: The critical factors behind the

spread of Algorithmic trading are: the

development of more widely available

streaming FX market data feeds from

alternative trading marketplaces as well as

leading dealers; the introduction of a prime

brokerage model for FX-oriented hedge

funds that gives them much more

transparent access to the FX marketplace;

the advancement of affordable cross-asset-

class trade management systems, which

are allowing users to both develop their

own rules-based trading and routing, as

well as integrate best of breed third-party

capabilities; and the highly competitive

environment for arbitrage participants in

equities which has encouraged aggressive

exploration of other liquid asset classes,

with FX being amongst the cheapest and

easiest to deal in.

What makes the foreign exchange market

attractive from an Algorithmic trading

point of view?

Bates: FX is a natural for algorithmic

trading. The volumes and volatility are

exactly the right business context for

algorithmic trading and, as a 24/ 7 market

that is by definition international, the

unattended capability of algo platform

trading is appealing, as well. Now with

more real-time market data and the

evolution of exchange-like trading through

ECNs like Hotspot, algorithmic trading

becomes even easier and more powerful.

Ratner: Algorithms in FX are really about

smart, efficient trading and best

execution. They go out to the market and

locate best-execution opportunities. By

having all prices in one place, customers

are taking advantage of best execution,

which does not always mean “the best

price on the market at the moment,” but

instead means “the most efficient

trading.” This efficiency goes beyond

speeding the transaction. Firms can now

automate give-ups, reporting and

workflow from back to front office, as well

as reporting to fund administrators. It

goes well beyond the initial transaction

into pre- and post-trade processes;

algorithms can be used to determine a

strategy and manage it from end to end.

Yao: Due to its liquidity, size, and the fact

that it trades 24 hours-a-day, the FX

markets are a natural fit for algorithmic

trading. The chief advantage of applying

algorithmic trading to the FX market is the

ability to collect and analyse a vast

amount of price data from multiple banks

and ECNs. The decreasing influence of

fundamental factors and central bank

intervention in the price movement of FX

rates has made the market more attractive

for computational analysis of price

patterns and trade strategy automation.

Increases in computational power and

data storage have led to improvements in

the handling of high frequency,

asynchronous data which has allowed

market participants to see patterns in price

behaviour at a much more granular level

resulting in the ability to build trading

strategies they can ultimately profit from.

Montgomery: First of all, trading methods

for FX are behind the curve compared to

other asset classes, which means there’s a

whole untapped area for providers of

algorithmic trading models to embrace.

What’s more, the FX market is something

of a captive audience: relationships with

particular banks are already firmly

established for other, specific areas of

business. For the banks, therefore,

pushing an algo to FX traders is relatively

straightforward. This also creates an

incentive for other members of the buy-

side, who may well be resistant to the

bank’s domination in this area, to enter

the algorithmic trading space themselves.

Ogg: The foreign exchange market is

attractive from an algorithmic point of

view because there is deep liquidity and

buying one currency always means

selling another, as opposed to equities

where short selling is more regulated and

can incur more risk than buying.

Currencies are also attractive from an

algorithmic point of view because of the

24-hour trading day, which removes price

distortions that can occur at open and

close, such as in the equities markets.

Stock prices can be dramatically affected

by news and can gap considerably in

percentage terms, whereas major

currencies are usually more stable which

makes them more adaptable to

algorithms.

Sibirzeff: With an estimated $2.5 trillion in

daily trading volumes, the global foreign

exchange market is attractive for

algorithmic trading because of its deep

liquidity structure and sheer size of

volumes. To meet this demand, several

>>>

Lee Ratner

“Algorithms in FX are really about smart,efficient trading and best execution”



competitive electronic marketplaces,

where both anonymous and transparent

dealing conditions prevail, have grown

over the last six years, creating an

environment where institutional investors

can gain direct access to the markets and

quality historical data that facilitates the

testing and execution of quantitative

trading models and strategies.

Additionally, because FX is such a mature

market, most firms have access to

sophisticated risk management

environments for both structured and

exchange-traded FX products, enabling

them to manage trade-desk and

organizational risk.

Algorithmic trading requires reliable

market data and efficient execution of

market orders. Are you confident that a

suitable level of automation currently

exists in the FX environment to support

Algorithmic Trading and how important

has the arrival of true, executable

streaming rates in FX going to be, in

facilitating it?

Bates: Streaming rates and the evolution

of aggregated liquidity pools like EBS and

ECNs like Hotspot, are already driving

successful algorithmic trading in FX.

Algorithmic applications are no different

than any application in that they are

dependent upon the data that drives the

business logic. Thus, access to the data

that drives algorithmic scenarios is clearly

a key element. We believe from our

experience in equities and other

instruments that there is currently – and

will continue to be – access to inbound

data at rates and reliability that can

successfully drive algorithmic execution.

More important, perhaps will be the

access to liquidity with the necessary

transparency to determine best price.

That is not just a question of speed, but

also of transparency and market depth.

Ratner: Algorithmic trading cannot exist

without real-time, streaming executable

FX rates. Currently the application of

algorithms is very uneven across liquidity

providers, and the deciding factor is

typically whether these providers can

offer real-time streaming, executable

quotes. Our experience has been that the

technology has gotten better and faster

over surprisingly short time periods. We

now see transactions completed in 20 to

40 milliseconds, up from about 400-500

milliseconds two years ago. As the

technology gets better and firms

increasingly use a single standardized

protocol like FIX, that number will halve in

two years. But this will only be possible

with real-time streaming. If you have to

request a quote and wait for it, it is hard to

make an algorithm work.

Yao: Executable streaming prices are

absolutely a requirement for the support

of algorithmic trading. While models are

running, they must be able to depend on

the fact that the prices they are fed are

indicative of where they can deal. The

quality of historical prices used to develop

these models is also important. For the

purpose of ‘training’ the algorithms,

historical prices should indicate a realistic

price where the model would have been

able to trade. Garbage in, garbage out is

always important in the context of

algorithms. The ECN model has led to

significant improvements in the quality of

the data because those prices are

indicative of where the trades may occur.

Dealers that offer electronic rates, but

then have a last look option, are cluttering

the data with bad points and should be

filtered out for algorithmic purposes.

Montgomery: Executable streaming rates

for FX is essential in facilitating a move to

more automated processes including

algos. However, I think it’s fair to say that

point has yet to arrive. Like fixed income,

FX is not as visible a marketplace as

equities and the phone remains a

common tool for passing orders. As a

result there is a lack of historical data on

which algos can base prices. Furthermore,

the history of FX as a secondary trading

activity means there is no central

marketplace, and consequently no readily

available aggregated data. Currently,

automation does not represent the full

breadth of the marketplace, and some

form of data aggregation and a common

environment is essential before FX can

take full advantage of algorithmic trading.

Ogg: There are many electronic trading

destinations which now offer live,

executable rates, so there is a high level

of automation already present. However,

significant liquidity is still unavailable to

algorithms due to market fragmentation

and the fact that significant business is

still conducted via “Requests For Quotes”

or over the phone. Algorithmic trading

should continue growing as long as

overall FX market data rates are

increasing due to greater participation in

electronic streaming marketplaces.

Sibirzeff: While there is still a gap

between the scale of automation that is

possible in equities and foreign exchange,

we believe that there are significant

opportunities foreign exchange offers our

clients with access to the right best-of-

breed execution venues. In the equities

market, four key conditions helped

algorithmic trading to thrive: 1) standard

communications protocols; 2)

competition among exchanges and

alternative trading markets to attract

order flow both in terms of market

information and executable trades; 3)

direct market access to liquidity, either via

an execution partner or through direct

membership, for the purpose of

developing automated trading methods;

and 4) low latency, high bandwidth digital

feeds with standardized APIs allowing

market participants to easily connect to

sophisticated vendors with strong trade

management capabilities. We at Orc

Andrew Yao

“The chief advantage of applyingalgorithmic trading to the FX market is the ability to collect and analyse a vast amount of price data from

multiple banks and ECNs.”

Software believe those conditions have

developed sufficiently in the FX market to

facilitate new algorithmic trading

opportunities for our clients.

Both buy-side and sell-side are seeking to

bring Algorithmic technology to the FX

market and eventually the technology

itself will become commoditised. How

are vendors likely to go about

differentiating their strategies and

offerings and seek to add value?

Bates: The challenge for algorithmic

trading in any market is having

differentiated strategies. The first

generation of algorithmic offerings

succeeded largely through the novelty of

sell-side firms making algorithms

available to the buy-side. But over time,

the market has come to recognise that

commodity algorithms available to all are

truly an advantage to none. Developing

customised strategies using traditional

development methodologies can take

weeks or months from concept to

production. This is too expensive in

terms of time and man power as by the

time the strategy is in production a

competitor may have capitalised on the

opportunity already. We believe the key is

a platform that allows an organisation to

quickly leverage their own proprietary

strategies in ways that are unique to

them. With tools that can quicklydevelop,

test, deploy and monitor the execution,

those firms gain the “agility” that

distinguishes their offerings from what

we would call COTS (commercial off the

shelf) algorithms.

Ratner: Although more liquidity providers

have chosen to implement FIX, from our

own experience, that still represents only

10 to 15 percent of providers. Those firms

that are currently overhauling their

technology are currently choosing FIX,

but it is not yet a standard in the FX

market. So a vendor that can manage

multiple connections and application

program interfaces (APIs) will be at an

advantage until the market firmly settles

on FIX as its standard. Buy-siders are

growing weary of managing connections

to multiple execution platforms. By

standardizing their interface with multiple

liquidity providers, vendors such as

FlexTrade can help to remove the

technology burden. Of course, in addition

to managing connections, a high-quality

vendor will also offer both pre-built and

customizable algorithms. The

responsibilities of traders at buy-side

firms are changing; equities traders must

also be knowledgeable about options,

futures and FX as well. The vendor that

anticipates this trend by offering these

four major asset classes on one platform

will be at an advantage.

Yao: While it’s true that certain types of FX

algorithms will be commoditised as in the

equities world, the best algorithms will be

kept proprietary and used by the buy or

sell side to generate profits for their

respective firms, not for their clients. As

an independent vendor, Portware offers

clients the ability to build their own

algorithmic strategies, providing them a

toolkit to quickly build and deploy all

types of automated trading applications.

By providing them with a platform to

easily systemize and operate their

proprietary strategies, clients are able to

bring their own intellectual property to

market very quickly and add value where

it makes the most sense.

Montgomery: There’s little reason to

assume that strategies for algorithmic

trading in FX will not follow a similar

pattern to those already seen in the

equities market. If the core data, including

historical trend information, is strong

enough to build an algo offering then the

sell-side is likely to start customising their

strategies to one or two of their larger

clients. Provided the algo can automate

existing manual strategies, these clients

will be able to conduct all eligible business

through the algo. If this happens we will

see a dramatic rise in the development of

algorithmic trading, provided that clients

are users of a particular strategy. For the

buy-side, as long as the algo enables them

to carry out their daily, manual processes

more easily and more efficiently, then the

tools will be adopted.

Ogg: Vendors can differentiate

themselves by producing algorithmic

products that are more conducive to

trading in the currency markets, rather

than purely copying them from other

markets. The innovators will likely be

those that succeed in the space.

>>>


Mark Montgomery

“Executable streaming rates for FX isessential in facilitating a move to moreautomated processes including algos.”

Meeting the demand for FX Algorithmic Trading

Sibirzeff: The marketplace for vendors is

evolving rapidly from enablers to offering

advanced solutions for black-box trading,

order routing and risk management.

Previously, dealers were investing in

technology to enable themselves and

their customers to trade electronically in a

growing array of different marketplaces.

Now, the emphasis is turning to the

quality and speed of execution alongside

efficient STP in the widest number of

markets. Vendors will differentiate

themselves by integrating order routing

with trade management, and trade with

post trade. Vendors, such as Orc

Software, who can deliver this within a

multi-asset-class environment, will have

an even greater advantage for those

multi-strategy and proprietary trading

clients who are executing cross-asset

transactions with increasing frequency.

Orc Software today is among a small

number of vendors who have the market

connectivity, transaction management,

and multi-asset class risk and trading

capabilities to support the top clients.

Why is the FIX protocol expected to be so

important in the FX Algorithmic arena?

Bates: Currently every bank and other

liquidity pool has a proprietary API

meaning that FX platforms must either

limit themselves to single platforms or

support multiple platforms. Clearly

standardisation on FIX will simplify

access to multiple liquidity pools.

However, with certain platforms, such as

Progress Apama, FIX is not a prerequisite

to taking advantage of algorithmic

opportunities in FX.

Ratner: FIX made equities what it is today.

It is essentially impossible to be a

significant presence in the equities space

without using FIX. Because FIX is so

widely used, it represents a level of

freedom for the buy side that is quite

unprecedented. If the buy side wants a

new broker, that is easy to provide, from a

technological standpoint. It is simply a flip

of the switch. The same benefit is now

becoming a reality for the FX customer.

But there is benefit for the sell side, too --

banks will find it much easier to extend

connectivity to their customers and start

trading, and their technology teams can

focus on creating powerful algorithms and

trading systems, rather than maintaining a

proprietary communications protocol.

Yao: FIX is important because it offers

standardization. By standardizing on the

FIX protocol, the barrier to entry is

lowered significantly which leads to an

increase in the number of participants.

and therefore, an increase in market

liquidity. An increase in liquidity in the

market should compress spreads and

reduce the cost to trade which means

more opportunities to trade and

subsequently to growth in algorithmic

trading. If we can't all speak the same

language between systems, then the cost

of doing business remains high for all

market participants.

Montgomery: Algos require aggregation

of lots of different data sources. FIX is a

proven common protocol in electronic

trading that provides a standardised

message format that can be used by all

participants in the process. If each bank,

broker, OMS and network provider used a

different protocol the whole system

would collapse. Consequently the use of

algorithmic trading will simply not be

possible without FIX.

Ogg: The FIX protocol is already well

established in other markets, where the

bulk of algorithmic trading occurs today.

Hedge funds with quantitative trading

models are usually very excited to learn

that their underlying infrastructure can be

used for FX without much additional

development work and those platforms

that offer true FIX connectivity are at an

advantage.

Sibirzeff: FIX is an important and fast way

for buy-side Algorithmic trading

participants to connect to markets and

alternate points of liquidity. FIX adoption

in foreign exchange algorithmic trading



Peter Sibirzeff

“Vendors will differentiate themselves byintegrating order routing with trade

management, and trade with post trade.”

David Ogg

“Algorithmic trading should continuegrowing as long as overall FX market

data rates are increasing due to greater participation in electronic

streaming marketplaces”


has proven beneficial because of its

“lightness” – the fact that it’s an industry-

standard protocol that has been

extensively tested and used in production

execution environments at leading

financial institutions. Investment banks

have learned that the more complex a

protocol becomes to test, maintain and

integrate, the harder it becomes to adopt

dynamically in front office trading. FIX

has proven itself in productive

environments time and again.

What are the main lessons that the FX

market could learn from the use of

Algorithmic trading in the equities

market?

Bates: The following lessons have been

learned: 1) That pre-built algorithms

become commodities and that the

buy-side and prop trading groups

require the ability to customise and

continuously evolve their algorithms. 2)

The requirement to connect to multiple

liquidity pools in parallel, enabling

routing to the pool with the best price,

arbitrage or quantity hiding across pools.

3) The requirement to be able to be part of

a complex cross-asset class trade rather

than just a stand-alone asset class, for

example buying an equity, hedging with a

future, and taking out an FX position. 4)

The requirement to be able to rapidly

backtest and tune an algorithmic strategy.

Ratner: The traders that are now entering

the FX market have gotten used to the

freedom FIX – combined with algorithms

that relentlessly seek the best trading

value all day long – will have the same

expectations of technology’s potential in

the FX market. Time has repeatedly

shown across many industries that once a

technology becomes a standard, rapid

change is virtually assured. Liquidity

providers will no longer be able to retain

customers solely because technology

makes it difficult for them to switch. They

will need to offer a combination of fast,

efficient technology with what they have

always done best – build and maintain

relationships. No matter how much

technology influences the marketplace, its

functioning will always first and foremost

rely on relationships.

Yao: The FX market should understand

the changes in market microstructure that

will occur as a result of increased

electronic trading. Prior to the existence

of real executable streaming prices, the

FX markets certainly supported an

electronic means of communication, but it

could not be said that they were fully

electronic. Now, with real, dealable

quotes, the market does become fully

electronic. As we know from the equities

world, electronic trading increases

trading efficiencies which in turn leads to

more trading and higher volumes. As

spreads compress, market makers will

reduce the size of their quotes which will

lead to an increase in the amount of

trades required to get the same volume of

transactions done. As a result, the

number of messages, orders, quotes, and

tickets will increase and affect everything

from trading to settlement. Market

participants need to realize that there will

need to be a tremendous increase in

capacity and throughput to properly

support the advent of algorithmic trading

in the FX world.

Montgomery: There has been a

discernable trend in the equities market:

the average execution size has gone

down and the number of trades has gone

up. As a result, transaction costs have,

arguably, also increased. This has been

facilitated by algos at the same time as

driving their adoption. While FX does not

have the liquidity issues that equities face,

we could see the same pattern emerge,

enabling traders to spread their orders –

and the risk – over a period of time.

However, perhaps the biggest lesson to

be learnt from equities is that we cannot

assume that just because algorithms

appear accompanied by a fanfare it

doesn’t necessarily follow that there will

be an immediate and universal take up of

algorithmic trading.

Ogg: The first lesson is that market

makers must be protected. In equities, a

proliferation of algorithmic models drove

many market makers out of business.

Given that FX is a utility market which

must remain deep and liquid in order to

thrive, it is important that market makers

not be disadvantaged in favor of purely

speculative trading. Another lesson from

equities is that infinite spread

compression is not necessarily good for

the business because it ultimately

removes the incentives for participation.

Sibirzeff: It is absolutely crucial that

traders maintain direct market access to

the key liquidity venues and the market

data they provide. Rules-based trading

has become so important in many equity

markets because deep liquidity is either

non-existent or not transparent to the

broader market. In the same token, the

foreign exchange market has historically

been less transparent for the end

customer. With the growth of alternative

>>>

John Bates

“Currently every bank and other liquidity pool has a proprietary API

meaning that FX platforms must eitherlimit themselves to single platforms or

support multiple platforms.”

Lee Ratner

“Algorithms can now make the kinds ofminute decisions that tied up good

portions of the sell side trader’s day”


trading systems, we’ve seen transparency

and anonymous trading blossom. Though

the two markets have arrived at

algorithmic trading in different ways, both

will benefit from the growth in

competition amongst execution venues.

Additionally, though certainly not to the

extent it happened to the equities market

in the mid-1990s, liquidity fragmentation

in the foreign exchange market, caused

by different competing models, is

occurring and is undermining the working

order of the bank to bank dealing

marketplace that has prevailed for so

long. To address this problem, and

indeed to capitalize on it, algorithmic

trading will continue to grow, and will

place those who can tap into all liquidity

pools quickly, efficiently and with

“stealth” at an increasing advantage over

the others.

What are the key benefits that Algorithmic

trading brings to the FX buy-side and

sell-side?

Bates: For the sell-side, a bank offering

quality streaming FX market data and

real-time access to the bank’s liquidity

encourages buy-side clients to use the

bank for algorithmic trading. In addition,

forward-looking banks can offer platforms

for their clients to use pre-built algorithms

or to build their own algorithms and host

the algorithms in the bank – thus offering

additional deal flow to the bank. Also on

the sell-side, use of fully autonomous

algorithms is proving successful to assist

with maintenance of currency cross

positions and management of value-at-

risk. For the buy-side, algorithmic trading

offers competitive advantage in trading

and potential cost-savings.

Ratner: The sell side will be able to

efficiently offer prices to clients, and

maintain efficient risk and spread

management. Algorithms can now make

the kinds of minute decisions that tied up

good portions of the sell side trader’s day.

In a millisecond, based on adjustable

parameters the trader has set, can

determine whether to lay off risk in the

open market, put securities in inventory,

or cross internally. That is not to say, “get

rid of the human trader.” Far-reaching

decision-making and insight will always

be the province of human intuition and

market savvy. The buy side will be able to

gain all of the same advantages of

efficiency, time savings and risk

management, and its traders will have

much greater choice about where they

send their order flow.

Yao: The buy side will benefit by being

able to take advantage of short-term

trading opportunities when utilizing

algorithmic trading. They will be able to

develop strategies that trade at higher

frequencies based on tick-by-tick data

which will offer greater diversification and

low correlation to the long/medium-term

trend following strategies currently in

use. The sell side will benefit from

greater trading efficiencies and the ability

to do more with less headcount. They will

be able to reach a great variety of clients

and hopefully grow market share, which

will in turn provide them with more

information on trade flows.

Montgomery: For the buy-side

algorithmic trading makes the process

easier. It offers greater control, better

execution and segregation of work flow.

Algos can discover liquidity quicker and

offer economies of scale. However all this

is on the assumption that automation can

replicate existing manual processes and

strategies. For the sell-side there is the

possibility that algos will dilute

profitability ,as a more transparent market

becomes more efficient, but this can be

countered through the reallocation of

resources. Where the sell side will

definitely benefit is in its ability to deal

with a greater range of different clients

with different risk appetites.

Ogg: One key benefit from algorithmic

trading is that it increases the likelihood

for both buy-side and sell-side to be given

and paid quickly. This means a customer

who places a bid or offer is more likely to

get executed today due to the many

models which are willing to deal in order

to satisfy their own requirements. An

algorithm which needs only to maintain a

certain average price or follow a certain

trend is more likely to execute against a

posted bid or offer than a market maker

who is just trying to make a spread or a

desk trader who is just trying to achieve

best price.

Sibirzeff: Algorithmic trading allows

execution techniques that are based on

quantitative approaches to engage much

more dynamically with the marketplace.

As algorithmic trading emerges in the

market, the larger capacity of firms to

capture volume and segregate order flow

between clients through the same

techniques will drive significant revenues.

Buy-side clients will enjoy the information

flow and direct access to real-time

executable prices, and thus will add

algorithmic trading to their arsenal more

and more as time passes.

What factors are likely to influence

whether FX buy-side firms seeking

Algorithmic trading functionality choose

a solution from a broker, third-party

vendor or decide to develop their

technology and models in-house?

Bates: Any decision is fundamentally a

determination of ROI in which the firms

must judge whether the value of

implementing algorithms – from any of

the three choices - gives them advantages

worthy of the cost. In that regard, we



Andrew Yao

“The rate of adoption and change withregard to algorithmic trading among

participants will govern whether it makeseconomic sense to build or buy thenecessary algorithmic functionality”

>>>


believe that tools that provide a platform

by which a firm can exploit its own

intellectual capital in terms of proprietary

algorithms will be the right choice – as

long as the technology is amenable to

rapid deployment and iteration. These

are fast changing markets where the

algorithms that worked last week or

yesterday are perhaps not the ones for

today or tomorrow. FX is a market that is

particularly attuned to economic factors

and algorithmic tools must be able to

adjust quickly to the changing winds of

economic fortune. Factors that will

determine selection include level of

sophistication (i.e. can the firm create or

customise its own algorithms), required

time-to-market for an algorithm, ability of

in-house staff to build the algorithm, etc.

Ratner: Cost is clearly a factor, but both

initial cost and ongoing cost must be

considered. There is a higher initial cost

for vendor technology, and a higher

ongoing cost for building in-house

technology. But we ask our potential

clients this question: when bank APIs

change two to three times a year and we

have 12 people whose sole job is to keep

up with those changes, where is the

advantage to each firm trying to do that

individually? Openness of technology will

be another decision factor: a firm will be

much more inclined to incorporate

vendor technology, or broker technology,

for that matter, which does not dictate a

change in its business model. Ultimately,

each firm needs to determine: how deep

is the need for algorithmic trading? Do

their projections of future trading volume

and strategies justify the installation of an

optimized system? We believe that it will

be more difficult to do without algorithms

in the future.

Yao: The rate of adoption and change with

regard to algorithmic trading among

participants will govern whether it makes

economic sense to build or buy the

necessary algorithmic functionality. If a

firm builds a strategy that captures a

certain opportunity but doesn’t have the

method or means to implement that

strategy quick enough to take advantage,

then it makes more sense to figure out

how to decrease time to market. The

Portware platform provides users the

ability to design and deploy these

strategies quickly.

Montgomery: Just as with equities, one of

the prime factors will be whether the

traders are serious players or just

occasional traders, and whether the scale

of trading will affect the value to be

derived from the different types of

solution. Then there’s the existing

relationship with banks and other

providers to be considered. A number of

buy-side firms have down stream

operations outsourced to third parties, for

example, and we see Barclays or JP

Morgan Chase handling clearing for

another house. In such cases the buy-

side firm has a tendency to go to that

provider. Banks are well placed in terms

of resource and experience to develop

algos, but there may be a concern the

cosiness of the relationship between the

two, and the lack of open competition,

may compromise performance. The issue

of whether execution will be measured

against benchmarks therefore comes into

play. Furthermore, third party providers,

and some in-house deployments, will

have sunk a significant amount of money

into quantitative research and want to see

a payback from this. There’s also the

question of whether other players will

want to disclose trading information to

the big banks, which again will influence

their choice of provider.

Ogg: In general the level of technology

sophistication and concern with privacy

determines what kind of solution the buy-

side client is interested in. Many buy-side

clients feel comfortable with solutions

from a broker if they are receiving good

soft-dollar services such as research or if

they don’t mind their transactions being

visible to the broker. FX buy-side firms

which already have a large infrastructure

and place a higher value on having their

trades and algorithms confidential from

the market will probably opt for a third-

party or in-house solution.

Sibirzeff: At the end of the day, much of

the decision to build or buy will depend

on how much quality resources a buy-

side organization can commit to product

development.

Mark Montgomery

“While FX does not have the liquidityissues that equities face, we could see thesame pattern emerge, enabling traders tospread their orders – and the risk – over a

period of time”


However, what we’ve learned from the

equity and derivative markets is that

statistically-oriented buy-side firms place

a lot of emphasis on building and

maintaining models but do not

necessarily take ownership of the entire

algorithmic trading process. Vendors,

such as Orc Software, who offer solutions

for model building, model testing, and

order routing via direct market access or

broker connections, will certainly continue

to win buy-side client business, and will

gain broker sponsorship.

What sort of growth prospects do you

predict for Algorithmic trading in the FX

markets and which side of the buy and

sell-side divide do you anticipate most

demand for it coming from?

Bates: We are seeing demand on both the

buy-side and the sell-side. Following

enormous growth in interest in the last 18

months, 25% of our enquiries now come

from the FX space. This started out as a

small number of top tier hedge funds, but

has now broadened to a wide range of

hedge funds and banks interested in auto-

trading and auto-hedging capabilities for

risk management.

Ratner: In general, the buy-side demand

for new technology always outweighs

that of the sell side, which typically finds

itself in a responding position. The current

phase is interesting, because the sell side

is trying to keep up with the buy side’s use

of technology, particularly at hedge funds.

Bank of America’s recent acquisition is a

good example of this . There may be a

new wave of acquisitions of firms that

have developed advanced algorithms in-

house, and hopefully, this will drive

vendor business as well. Buy side

demand typically outweighs that of the

sell side; that is the nature of the business.

In general, these firms’ smaller size allows

them to act more quickly. But the sell side

is in the heat of a technology build right

now, because it has been surprised by

small funds’ technology tenacity.

Yao: Algorithmic trading in FX is still in its

infancy. It is difficult to arrive at a single

concrete definition of what algorithmic

trading really means. The natural

evolution of any electronic market is

toward more automation and model-

based, or algorithmic, trading. The

demand from the sell side will arise from

the desire to increase operational

efficiencies and maintain a product that

meets the buy side’s needs. The demand

from the buy side will come from the

changing nature of the strategies they are

trading and the opportunities that arise

from the spread of electronic trading.

Montgomery: In fixed income and equities

trader behaviour is largely predictable and

repeatable: the ideal conditions in which

algos will thrive. However, the FX sector

has not evolved as fully as certain other

asset classes, which may well impact

algos’ prospects. FX is still fragmented:

there’s no central marketplace, so some

form of consolidation or centralisation is

going to help the growth of algorithmic

trading in this sector. Furthermore, it does

not yet have the drivers seen in elsewhere

ie the discovery of liquidity and need to

prove best execution. Liquidity is unlikely

to become an issue in FX, but if it becomes

regulated with regard to best execution

then the growth prospects for algos will be

that much stronger. Regulation will

certainly be a key driver for the buy-side,

which would then see the time spent on

FX go down and efficiencies created as a

result. As for the sell-side, there is an

established way of doing things, and

inevitably a degree of inertia has set in.

The sell-side will need to look at the

degree of savings made possible. An

indicator might be the efficiencies created

when currencies unify – usually an ideal

opportunity to establish whether a desk is

over-staffed or not. If sell-side firms made

significant savings over the introduction of

the Euro, for example, they may well see

greater advantages in FX algos.

Ogg: Right now we still see the greatest

demand for algorithmic trading coming

from the buy-side. That being said, the

increase in demand on the sell-side has

been exponential and extremely rapid.

There are many bank proprietary trading

desks which are now aggressively seeking

venues to use for algorithmic trading. The

biggest future use of algorithmic trading will

probably come from the sell side as banks

transform themselves and learn that they

need to evolve and move in new directions

as quickly and as nimbly as do the buy-side.

Sibirzeff: Orc Software predicts steady

growth in the years ahead for algorithmic

trading, particularly if spot marketplaces

such as FXall, Hotspot FX, and EBS

continue to do well; the Chicago Mercantile

Exchange’s foreign exchange futures and

options contracts continue to boom; and

FX prime brokerage, as a scalable

business, continues to grow. On the

Buyside, the macro, multi-strategy, and

statistical arbitrage funds are expected to

be the winners, although we would not be

surprised to see the independent

proprietary houses that have been mostly

turning their attention to the derivatives

markets in the past two years to also move

into the foreign exchange market. Both

sides of the marketplace will benefit from

increased algorithmic trading adoption.


David Ogg

“There are many bank proprietary tradingdesks which are now aggressively seeking

venues to use for algorithmic trading”

Peter Sibirzeff

“Algorithmic trading allows executiontechniques that are based on quantitative

approaches to engage much moredynamically with the marketplace”



Retail traders tend to deal in small

amounts. However, the sheer number of

this type of trader across the globe makes

the volume they generate quite hefty. FX

brokers are marrying the old with the new

as client demands for personalisation and

human contact meet automated and online

FX trading.

At Gain Capital, Glenn Stevens, managing

director at Gain Capital, says the customer

is king:

“The retail client is all important to us. Our

industry has become more commoditised

through transparency of pricing & spread

compression, and there are now many

competitive offerings in this space. How

well you support your customers and what

value added services you provide to them

are increasingly important. So things like

proprietary research, advanced order

types, and knowledgeable and responsive

customer service teams are crucial ”

Retail clients want more than just a purely

electronic experience, Alex MacKinnon,

head of FX at ODL Securities, says.

“Retail customers place quite a big

emphasis on trading relationships. Rather

than just automation, they want traders on

the other side, advising them on the market

and providing a two way dialogue. Our

attitude is to look after our retail customers

as we would look after a larger, institutional

customer.”

Heather McLean is a freelance writer.

When you are dealing with asmaller client in any industry,you tend to need a morehands on approach to keepthem happy and confident inyour technology and yourcompany. Yet when theindustry you are workingwithin is all about electronicand automated trading, thatcan be difficult to achieve.However, that’s exactly theapproach that’s been utilisedby FX brokers who aredealing with the thousands ofretail clients out there.

Retail eFX: Strengtheningtrading relationships with clients

Glen Stevens

Alex MacKinnon

Importance of Trust

Trust is the key word at ODL Securities,

MacKinnon says: “Retail clients need to

have confidence in their brokers’ ability to

handle orders. A retail trader thinks an

order of £1 million is a big investment. They

need to feel secure with their broker and

that the broker is managing their best

interests for them.”

Muhammad Rasoul, executive vice

president and chief operating officer at

Globel Forex Trading, agrees:

“Even though the majority of this business

is done online, I think the customer still

wants the ability to call in and talk to

someone, and trust someone. For our

company, the relationship is one of the

biggest things we focus on. Our firm is not

at all about just bringing in the numbers;

it’s about the relationship with our

customers, which is linked to the type of

service we give our customers.”

Tom O’Reilly, national sales manager at

FXDD, says there are four areas that a retail

client looks for when choosing an FX broker.

The first three are: reliability and stability of

the trading software; quick, fair and

unbiased execution of deals; and a solid

company pedigree that offers a degree of

comfort with safety of funds. He says the

fourth and often deciding variable lies in

the area of customer service.

Excellent customer service and support is a

key to success for any company, in any

industry, but it is perhaps even more

important in the retail FX business. He

claims the trading environment can be by

nature very stressful, so clients need to be

certain that they can access their broker

quickly and have their questions answered,

or problems solved, efficiently and fairly.

Technology strengthening relationships

Todd Crosland, chief executive officer at

Interbank FX, believes FX technology

strengthens trading relationships between

his company and its clients.

He comments: “The more technology we

use in our trading platform, the more our

relationship with our clients grow. We have

programmers that assist our customers by

writing trading strategies for them. We put

trading formulas into automatic trading

platforms for clients, so they don’t have to be

in front of their computers 24 hours a day.”

In addition to automated trading strategies,

Interbank assists its customers in other

ways, Crosland states: “We provide daily

webcasts for customers to log onto to learn


>>>

Muhammed Rasoul

Tom O’Reilly

Tod Crossland


about our platform and eFX trading. We

also provide our clients with wireless

trading applications, such as Pocket PCs

and Palms, so they can receive alerts, real

time news, updates on currency pairs and

charting. To provide even more support

for our retail clients, we have just

implemented a sister site to Interbank FX,

www.myexpertadvisor.com. This is a live bulletin

chart forum, with a moderator that helps

answer questions for that community so

they can teach themselves.”

Single point of contact

A single point of contact for each customer

is key to building a strong relationship,

Rasoul says: “As soon as we are in contact

with a potential customer, they are given a

regulated FX specialist to talk about the

market with, who acts as their dedicated

account specialist. We want our customers

to feel they have a single point of contact

with us, from their first contact with us to

when their account is opened. After that,

the customer gets very familiar with the

people they talk to within our business. Our

customers call customer service or

technical support and ask for our staff by

name. This personalised customer service

is one of the ways we differentiate

ourselves in the market place.”

ACM also gives each client, retail or

institutional, one point of contact. The

institutional trader will develop a

relationship with their dealer, while the

retail client will develop a relationship with

their original sales person. “Nowadays our

business is mostly online, so once a retail

client gets an account it means they trust

this company and their sales person,” Nick

Bang, Executive Director at ACM,

comments.

“Once the retail client is up and running,they will hardly talk to anyone else in thecompany as long as everything goes well.But you can’t forget about the customer.You have to be reachable 24/7, as a lot of retailclients do tend to need immediate support,even if it is only twice in their lifetime.”

Availability

Availability is everything to a retail customer,Bang continues: “You have to make sure youare available at all times for these clients.There are five or six methods of getting holdof someone at ACM. Each way is connectedat the back end and there is literally a bellthat goes off here in the office so we can givethe customer an instant response.”

As there are not as many institutional clientsin the world as there are retail clients, itmakes sense to Bang to have as strongrelationships as possible with retail clients. However, he adds: “It’s impossible for us todevelop the level of proximity with retailclients that we would have with aninstitutional broker. If you have thousandsof customers, you can’t focus individuallyon each of those customers.”

Hisham Mansour, chief executive officer atMIG Investments, says technology isstrengthening his company’s relationshipwith its retail clients. “Communications

can help strengthen the relationship.” Hesays. “Each of our clients has a person inour business responsible for them. As wellas an account manager, we have 24 hoursupport online and a client can request acall back at any time. We also have amobile trading solution and a WAPsolution, so people can access theiraccount from anywhere. Right now, we are developing an SMS system forretail clients so they can get information ontheir accounts by text messaging.”

Education is key

MG Financial Group provides its clients withthe added facilities they expect, to maintainthe relationship. The company offersvarious tools such as free charting, Alert!FXand Forexnews that give clients the abilityto become better educated, informed andaware of market events. These value-addedservices help clients to make better tradingdecisions, says Marla Miller, chief operatingofficer at MG Financial Group.

However, Miller adds that technological"gimmicks" do not take the place of trust andstability. She states that trust in the integrityof the firm, the stability of the platform andmost importantly, education are key tomaintaining good relationships in onlinetrading. Yet as a purely online business, shesays it is difficult to maintain the same kind ofclose, personal relationship a moretraditional retail operation may have with itsclients: “Like anything in the online world, ifyou buy books from Amazon you don’t get toknow your local book seller. It’s impossible tohave that face to face relationship whenyou’re doing online business. But in thesame way Amazon can give instant access toa library of books, it’s the instant access andfaster execution of their transactions thatappeals to retail forex clients.”

That being said, MG has always prideditself on the loyalty of its clients, Millercontinues: “Wireless gimmicks help,certainly, but it’s the core of the companyand what that company is about that’s keyin keeping the client happy.”

Value add

Value add and technology both worktogether to keep the customer happy andtherefore decrease churn of retailcustomers, Lars Christensen, chiefexecutive officer at Saxo Bank, states:

>>>Retail eFX: Strengthening trading relationships with clients

Nick Bang

Hisham Mansour

Marla Miller

“The more you can assist people in

improving their trading, presumably the less

churn you’ll see. If people feel they are

getting more value add they will be loyal.

Also, if you are adding significant value and

sophistication to the tools you provide

clients, you are creating a very sticky

platform in terms of features and complexity.

Add a higher service level for clients to this,

and they get a better result, which improves

your relationship with them. It’s success

through an alignment of interests.”

FX brokers have a choice to take in how to

approach the retail market, Christensen

asserts. He claims the choices are either

going for smaller clients using purely

automated systems and accepting a high

potential churn rate to get volume, or

instead, going for less volume through

slightly larger retail clients, and using

better relationships to reduce churn. The

latter, which is the option taken by Saxo

Bank, will provide higher volume over the

long term, Christensen insists.

Improving relationships

Improving relationships with existing

clients is the key to gaining new business,

Rasoul states. “Keeping existing clients is

what it’s all about. We get a lot of our

business by referral, so by servicing

existing clients well, we are able to grow

our business. We want to know how we’re

doing and what we can do to improve our

service with existing clients; finding these

hotspots by asking what is important to

people takes you back to the relationship

you have with them, which helps you

attract new clients.”

GAIN Capital has doubled its customer

base year on year over the past five years,

according to Stevens.

This dramatic uptake of clients means the

company now has to work hard to keep

those customers satisfied in order to

maintain its strong market position,

Stevens states. “Once you’ve become a

prominent player, you need to spend more

time and energy on retaining the

customers you already have. Of course, we

are still focused on customer acquisition,

but we also spend a lot of time thinking

about how to enhance the service offering

for our existing customers. It sounds like

basic business 101, but we’ve seen entities

fall by the wayside that have ignored this.”

Stevens says his company has utilized

technology to take some of the elements of

the institutional approach to customer

relationship management, and present

those aspects at low cost for the retail

market. One example is customer support,

which GAIN has improved by making all

the customer’s account and trade

information readily available to

representatives via a proprietary web-

based application. “While the institutional

service is solely driven by the size of an

account, for us, we’ve been able to use

technology to bridge the gap between

providing high service at low cost,”

Stevens explains. “The result for retail

clients is they now have access to a level of

service once available only to institutional

or high net worth clients.”

Future based on increased

customer service

The future of retail eFX trading is all about

increased customer service, O’Reilly

predicts: “I believe in the not too distant

future we’ll see some consolidation in the

number of retail platforms. This may well

occur as a result of a tighter and more

discerning availability of liquidity from the

market making sector, and those firms that

survive and prosper will likely be those

that offer the best customer service to

their clients.”

As more FX brokerages tie into global

liquidity directly, rather than desk dealing,

Crosland agrees that the competition will

heat up. This will bring the relationship a

business has with its clients to the fore. He

says: “If everyone is going to be on an even

playing field, having that great customer

relationship is key to being successful. To

be successful going forward, companies

like us will have to provide more value add

propositions to customers.”

Retail FX is a young market, which makes

gaining the trust of clients now even more

important, Stevens says: “At the

institutional level, eForex has been

available for 10 years now, but retail FX

has only been around for the last five

years. So it’s really important for us to have

the trust of our clients so they know we’re

here to stay. Another way to show we

value customers’ trust in this industry,

would be to standardise some of our

business practices across all the firms,

such as the amount of leverage we offer to

clients and to establish set trading hours.

These types of things may seem

insignificant to some, but they will make

for a better, more cohesive industry, which

is where future growth will come from.”


Retail eFX: Strengthening trading relationships with clients

Lars Christensen

The e-FOREX Retail e-FXTechnology Awards 2006

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There is a mindset that permeates my

personal forex trading. It is recognize, react,

and repeat. These goals are only achievable

through chart study and flexible order execution.

The common fallacy is that there needs to be

some “new” study or “new” order execution

capabilities to accomplish this specifically in the

forex market. Trading the forex market is not

unlike trading stocks or futures; however there

are the challenges that can only be presented by

a market that trades 24 hours a day.

Almost any technical analysis tools can be an

asset to trade set up if it is used in the proper

market environment. Failing to do this is often

why so many traders fail in their pursuit and

continued use of technical analysis. There are

plenty of charting providers that offer both entry-

level and advanced charting and technical

analysis.

The trend however seems to be to access these

services from execution platforms. This can be

problematic as some brokerages, certainly well

equipped to execute orders, often are not

capable of offering much more than entry level

or intermediate charting and technical analysis

tools at best. This is not to say they are anot

effective for traders. Simply put they are not

necessarily effective for all traders.

Moving averages

There are tools that can easily be

applied to most charts to allow

traders to, for example, gauge the

strength or weakness of a

particular pair or time frame. One

tool commonly used are moving

averages. Moving averages are

perhaps the best tool that any

trader can apply to a trending

market. Every trader must understand that the

market moves in cycles. These cycles transition

constantly and in no set order from a quiet

sideways channel, to an uptrend, to a wider

ranging, more volatile sideways range, to a

downtrend.

All this means is that in order to best gauge

momentum, whether upside or downside, a

trader must first identify the type of market cycle

prices are trading within. This can be as easy as

recognizing sideways market to trending

markets. As simple as this may sound, it

unfortunately is the single largest stumbling

block for traders.

By multiple moving averages a trader can

recognize market cycles and therefore employ

the correct technical analysis. This analysis can

be applied to almost any charting platform.

By applying multiple moving averages to any

chart a trader can gauge the strength, weakness,

or lack of trend by simply measuring the angle at

which the moving averages are plotting.

Another tool that can help a trader identify the

onset, strength, or weakness of a trend is the

MACD Histogram.


Traders WorkshopAdvanced Technical Analysis -are you getting the most from your e-FX toolbox?By Raghee Horner


The ability to customize moving averages or use multiple

exponential moving averages assumes that the charting platform

we have access to can apply these studies to a chart. This is the

most basic type of customization. Today’s charting platforms

have the ability to not only give a trader access to any number of

well known technical studies but also “plug in” more advanced

and very specific studies. The customized formulas can range

from identify candlestick or chart patterns to Elliot Waves to

optimizing existing technical tools like RSI, CCI, and Stochastics.

Visual trading

Visual trading is growing in appeal as more and more traders are

being educated to the tools and strategies of technical analysis

and charting. This is by no means a revolution as these strategies

and tools have been available for well over a decade. What is

changing is the affordability and accessibility.

With broadband internet connections becoming not only available

but more affordable, a larger number of traders are subscribing to

chart and data providers such as Metastock, CQG, and eSignal.

While subscription costs vary from provider to provider, a trader

will gravitate towards one or the other based upon not only price

but scalability.

Chart and data provider eSignal has not only offers charting and

technical analysis to beginning traders that may just venturing

into the vast world of chart based trading, but also to the

advanced and professional trader who needs multiple charts,

independent floating quote screens, and the ability to formulate

their own advanced studies. There is an entire industry of

outsourced programmers dedicated to offering these advanced

formulas for existing chart and data platforms. Even if the user

has no interest in designing their own custom script or lacks the

scripting knowledge to do so, a highly skilled programmer can

write the script for them. The relationship between providers like

eSignal and these aftermarket programmers is a strong one. This

is not the case with all chart and data providers.

As one such programmer, Chris Kryza of Divergence Software (sr-

analsyt.com) explains, “Many traders are looking at the flexibility

of the programming aspect of their platform because they want a

customized solution, or they have a need that is not already

addressed in the platform.” Some programmers, such as Kryza,

will align themselves specifically with certain providers “due to

data or the custom formula scripting application”. There is also a

certain degree of cooperation between the best outside

programmers, such as Kryza, and the data and charting providers

themselves.

These companies will often consult with these outsourced

programmers be they realize that they cannot keep every client

happy. Kryza adds, “It also reduces the complexity on their end.”

I personally will contract programmers to fill a need with my

charting application and these types of add-on studies can make

the difference between out-growing a charting platform or being

able to scale it to the charting demands of the individual.

>>>

Traders Workshop

For example, when trading using pivot points

in the forex, it can be problematic for a forex

trader to use the high, low, and close that

might be scripted into an existing pivot point

tool that is most likely geared toward the

stock market.

Forex traders would certainly want some

flexibility when designating the times for the

open and close that the pivot point study

would use to make pivot point, support, and

resistance calculations. This might be a

simple point, but it is certainly symptomatic

of a greater need amongst forex traders.

There are a number of brokerages that have

acknowledged the desire for this type of

charting flexibility.

Rather than compete with established

providers such as eSignal, brokerages such

as Gain Capital are turning to these data and

charting providers to offer an alternative and

more flexible combination of tools to their

traders. They have incentivized these

platforms as optional tools that clients

may utilize.

The ability to control the applications on

a trader’s screen has been relegated to

multiple windows within an execution

platform but with these cooperative

efforts, traders are to use their charting

platform, at reduced rates or free, to set up

the trades within their methodology.

Thus a trader can use as sophisticated a set of

tools as they are free to create and then utilize

the order execution of their online execution

platform to make their trading plan a reality.

Advanced TechnicalAnalysis - are yougetting the most fromyour e-FX toolbox?

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The e-Forex Interview

The e-ForexInterviewWith Reine Dossou, head of

e-business at Société GénéraleCorporate & Investment Banking

>>>

With an average daily turnover of approximately USD 25 billion and

employing over 300 sales and trading professionals in 45 dealing

rooms around the world, Société Générale is clearly a leader in the

global foreign exchange & treasury market. How does your extensive

global coverage coupled with a strong culture of innovation benefit

clients who are seeking FX e-commerce partners and solutions?

The fact that Société Générale has established its presence

throughout the worlds’ financial centers brings synergies that could

not be achieved by any other way. For instance, the rapid growth in

Société Générale activities’ in key developing economies of Eastern

European and Asian markets allow e-commerce clients to benefit

from increasing liquidity and competitive pricing on those exotic

currencies. Nowadays, clients have very similar FX e-commerce

needs which are more dependent on their business profile than their

country of origin. All in all, they are seeking a secure and reliable

environment where they can obtain well priced and sufficiently deep

liquidity. Such a currently homogenous global marketplace enables

us to put all of our innovation efforts towards the perfection of

fundamental aspects of the e-trading, covering the quality of service

from deal initiation to BO confirmation and delivery.

You started last year with the launch of SGFXTrade, your proprietary

Forex and Money Markets e-trading platform. What type of

customers is the platform targeted at and has it been as successful

in attracting the volumes and growth of business you anticipated?

SGFXTrade is a tool with very clear benefits, and which is, following

market trends, enhancing our client-sales relationship. It was targeted

at a large range of Société Générale clients whatever their size or

profile and has performed well beyond our highest expectations. Not

only have we managed to keep most of our ex Centradia (our own

previous multibank e-trading platform) clients, but also add

substantial numbers of new customers. The popularity of SGFXTrade

is the best proof that Société Générale clients appreciate the product.

What factors are likely to shape a clients’ decision on whether to use

a mono-bank portal such as SGFX Trade, or a multi-bank portal?

With e-trading solutions becoming more easily available to clients

we are in a fiercely competitive environment where spreads are

tightened to market levels, and where the client is demanding fair

instead of the best price. Therefore pricing is not the only element in

customer choice, moreover, often not even the most important one.

Mono bank platforms have several advantages over the multi-bank

portals. Firstly, the flexibility and reactivity to its clients is a most

important advantage of mono-bank platforms. Secondly while using

mono-bank e-trading solutions the client enhances its trading

relationship with sales. And thirdly, mono-bank platforms such as

SGFXTrade are the ones that include the latest developments,

whether it is a new product, functionality, extension of trading hours,

or automatic back office confirmation. Our clients are looking for an

outstanding “all inclusive” service, where they can benefit from a

zero default service from the conclusion of the deal to the automatic

matching of its positions. The success of SGFXTrade when

measured against its multibank rivals is dependent of whether those

benefits are communicated, understood and needed by a client.


You have recently added e-confirmation functionality. What

prompted this and what other key functionality does it offer clients?

Using this functionality, a customer can handle the validation

process (confirmation, validation or refusal) in a quick and efficient

manner. This functionality was a response to the clients' need for

additional efficiency and security. All investors are looking for

integrated solutions allowing them to reduce as much as possible

their tasks before the trade, during the trade and finally after the

trade and that is exactly what e-confirmation does for them.

Last year you launched your own FX prime brokerage offering,

Société Générale Prime. What range of services does this provide and

how have your Hedge Fund and Institutional clients responded to it?

In addition to standard FX prime brokerage features it also gives the

customer the capability of monitoring their trades as well as

positions on a real-time basis. The positions can be monitored on a

consolidated basis, so that the client is able to see what has been

done across all ECN's utilized by them. The consolidated positions

facilitate reduced credit use and give room for more trades. Clients

will soon be able to monitor billing reports as well.

Most major FX providers continue to add a wider range of tools to

their platforms, for example click and trade functionality or

benchmark execution. What’s driving this pace of e-FX product

expansion amongst providers? Is it simply to match their

competitors or is it really to entice and cater for a wider range of

clients?

The primary aim of our e-FX trading solutions is to fulfill the needs

of our existing clients. Accordingly, that is where our development

efforts are focused. Having this approach we are seeking long-term

stable benefits from the increasing loyalty of our existing clientele,

rather than placing us in the hunt of short-term profits from

temporary increased volumes.

In our recent regional e-FX perspective article on France, we noted

that the French buyside is still heavily weighted towards corporate

especially with regard to electronic trading. Is attracting flow from

the more active trading community becoming important for Société

Générale and how are you looking to meet the e-FX needs of the

next generation of clients?

Penetration of the institutional investors segment is definitely one

of Société Générale priorities in 2006. The attractiveness of these

clients in terms of volumes, however, is delicate since Institutionals

are the most demanding clients with accompanying specific risks.

They are very price sensitive, and therefore are usually convinced

by the price advantages of multibank platforms. They also are keen

on using very sophisticated technology (for instance most of them

have API’s which are plugged into several e-marketplaces). The

most significant development that will help us to compete in this

market is our pricing engine. This state-of-art instrument,

maintained by Société Générale traders completely dedicated to e-

trading, allows us to outperform our rivals not only in the prices

itself, but also in rapidity of response, in the end providing the best

time-to-market prices to the client.

Currently our developers are testing the latest development adding

streaming functionality, which is essential in gaining a substantial

part of the institutional client market.

The online FX market is very dynamic. Looking ahead, is it likely to

get harder for leading FX providers like Société Générale to

differentiate their e-FX offerings from other competitors and if so,

how do you plan to address this challenge?

As I have mentioned earlier, the battle between different

competitors will not just be a question of better price but rather a

question of liquidity, efficiency and reliability of the bank's trading

systems. Personally, we are confident on this point. It’s exactly the

reason we made the choice years ago to develop all our systems in-

house and not be dependant on external technology providers. Of

course, it has consumed more time and resources in comparison to

our competitors, but today, we are enjoying the fruits: being

reactive and confident in our architecture - which we totally control.

Our goal is a "zero default" service which is ensuring that when a

client clicks on an Société Générale price, he is certain that he has

done it at a fair price and that he will not face any technical issues.

To achieve this goal we have developed a real-time monitoring

system which allows us to be alerted before the client meets any

potential problems. We are also applying our 3C price policy which

consists in being Consistent, Constant and Competitive on the

larger range of currencies.

Société Générale made very strong progress in last years FX Week's

Best Banks Awards, achieving a spectacular improvement from the

previous year. Are you confident of building on that progress going

into 2006 and are you intending to continue bolstering the level of

your current FX sales, trading and e-distribution capabilities?

The fundamental pillar of Société Générale’s success is based on a

state-of-the art pricing scheme. The powerful price engine generates

deep liquidity auto-quotes at all times, maintaining elevated

thresholds and permitting Société Générale to preserve its

outstanding reactivity performance ahead of its rivals. Behind it, SG

has set up a team of traders dedicated to e-trading, who watch the

market as well as clients’ price requests and are able to intervene in

this constant flow of information, in one click, bringing client closer to

the market. That is how we have achieved this substantial growth, and

that is why we are confident in continuing doing so.

The e-Forex Interview – with Reine Dossou


Danske Bank is the largest bank in Denmark and a leading player

in the Scandinavian financial markets. The Danske Bank Group

offers a wide range of financial services, including insurance,

mortgage finance, asset management, brokerage, real estate

and leasing services. Over 800,000 users rely on Danske Bank’s

online banking and trading services – and of course, security and

stability are always in focus.

With excellent ratings at both Moody’s and Standard and Poor’s,

Danske Bank offers a one-stop gateway to the top of Europe, and

although our Scandinavian roots afford us a distinct advantage

in the region they certainly don’t hold us back from further

international growth.

Key figures from our 2004 annual report show:

• Total assets: DKr2,078bn

• Shareholders' equity: DKr61bn

• Solvency ratio: 10.2%

• Subordinated debt: DKr34bn

• Core earnings for 2004: DKr12,682m

Danske Bank – always open for FX

Within the realms of FX we offer a dedicated team focusing on

global flow 24 hours a day. High-tech access to our services is

available through all channels – Danske Trader, Reuters

Dealing, and of course, by phone.

Danske Trader

The online tool for FX spot, outright and swap transactions for a

wide range of currencies, Danske Trader provides consistent

streaming prices and a host of other valuable FX execution

services such as Quick Trade, split and block trades.

Individually configurable, Danske Trader is extremely flexible

and intuitive to use. Danske Orders is a part of Danske Trader,

and allows users to view, place, amend and cancel profit and

loss orders 24 hours a day. Individual settings mean you can

receive notification of order execution via email or SMS, and

track all your orders on the deal log.

Easy access at all times and a high level of control are crucial

factors built into Danske Trader, whilst Straight Through

Processing and a high level of transparency, coupled with the

ability to view price streaming online, mean that you need never

miss an opportunity.

Sponsored Statement Danske Bank is voted no. 17 FX Bank in the world and no. 1 in Scandinavia (FX Week/ RISK Magazine)

Danske Bank –always open for FX

For further information please contact:

Danske Markets

Global Flow and Solutions

Jesper Ronald Petersen, e-mail [email protected] or

Claus Holmark Asved, e-mail [email protected]

Reuters DANO/DANX +45 3334 1003

Meet us at

ACI Forex in Bremen from March 31 to April 2 2006

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