eFOREX e-e-FOREX FOREX january 2006
transforming global foreign exchange markets
visit us at www.e-forex.net
What's a customer? - electronic FX converging the buy and sell sides
The Anonymous FX Trading Model - why is it so appealing?
Regional eFX perspective - spotlight on Scandinavia
FOCUS on Treasury Best Practice - the role of FX automation
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l i q u i d i t y. . . r i s k m a n a g e m e n t . . . S T P. . . e - C o m m e r c
e-Forex
welcome to
Winter 2006
HAPPY NEW YEAR! Susan Rennie
Michael Best
Susie@Aspmedialtd.com Managing Editor
Michael@Aspmedialtd.com Subscriptions Manager
Charles Jago
Louis Riley
burden. We have highlighted how extending the benefits of FX
Charles@Aspmedialtd.com Editor (FX & Derivatives)
Louis@Aspmedialtd.com Features Manager
STP and automation can assist in compliance with standards
Charles Harris
Anthony Bannan
such as Sarbanes Oxley and IAS 139, by eliminating all
Charles@Cjag.demon.co.uk Advertising Manager
Anthony@Aspmedialtd.com Commercial Manager
Helen Rochford
Helen Murray
Helen@Aspmedialtd.com Production Manager
Photography
major topic in this edition has been the role that eFX
A
systems are playing in helping organisations comply with the ever increasing regulatory and governance
unnecessary manual intervention and standardising the transactional process. Although the impact of new standards may well vary according to market segment, the imposition of increased volumes of regulation is sure to be a major driver in the future evolution and adoption of eFX and will create a need for additional technology. Already many technology vendors have noticed an increased
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demand for integrated tools that add compliance to the STP path and of course the added focus on control brought about by these regulations may provide treasurers with an ideal opportunity to justify and secure new budgets for investing in the technology to further automate their treasury and FX activities. The EU Markets in Financial Instruments Directive (MIFID) is due to be implemented in 2007. With its focus on increased rigour around client reporting and disclosure of fees and charges to clients, coupled with significant order handling requirements and
Design and Origination: Phill Zillwood Design Works Phill.design@btconnect.com Printed in the UK by Broglia Press e-Forex (ISSN 1472-3875) is published quarterly in January, April, July and October www.e-forex.net
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obligations regarding pre and post trade information publication, the directive could have a significant impact on the Electronic FX environment. We plan to examine these issues in our next edition. A new regular feature we have included in this edition is the Product Spotlight. Let us know if you would like your innovative, new eFX products to be the focus of this article in the future. As usual we hope you enjoy this edition of the magazine.
Charles Jago Editor
Subscriptions hotline: +44 (0) 1225 868 948 Although every effort has been made to ensure the accuracy of the information contained in this publication the publishers can accept no liabilities for inaccuracies that may appear. The views expressed in this publication are not necessarily those of the publisher. The entire contents of e-Forex are protected by copyright and all rights are reserved.
Companies and organisations in this issue: A ABN AMRO Achelon Group ACI ACM Aegis Agricultural Bank of China Aspect Capital B Bank of America Barclays Capital Baxter Solutions BDRC Bertelsmann BGC Bloomberg BMO Nesbitt Burns BNP Paribas BOCOM Brown Brothers Harriman C Calyon Cantor Fitzerald Celent Communications Chicago Mercantile Exchange Chieron Trading China Construction Bank CITIC Citigroup City Practitioners CLS bank Cognotec CPSS-IOSCO Currenex D Danske Bank
page 34 page 111 page 22 Inside Front Cover page 85 page 14 page 124
page 9 page 10 page 17 page 36 page 84 page 60 page 61 page 74 page 39 page 14 page 43
page 6 page 59 page 58 page 111 page 113 page 14 page 14 page 6 page 30 page 22 page 7 page 22 page 57
inside Back Cover page 31
Deutsche Bank E EBS Ericsson ESCB/CESR eSignal eSpeed Eurex Eurobase
pages 4 & 5 page 64 page 22 page 117 page 59 Outside Back Cover page 12
F Federal Reserve FIX Protocol Org. FlexTrade FNX Forex Capital Markets ForexManage FXall FXDirectDealer
page 22 page 107 page 101 page 87 page 119 page 83 page 23 page 123
G GAIN Capital GFI GlobeOp Green River Computing Greenwich Associates
page 115 page 29 page 16 page 99 page 58
H Handelsbanken HotspotFX HSBC
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page 81 page 13 page 56
I IFX Markets Integral Development Corp Interbank Group ISDA
page 33 page 15 page 113 page 22
J JH Financials JP Morgan Juniper Networks
page 113 page 6 page 98
L Lava Trading Lufthansa
page 60 page 84
M Merrill Lynch MIG Investments Misys
page 56 page 97 page 89
N Nordea
page 69
O Oasis Research Option Computers Oracle Orc Software
page 112 page 39 page 100 page 64
P PriceWaterhouseCoopers
page 90
R Rabobank RBS Financial Markets Refco Capital Markets Reuters Riksbank Royal Swets and Zeitlinger
page 19 page 6 page 22 page 58 page 64 page 85
S Saxo Bank Saxon Trading SEB Merchant Bank Skandia Capital SmartTrade Societe Generale Standard Chartered Bank State Street Corporation Stentra StrategyRunner Sungard SuperDerivatives Swedbank Swiss Postfinance
pages 24 & 25 page 112 page 66 page 65 page 51 page 8 page 12 page 59 page 48 page 116 page 65 page 14 page 21 page 86
T 360T Textron TF Network Townsend Analytics TraderTools TradingScreen Traiana Tremont Capital TWIST
page 6 page 85 page 72 page 47 page 37 page 20 page 55 page 56 page 65
U UBS
page 74
W Wachovia Wall Street Systems
page 11 page 93
X Xconnect Trading
page 113
january 2006 e-FOREX
Godfried De Vidts Focus on risk
Philippe Buhannic What's a customer?
Andrew Kidd Middle market e-FX
Peter Kriskinans Front & middle office
Michael Laven Tri-Party Credit Analysis
Harrell Smith Anonymous FX trading
Sebastian di Paola Sarbanes Oxley
Dr Anna Becker Automated Trading
Greg Michalowski Slippage
Christian Baudoin The e-Forex Interview
January 2006
contents
Foreword 22. This time we have been lucky! Godfried De Vidts looks at the lessons learned from the recent Refco case.
Features 26. Leader – What’s a customer? Electronic FX converging the Buy and Sell-side. Philippe Buhannic examines the new FX market structure and how the role of the buy and sell-sides will continue to blur further in the future. 30. Risky Business: Improving Risk Management strategies in the online FX environment. Paul Ronan considers some of the credit and market risks faced by banks in the rapidly developing online FX environment. 34. E-FX – on the way to meeting the needs of the middle market. Andy Kidd discusses how web technology is providing opportunities to deliver the services and functionality that the middle market segment needs. 38. eFX - Unifying the Front and Middle Office Environments. Peter Kriskinans outlines how unified streams of interactions and deals provide valuable information and how a unified approach benefits sell side banks. 44. Broadening client connectivity - improving backoffice processing. Nick Dyne identifies how the post FX trade environment still offers possibilities for exploiting the benefits of automation and technology. 48. Improving Customer flow quality: making best use of technology to monitor market making profitability. James Kemp takes a look at ways in which service providers can make best use of technology to monitor the quality of customer flow. 52. PRODUCT SPOTLIGHT The Mark to Market Monitor (MMM) from BAXTERSolutions Kft. 54. Extending Technology innovation to Tri-Party Credit Analysis. Michael Laven illustrates how automation of the credit analysis process has resulted in increased confidence from the large financial services institutions to expand their business 58. Privacy Please – the attraction of anonymous FX trading. Harrell Smith examines how the inflow of capital into the hedge fund community will lead to more firms exploring the use of trading platforms that offer anonymous execution. 62. Regional eFX Perspective: Scandinavia. Andy Webb looks at eFX within the region. 70. VIEWPOINT: Pulling in the reins - offering liquidity on a selective basis.
102. FORUM: e-FX Technology: powering the growth of new trading opportunities. With Misys, FNX, Townsend Analytics, Wall Street Systems and Cognotec. 110. Online Technology - a key differentiator for Trading arcades and prop shops. Heather McLean interviews industry players to see why Trading Arcades & Prop shops are growing in influence and how their trading models differ. 116. Automated trading solutions – FX trading of the future? Dr Anna Becker looks at the development of automated programs designed to maximize FX trading revenue and efficiencies, and the levels of customisation that are now available. Risk Management strategies
120. Traders WORKSHOP: Slippage Greg Michalowski talks about Slippage in FX trading and how to minimize its impact. 124. CASE STUDY: eFX technology – helping to minimise the problem of Slippage at Aspect Capital.
The e-Forex Roundtable 74. Squeezing efficiencies – where will the benefits of eFX be focused next? With Deutsche Bank, Bank of America, UBS, Brown Brothers Harriman and BMO Nesbitt Burns
FOCUS: Treasury Best Practice – the role of FX automation
Unifying Front & Middle office
80. Best execution - a fundamental part of best practice Keith Hill explains how best execution may have become a fundamental part of best practice in FX trading, but there is still considerable disagreement about how to define it. 84. e-FX and Best Practice in the Treasury environment. Heather McLean speaks to several leading international companies about the best practice advantages for their treasury departments of using eFX technology. 90. Automation in Treasury - facilitating compliance with Sarbanes-Oxley. Sebastian di Paola examines how automating FX trading can assist in meeting Sarbanes-Oxley compliance.
Customer flow quality
94. Why automation for IAS 139 is a must have - not a nice to have. Jiro Okochi identifies the key areas within hedge accounting that would benefit from automation. 98. CASE STUDY: How Juniper Networks turned its FX Hedging activity into a straight through process.
The e-Forex interview 127. With Christian Baudoin, global head of e-Forex at BNP Paribas.
Tri-Party Credit Analysis
january 2006 e-FOREX
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news Continued development of
JPMorgan eXpress FX JPMorgan is continuing to develop its JPMorgan eXpress FX platform and has recently added the ability to leave on-line orders. The 'Leave Orders' service includes flexible, automated order functionality. Users will be able to place 'Limit', 'At Best' and 'Stop Loss' orders. The orders will be automatically filled by JPMorgan. “Automating the order process will save time since there is no need for confirmation over the phone once the order has been filled” says Elena Theodorou Head of FX eCommerce Sales – EMEA. The process will eliminate errors and facilitate Straight Through Processing (STP). Placing orders via JPMorgan eXpress FX enables complete trading records to be maintained electronically for ease of reporting Elena Theodorou and monitoring. Additional functionality includes partial fill. Clients will be able to see the status of the order, along with a visual display of the tranche executed. JPMorgan's increasing investment in its e-commerce offering compliments its recent spate of hiring to its e-sales teams globally.
RBS
to add FX Electronic Orderbook
RBS will shortly be adding a new system, FX Electronic Orderbook, to its foreign exchange dealing platform. Aimed at making access to RBS’ foreign exchange trading desks even easier for clients, the FX Electronic Orderbook allows spot and forward orders to be submitted electronically - 24 hours a day.
The new system can handle a range of orders from the simple to the complex – including combinations of Order Cancels Order and If Done Other. Clients retain complete control with the facility to not only monitor, amend and cancel orders in real-time but also set-up exclusion periods in advance. FX Orderbook will operate through RBS’ browser-based website Trade or via an API linking directly with clients’ own systems. (www.rbsmarkets.com/fxorderbook)
Citigroup introduces CitiFXTM Flow Weighted Indices Citigroup has announced the introduction of CitiFXTM Flow Weighted Indices (CFWI), a set of cutting edge tools created to assess the value of a currency based on today’s composition of the foreign exchange market. The indices represent a significant departure from the composition of the market indicators, such as Trade Weighted Indices (TWI) and Effective Exchange Rate.
The CFWI will be updated annually and incorporate all flows from all client types. The currency weights will be calculated from the last three years of flow data, which allows the weights to be statistically robust and dynamic. The 10 currency indices will be calculated in real-time and available on Reuters and Bloomberg under the symbol CFWI <GO>.
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Calyon provides liquidity through new e-channels Calyon now provides liquidity through two new electronic channels (360T and CFETS) on top of the existing ones: Proprietary, FXall and Currenex. The bank also now offers 24h pricing on G10 currencies in FX Spot, Outrights and Swaps.
Clients can also receive their deals via an integrated STP solution (available in TOF, XML, CSV formats): They will, for example, trade on the platform (directly or via any ECNs Calyon is connected to) and receive the deal flow in real time, either directly to their in-house system or as a flat file. Calyon is focusing on developing long-term global partnerships with clients and offering a 24-hour dedicated multi-lingual Client Services team as well as integration support.
ARE YOUR EXECUTABLE STREAMING RATES THIS FAST? Cognotec RealStream™ offers genuine one-touch trading and enables banks to offer true streaming bespoke pricing. Intelligent positioning of critical data facilitates the seamless integration of rates and execution 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 bank against 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
RealStream
TM
DEALING IN EXPERTISE The Future of Executable Streaming Rates
www.cognotec.com/realstream.html info@cognotec.com New York +1 212 433 1520 London +44 (0) 207 448 5917 Singapore +44 65 6837 2008 Tokyo +81 3 3507 5776
news SG adds e-confirmation functionality to SGFX Trade E-confirmation is a Société Générale Investment Banking service for its counterparts in capital market transactions that have subscribed to the on-line deal confirmation service which is available 7 days a week, 24 hours a day. Using this functionality a customer can handle the validation process (confirmation,validation or refusal) very quickly and easily. All important transaction information is now listed directly on the front screen, and a mass validation is authorized.
Deutsche Bank releases new version of autobahnFX Deutsche Bank has released a new version of autobahnFX. The new release includes many new functional and technical enhancements, amongst them a robust Rich Client User Interface, Laddered Pricing and Trade Weighted Indices (TWI). These new enhancements help autobahnFX differentiate itself amongst other single bank portals.
SGFX Trade is Société Générales proprietary Forex and Money Markets e-trading platform. It’s a monobank platform dedicated to the entire range of SG clients from SME’s to large institutional or corporate clients. The profile of current SGFX Trade clients’ has proved to be well beyond the geographical boundaries of Europe and that’s why SGFX Trade will be operational 24/24 in the near future.
Bank of America enhances FX dealing platform As part of its ongoing commitment to delivering a world-class FX service for clients, Bank of America has launched FXtransactTM Dealer. Clients are now able to access Bank of America two-way streaming tradable prices in spot, forwards and swaps over FXtransact Dealer. Screens and functions are customizable by the individual user, and detachable trade windows allow the main application to be minimized, preserving screen real estate. FXtransact Dealer is the latest addition to
Laddered Pricing which allows each user to customise the amounts they see streamed to them. Each amount is priced dynamically according to size and the user can trade direct from their Liquidity Window screen. Laddered Pricing is also available via a new Rates API. Deutsche Bank now also offers electronic pricing in its full suite of DB FX Indices – comprising both Trade Weighted and Regional Currency Baskets.
Saxo Bank opens headquarters in London Saxo Bank’s primary focus of expanding into London lies within the institutional space and it’s London office is scheduled to be up and running in the first quarter of 2006. Saxo has recently focused on attaining formal FSA approval and finding a suitable domicile. With that in place the company is now turning its attention to the recruitment effort lying ahead.
the e-FX suite of solutions Bank of America provides for its client base, and includes streaming tradable or indicative APIs in various protocols, STP APIs, integration with Payment and Settlement and Cash Management solutions, and a set of White Label offerings.
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Peter Klein, Director of Saxo Bank UK says, “We’re delighted that the FSA has granted us their approval, and we’re looking forward to intensifying our search for skilled and professional institutional sales people from the financial markets. The London office is an important initiative that provides the bank with better access to the world's largest pool of qualified financial personnel.”
Peter Klein
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news
Capital Forex using ForexManage
Russell continues FX Trading build up with LavaFX
Capital Forex, the FX arm of the London Capital Group have launched ForexManage's browser-based online dealing system to their retail clients. 'With hosted market-making, risk-control and back office, we have a highly flexible system to help Capital Forex win customer business.' says Andrew Gibson, Sales Manager at ForexManage.
Russell Investment Group has begun using LavaFX™, Lava Trading Inc.'s electronic foreign exchange (FX) trading system, and is now able to trade as a market maker for its clients. "LavaFX is a critical addition to Russell's expanding and diversifying FX trading capabilities," said Ian Battye, Russell's head of currency management. "Our clients, many of whom are buy-side managers, are generally price takers instead of price makers. LavaFX represents a different FX trading model than that used by most buy-side managers, but Russell anticipates this model to become more prevalent as electronic trading evolves." "By adopting the latest in electronic trading technologies, Russell is leading the charge amongst asset managers in recognizing the benefits of new technology in an ever changing industry," said David Ogg, head of LavaFX, Lava Trading Inc. David Ogg
Reuters releases upgrade to 3000 Xtra
Risk control, whether by pre-trade check or post trade margin monitoring, is paramount and the ForexManage solutions centre on these real-time calculations. Capital Forex Pro, the institutional arm of Capital Forex utilizes integrated deal capture with the available position-keeping and reporting, for platforms such as Currenex. “ForexManage took Capital Forex definitions and delivered an extensive client dealing experience. The system supports retail clients and money-managers with real-time position valuations of spot and forwards. Additionally, it compliments our institutional Currenex service with extensive live reporting and analytics” says Gavin Foster of Capital Forex.
Reuters has released a major upgrade to its flagship product Reuters 3000 Xtra (version 5.0)
Barclays Capital
introduces autoquoting up to 100 million across all majors on BARX
Following its successful launch earlier this year of Precision Pricing - pricing in tradable increments down to 1/10 of a pip - Barclays Capital’s award winning platform BARX for FX Trading continues to be committed to providing the fastest and most flexible executable pricing. This is evident in the recent introduction of
The key enhancements are as follows: • Simple, browser-based search to make it easier for customers to find what they need from Reuters broad range of content • MetaStock Premium graphics, which make sophisticated charting capabilities simple to use. New Quick Charts provide predefined, server driven, browser delivered and task-specific charts, simplifying previously complicated charting • New Fundamental and Reference data giving easy access to mutual funds from Lipper, institutional and stakeholder data from Factset, future events from Kalends and M&A content • Improvements to overall usability and customisation for better management of screen space e.g. ability to retrieve Templates from a drop down menu bar or put multiple objects into one frame on the screen. • Key improvements to the Reuters 3000 Xtra package to simplify and streamline the install, deployment and maintenance process.
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streaming rates up to 100 million across major currency pairs which are all executable in one mouse click. BARX for FX Trading also offers configurable pricing displays, rate calculators, quick deal panels and history graphs. For more information, visit www.barx.com/fx.
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news
Smart Trade releases STTP 4.0
Forex Capital Markets launches FXCM Pro Forex Capital Markets, LLC (FXCM), has announced the launch of FXCM Pro, its agency trading service aimed at middle market hedge funds and financial institutions.Leveraging over $100 billion in monthly trading volume, FXCM Pro gives clients access to global top-tier banks using its own lines of credit.
Providing the best in full service 24-hour agency execution desk, the FXCMPro suite features: • Multi Dealer Platform with Executable Streaming Prices • Anonymous agency execution • Deep Liquidity pool available to all customers • Leave Orders with their 24 hour full service desk • Proprietary Research and Analytics FXCM currently services over 50,000 active retail FX clients and more than 400 institutional clients.
Eurobase to supply SCB with Siena XML Gateway
Smart Trade Technologies has released STTP 4.0 of its multi-asset class trading and routing solution, offering clients even more improved performance and possibilities to build their new trading infrastructure. STTP 4.0 has more flexible matching algorithms that enable orders to be matched on multiple parameters (price, volatility, yield…) under user-defined matching criteria, and consequently offering more ways to define trading strategies as well as additional order types.
Pluggable Transport protocols can now be defined via dedicated plug-ins, sharply reducing the implementation time within the bank by leveraging existing infrastructures and middlewares. New GUIs have also been released for retail clients and FX including Options. The main benefits to banks using STTP 4.0 will be seen in terms of performance, flexibility, deployment, time-to-market, reduced integration costs, and improved personalisation.
Townsend Analytics expands FX offerings Software provider Townsend Analytics (TAL) is offering direct access to Saxo Bank’s spot Forex and metal products, through its RealTick trading platform.
Eurobase Banking Solutions has won a contract to supply Standard Chartered Bank with its Siena XML Gateway. The Gateway will be used at first to provide connectivity between the Bank’s in-house rates engine and the dealing interfaces, or portals, where end-users and intermediaries can deal with the Bank in a wide variety of currencies and products and will provide a generic connectivity infrastructure for the Bank’s trading and web marketplaces.
The Bank plans further automation of its foreign exchange liquidity management using the Gateway so that it offers pricing to corporate customers, financial institutions and other banks on the widest possible number of currencies and so that these customers are offered competitive rates even for non-standard currency pairs.
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The deal allows TAL to expand its foreign exchange offerings, and will mean that traders will get access to Saxo prices within a few weeks according to the Danish FX specialist. TAL said it is also enhancing the FX trading capabilities to give customers access to greater liquidity through RealTick. The software firm said the deal between the two companies was brought about by customer demand.
news
SuperDerivatives releases new version of SD-FX
FXDD rolls-out MetaTrader 4 FXDD, an online retail forex firm, has recently rolled-out the latest version of MetaTrader (MT4), a third party trading platform they offer free-of-charge in addition to their proprietary platform, FXDD Trader.
MT4 delivers a greatly improved look and feel and packs a powerful technology punch: extensive charting capabilities and trailing stops, faster execution and extensive black box functionality. Shawn Dilkes, Chief Technology Officer, FXDD, said: “We are dedicated to providing our clients with excellent technology and instant execution. Additionally, we provide consistent interbank pricing and liquidity allowing us to offer such tight spreads as 2pips on EUR/USD and USD/JPY and 3-pips on GBP/USD and USD/CHF.”
Currenex and Traiana offer STP for FX trades Traiana, Inc. and Currenex have integrated their platforms to automate and streamline order processing for prime brokers conducting foreign exchange trades on the Currenex execution platform. The complete straight-through-processing integration of Currenex’s platforms, the Traiana Harmony™ service and Traiana’s Trading Relationship Management (Traiana TRM™) software will bring additional speed and seamlessness to the trade process.
Prime brokers can now receive immediate, electronic Currenex deal confirmations via the Traiana Harmony message center, meaning they can more effectively manage total positions, and provide their buy-side clients with increased efficiencies, improved reporting and reduced operational risk.
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SuperDerivatives® has released a new, even more powerful version of its SD-FX™ pricing platform which now includes additional cutting-edge exotic foreign exchange (FX) options, such as multiperiod faders with knock-outs and accumulators, basket options and variance swaps. A correlation module has also been added, allowing the real-time calculation of correlation-dependent options.
The latest release includes many new tools for corporate users and fund managers. Among them are powerful risk management utilities, such as the volatility sensitivity analyzer. This lets portfolio-managers assess the potential exposure of their options portfolio to simultaneous changes in both the spot rate and implied volatility, based on real market prices. A new hedging Strategy Wizard has also been added; this automatically suggests effective strategies for hedging specific currency exposure, subject to parameters defined by users.
China Construction Bank joins ®TM the EBS trading community EBS®TM has signed China Construction Bank Corporation (CCB) as an EBS®TM Spot and EBS®TM Prime customer. As the latest Asian bank to sign up as both an EBS Spot and EBS Prime customer, the benefits to CCB include access to higher levels of liquidity and thus optimum prices in the most actively traded global currencies – the US dollar, Japanese yen, euro and Swiss franc (CHF). “Banks in China understand the need to join a global FX platform,” explained KC Lam, Head of Sales Asia Pacific, EBS. “EBS’ clients generate increased revenues through FX trading as they are able to directly enter the interbank FX market to access tighter pricing and global liquidity. China and its banks are an important part of our global offering.” The news means that KC Lam four of China’s biggest banks have now joined the EBS trading community – they are Agricultural Bank of China (ABC), Bank of Communications, China (BOCOM), China Construction Bank Corporation (CCB) and CITIC Industrial Bank of China (CITIC).
integral development corp.
worldwide state-of-the-art
u.s. patented technology
Welcome to next generation eFX. software & services internet
innovation in capital markets
enterprise java
e-business solutions To upgrade your eFX solution, contact eFX@integral.com or visit http://www.integral.com/eFX.
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news
BNP Paribas launches customisable displays on FX Dealer
ABN AMRO launches electronic Swiss franc IRS ABN AMRO has launched electronic trading in Swiss francdenominated interest rate swaps, making it the first bank to offer this capability. Clients who wish to hedge their interest rate exposure have always been able to do so through voice execution, but Swiss franc interest rate swaps have remained voice-only while other products have become available through electronic platforms.
Switzerland, along with Italy, already makes up a substantial part of fixed income trading on Bloomberg, and electronic Swiss franc interest rate swap trading is a natural next step in the business-toclient area, comments Paul Humphrey, Global Head of Fixed Income eBusiness at ABN AMRO.
TraderTools introduces GLOBE™ TraderTools LLC has introduced Global Limit Order Book for the Enterprise - GLOBE, the first comprehensive global order book of its kind in the world. GLOBE facilitates the entry of orders into STPlatform via Order desk by a dealer or salesperson, Web interface by remote branches or Internet-based customers and API by systems generating orders electronically.
With GLOBE, banks, brokerages and other financial institutions benefit from increased: • Flexibility: The system can be changed as business requirements change • Performance: Robust and reliable platform synchronizes every part of the hierarchy and structure in real time • Security: Top-down policy determines access from one trading entity to another • Integration: Clearly-defined entry points to front-, middle and back-office and an open interface to any system.
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BNP Paribas has launched fully customisable live spot price displays on the FX Dealer portal. This latest enhancement to the functionality on the FX Dealer Portal will allow customers to not only select which currencies they want to view, but also how they view them. The full list of live tradable FX prices coming directly from BNP Paribas traders can be edited by the customer, so that they display only the currencies they require.
Alternatively, customers can specify to view rates by currency blocks, such as USD majors, Euro Crosses, Asia, Eastern Europe and Latin America. In addition to the live bid and ask rates, when detached in its own window, customers can format the display further by requesting additional information including the open, high, low and close, as well as the percentage change on the day. But, probably the most powerfully piece of functionality is the capability for customers to create and maintain their own list of cross rates, for which live prices are displayed.
GlobeOp to offer connectivity to Currenex GlobeOp Financial Services has announced an agreement to offer connectivity to the Currenex electronic fx trading platform via GoMarketssm, GlobeOp's new electronic trading connectivity platform for its hedge fund clients. GlobeOp's clients will now be able to access Currenex's multi-dealer electronic solution for fx trading. Through connectivity via GoMarkets, Currenex's participating market makers can expand their service to GlobeOp's hedge fund clients and a large and diversified buyside community, accounting for a significant share of the daily global foreign exchange market. Hans Hufschmid, chairman and chief executive officer of GlobeOp, said, "The addition of Currenex's e-FX trading platform to our GoMarkets service enables GlobeOp to offer its clients an industry-leading fx execution service with STP benefits. Increasingly, by adding quality partners such as Currenex, GlobeOp is growing to become strategically more important to our clients, who look to us for a broader range of hedge fund support solutions."
Hans Hufschmid
The TrackWheelÂŽ: An efficient visual interface for traders to quickly and intuitively adapt their pricing in real time. "Skew" commands are sent to the server side, allowing to integrate the Dealer's knowledge in the Price Stream.
Trade Blotter: Real-time market activity is reported at lightning speeds, even over remote networks. Trades can be marked-to-market for 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 that affect their trading profitability.
To organise a demo please contact Gabor KORMOS or Franck MIKULECZ.
Alternatively please call a member of our professional technical sales teams in the following offices:
BAXTER-Solutions Kft. 1075 KĂĄroly krt. 1. Budapest, Hungary phone: +36 (1) 235 06 87 e-Mail: info@baxter-it.com
BAXTER-Solutions LLC 2116 3rd Street Santa Monica, CA 90405 USA
BAXTER Financial Services Ltd. Dublin Exchange Facility IFSC, Dublin 1 Ireland
phone: +1 (310) 399 00 93
phone: +353 (1) 670 04 55
news
Rabobank introduces online
Over 300 funds now settling through CLS Bank The number of funds settling payment instructions derived from foreign exchange deals through CLS Bank has now exceeded 300. Since launching its Enhanced Fund FX service, CLS Bank has seen a steady increase in the number of users.
service for Pension Fund Managers As of 1 January 2007, Pension Funds in The Netherlands are faced with a new set of regulations under the FTK (Financieel Toetsingskader or Financial Assessment Framework). These regulations force Pension Fund Managers to increase their focus on Assets and Liability Management. Within the FTK Framework, Collateral Management has been introduced to mitigate the credit risk between the Pension Fund and the Bank. It is a two-sided mechanism to minimise exposures stemming from long-dated transactions. Hereby both parties agree upfront to deliver cash, government or corporate bonds as collateral to minimise this risk.
Now fund managers, pension funds, hedge funds, investment funds and asset management divisions of banks are using CLS to settle payment instructions from foreign exchange deals relating to crossborder investment activity for 338 funds. Since the beginning of 2005, there has been a 445% increase in fund participation in CLS.
MIG Investments increases service offering at launch of new web design At the launch of its new web design, Switzerland based MIG Investments has introduced new margin conditions by giving its clients the opportunity to trade Forex with a leverage of 200:1. The companyâ&#x20AC;&#x2122;s margin conditions also include a no maintenance margin policy. This means no margin calls and no automatic closing of positions during weekdays, hereby giving the clients more flexibility in their trading. MIG also provides a special Mobile
In preparation for this development, Rabobank has introduced an online service for Pension Fund Managers called the Collateral Management Tool (CMT). The CMT, accessible via Rabobankâ&#x20AC;&#x2122;s TreasuryWeb website, offers the ultimate support function for a Pension Fund. It features online information, access and valuation of posted collateral and the mark-to-market of the underlying transactions on a day-by-day base. For more information visit www.rabotreasuryweb.com
FXall daily trading volumes surpass $43 billion FXall has announced that daily trading volumes have broken through $43 billion. The rise in volumes has been driven by increased activity across all FXall's client segments - active traders, asset managers, corporations, banks and broker-dealers - as new clients sign up and existing ones increase the volumes they execute on FXall.
Trading service that allows clients to view real time prices, charts, account information and even trade using their PDA. MIG Investments is already offering tight spreads on 20 currency pairs and on Spot Gold and Silver, with 3 pip spreads on six pairs.
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Philip Weisberg, CEO, FXall, said: "FXall's record volumes are proof of our success in meeting the diverse needs of clients across the institutional foreign exchange marketplace. Our end-to-end workflow and automation services have been as important as our trading services in winning new business. Thanks to the diversity of our client base, we have been able to sustain strong and steady growth despite cyclical fluctuations in trading activity by individual market segments.
Philip Weisberg
See the future Rabobank International, Global Financial Markets
Rabobank offers the solidarity and security of an AAA credit rating Rabobank provides a global commercialism founded on a tradition of co-operation, knowledge and customer focus. Rabobanks’ Global Financial Markets has significant research capabilities and our FX forecasting track record is impressive as evidenced by consistently ranking in the top of all banks surveyed by FX Week*
* FX Week, August 15, 2005
www.rabobank.com
Challenging convention Our aims are to create opportunities for you, search for fresh alternatives and realize new possibilities by anticipating change and taking the initiative. By looking at common things in an uncommon way, we try to find fresh angles. Success is about doing common things uncommonly well – and success is what we want to create for your business.
news
Swedbank launches FX Trade
WSS provides remote web salesperson facility
Swedbank has launched FX Trade – a fully flexible foreign exchange platform with the newest generation, high security logon solution.
The latest release of The Wall Street System provides support for the remote web salesperson that is trading over the Internet on behalf of his customers. The system enables the web salesperson to adjust the trade rate and/or margin on the trade and determine the margin P&L that will be earned on the trade.
The web salesperson can override a credit or trade size limit condition and also can easily trade on behalf of any counterparty in the system that has been set for Internet trading. If a remote salesperson is dealing on behalf of a customer and breaks a limit, the system will inform the salesperson by displaying each of the reasons prior to computing a price. The remote salesperson can override the condition and enter a comment, which is stamped on the trade.
Gain Capital releases enhanced FOREXTrader platform
With tailor-made customer screens, including the possibility of displaying a wide variety of indicative rates, streaming prices and one-click trading, the system suits all kinds of customers, from fund managers with multiple legal entities to corporates and proprietary traders. Various trade reports and a possibility of downloading trade data into clients own systems facilitate the administrative work. fxtrade@swedbank.com
TradingScreen launches TradeFX TradingScreen Inc.has announced the launch of TradeFX, its MultiLiquidity pool FX Trading Module. TradeFX simplifies foreign exchange trading by aggregating financial information from multiple assets and brokers on one integrated user platform.
GAIN Capital Group, Inc. has announced a new release of its proprietary forex trading platform, FOREXTrader. New functionality for FOREXTrader includes enhanced charting and technical analysis capabilities and marks the launch of Forex Insider, the newest addition to GAIN’s proprietary research offering. Forex Insider provides clients and registered users with actionable intraday analysis of news, events and technical levels that impact currency prices.
Forex Insider updates are published directly on the platform by senior traders and members of GAIN’s research team, up to 20 times per hour. The updates provide alerts on current technical developments, insights about major market flows, and timely analysis of economic data releases with GAIN’s reaction to comments by government officials.
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With TradeFX, end users can conduct transactions across the full spectrum of FX electronic trading models and venues, including Full Streaming (FS), Request for Stream (RFS) and Request for Quote (RFQ). This solution enables customers to trade FX as an asset class effectively and simply at a click of a mouse without complex integration across platforms and provides them with the ability to view consolidated quotes, including Spot, Forwards and Swaps, across multiple banks and liquidity systems. TradingScreen’s clients also have the ability to trade Global Equities, Options, Warrants, Exchange Traded Funds, Convertible Bonds and Listed Derivatives on the same platform.
Swedbank - a qualified banking partner.
Corporate Bank of the Year in Sweden 2003, 2004 and 2005 Source: Finansbarometern by Aff채rsv채rlden
Swedbank
Foreword
This time we have been lucky!
This time we have been lucky!
I
n our financial industry we are often challenged by events. Last time I wrote about the July 7 events in London and the resilience of our professionals and community at large. And indeed, the numerous events that have rocked the financial worldwide system have provided improvements in the way we deal with external events. As former Federal Reserve official Gerald Corrigan reported in a banksponsored post-mortem on LTCM, improvements in the financial worlds handle on market and credit risks are noticeable. However, operational risks resulting from the rapid rise in the use of credit derivatives and other financial innovations since LTCM’s fall could spiral out of control. This year the market absorbed the down grading of General Motors and Ford without too much fuss. The ISDA June 2005 survey cited important advances. Although only 40% of credit-derivative contracts are now confirmed by automated systems, up from 24 % a year ago, it is still less than half. And then Refco came. This firm that went public only a little while ago disappeared in a very short time. So what went wrong?
CPSS-IOSCO has published standards for CCP’s (central counterparties) which, in Europe will be adopted by ESCB/CESR. Consultations are currently under way and various associations will respond to this call for input. Some banks provide 3rd party clearing, in other words, open their books and provide their own name on behalf of others. The risk between the client base and the 3rd party provider can become that big that limits on total turnover might be considered. CLS bank, avoiding the payment versus payment risk, or Herstad Risk, also provides opportunities to use 3rd party clearing. Smaller banks and customers don’t need direct participation to CLS bank, as some banks have created a big business in providing this service. So far the sponsoring banks of CLS Bank need to see a return on the investment they made. Neither the regulators nor Central Banks have come forward with full endorsement or compensating with less capital requirements or higher for the nonparticipants. So have we covered all angles, do we understand what really goes on?
Access to the financial markets is crucial for many, not the least of course, banks. We need to serve our client base with an instant access to all currency zones and all products and the focus of the major players has widened from the pure FX and MMKT business. Some major industry players in the markets have created their own banks in order to have direct access to this increasingly electronic market place. This has not gone unnoticed by other players in the markets, in particular the hedge fund industry. The challenge for many of these largely unregulated market participants is to get access to these professional systems. Smaller banks and specialised trading houses also want to get access so they in turn can serve their client base better. As a consequence the range of clients having an indirect access to financial products has never been greater.
In the particular case of Refco, as an example, direct access was given to the FICC (CCP clearing in the US). When LCH became popular on this side of the Atlantic, Refco was also given direct access to the CCP in Europe thus opening opportunities for cash bond and repo trading. This opened opportunity for the client base of Refco to get access to markets that would be rather difficult in other circumstances. Although evidence tells me that some banks refused to trade directly with Refco as a counterparty, indirectly through the anonymous trading opportunities via the CCP function, they nevertheless provided access to the liquidity in the various products on offer. In other words, all direct participants in the CCP’s had unwitting risk on Refco.
One hurdle remains, the link. Anonymous trading is a must and the emergence of Central Counterparty Clearing in the last few years has provided opportunities for anonymous trading.
Reputational risk. No matter how we built risk management techniques, the human factor remains extremely important. Operational risk. This short article shows that you cannot cater for all events.
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The unwinding of many outstanding trades in FX, Futures, Bonds, Options hide the real problem. What if not enough margin was available to make this unwinding possible. We all know that some investors have lost a great deal of money, money they invested because of the high reputation of this firm. But what if the money had run out, how would we have coped with the unwinding. Infrastructure risk. We as a market fail to understand the importance of the infrastructure we deal with. Not many really understand all the nuts and bolds on which our industry is built. Concentration risk. The amounts going into each CCP is absolutely huge and so it should be. However, the various actors channelling liquidity into this unique pipe should realise that when things go wrong, everybody could be affected. The reputation, operational, infrastructure and concentration risks, among credit risk need to be our focus in the future. Markets are much faster and it is up to the markets to make sure they understand the various risks attached to new evolutions. This time we have been lucky. Next time it might be too late.
So what are the lessons we haven’t learned so far from this case?
Godfried De Vidts President, ACI
“
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.
www.fxall.com
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LEADER
What’s a customer?
Electronic FX converging the Buy and Sell side Historically, Foreign exchange, almost certainly the oldest financial business, was organized around three types of players: Clients carrying underlying FX exposure, Banks providing prices and credit to these Clients and Inter Dealer Brokers (IDB) insuring information flow among Banks and matching of the banks interest. This structure, traditional in OTC capital markets, has been eroding quickly in the last few years and has been replaced, practically if not officially, by a new market structure that integrates the technology advances of E-FX and better answers the new requirements of the market participants. This new structure, described below, drastically modifies the market by reorganizing it around three key competences: Liquidity provider, Credit provider and System provider. Philippe Buhannic, CEO of TradingScreen his evolution has fundamentally affected the traditional
T
This phenomenon of “market interna-lization”, traditionally
definition and role of Buy side and Sell side players. Some
performed by banks, is now becoming center stage and open to
players, such as very large hedge funds, have the know-how
third parties. At the same time the privilege of information and
today considering many of them were former bank traders. They
access to interbank pricing that banks enjoyed historically has
also have capital (through leverage) and risk limits that are
eroded as clients now can access EBS prices for instance. Finally,
sometimes even larger than banks, allowing them to become
to the one to one credit relationship maintained by the Buy side
significant liquidity providers if they choose to do so. Even more
with its FX counterparts originally has succeeded a multi lateral
important than when they look for liquidity is where do they look
organization of the settlement process. A Buy side will trade with
for liquidity? Nowadays, it is not always directly with banks.
one liquidity provider and settle through a prime broker, which
Anonymous venues have started to normalize participants as
will potentially cross collateralize its FX risk after netting with
“destinations” and chances are the Buy side will be matched with
other financial instrument positions. A market structure based on
another Buy side on these venues.
regulatory and historical definition has succeeded a market structure built around three key functions that are assumed at different time by different players indiscriminately. What are the technology trends that have provided the framework for this Buy-side/Sell-side role convergence? We can distinguish three main ones: 1. A revolution in the gathering and distribution of transactional information
The FX market has started its revolution. As always in times of revolution the innovation rate increases enormously, then a restructuration takes places taking the best of the old system and the new one to create a new level of efficiency. This is where we are today. If we follow the electronic trading experience curve, FX made its revolution after the Equity market and is converging in many ways towards the same model while keeping some of its more unique characteristics, such as its enormous, globally distributed liquidity pool. The key drivers behind this new transactional efficiency have been the introduction of first
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>>>
generation platforms (FXAll, Currenex, etc) simplifying access to the traditional counterparts followed shortly by anonymous liquidity enhancing platforms (HotSpot FX, Lava, EBS, etc) all based on a concentration of the liquidity in one single system. The current drivers: progressive establishment of the FIX protocol in FX and development of cross asset class platforms like TradingScreen, are moving the market towards a multi lateral aggregation of liquidity by using the global networks that have been established over the last years. These new approaches have normalized the market across Buy side and Sell side in terms of access to information and speed of execution, making strategy building and execution as efficient for both sides of the market. The FX market, historically one of the most efficient OTC markets, thanks to these new approaches, has advanced even further in terms of transparency, information distribution and operational efficiency. 2. A progressive reorganization of liquidity
Liquidity was historically one sided, provided exclusively by the Sell side and backed mainly by capital. The liquidity today is getting ruptured in various pools that are competing for the client’s interest and can be generated by capital as well as technology to a certain extent. Liquidity today is offered by Banks but also inter dealer brokers (EBS), anonymous platforms (Lava, Hotspot FX), Listed Derivatives Markets (Globex), and in some cases by access platforms (Currenex, FXAll). All these venues can now be accessed in a fraction of a second with the same interface and are de facto aggregated. On the other side of the market more and more clients are building algorithmic engines that are “listening” real time to the market and effectively give or take liquidity from the market but also arbitrage prices imposing a strong discipline on the various electronic pricing systems. Some of these client-developed systems are becoming quickly a significant source of liquidity but they also make the liquidity equation that much more complex. At the same time the traditional internalization of flows that was done by banks across their client base has been now amplified by a growing internalization of flows by some platforms, especially in the retail sector, adding yet another rupture to the centralization of liquidity. To have a view of the future in that area it is interesting to look at markets where “market impact’ is important,
such
as
the
equity
market.
The
successful
development of Alternative Trading systems like Liquidnet,
january 2006
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27
LEADER What’s a customer? Electronic FX converging the Buy and Sell
organizing large trades between the Buy side players, shows
the establishment of a more global view of banking
that it is not far fetched to think that the same market
relationship by the Buy side, more entangled in the entire
organization could have some application in the FX market and
activity of the client and less specific to the FX activity. This has
would have a major impact on liquidity by creating just another
reallocated the credit issue between the executing counterpart
separate pool to access.
(Bank or platform), the credit supplier (Bank or Prime Broker) but also the client, which can manage its activity through
The liquidity chase is therefore more vital than ever in the FX
gearing, and correlations to better use its capital. This is a far
market. Finally, another important element when analyzing
cry from the traditional one-way street that credit constituted in
liquidity is that today the liquidity is accessible
the past in the FX market.
progressively by all players due to the decreasing costs of transaction technology and the
Conclusions
numerous credit enhancement facilities that
The role of the Buy side and Sell side will
are prevalent in the new model. In
inevitably blur further in the future as
summary, both the Buy side and Sell
these evolutions reach maturity. The
side are faced with the same growing
FX market will eventually follow the
need for liquidity aggregation, but in
main model of the future for most
this new market configuration there
financial instruments whereby a
is less of the traditional two tiered
network
access system.
destinations or participants will
of
loosely
defined
become the market and where 3. A reallocation of the credit
liquidity will be split across a
function
wider number of participants.
Credit was perhaps the single
Automats will permanently scan
largest limiting factor to the
this liquidity and its patterns and
universal access to the FX market,
algorithmic trading will take
as counterparts historically worked
advantage of any opportunity
together based on a reciprocal
while optimizing the “market
recognition
system
reducing
impact” of trades. This will imply a
leverage and trading. Credit was
reduction of the trade size, a
highly concentrated in the banks
multiplication of the volume and a
balance sheet and only the most credit
greater specialization of the players on
worthy counterparts could access the
one or more of the three key functions:
market. Among the main factors which have
Liquidity provider, Credit provider and
structurally modified the credit issue in the FX
System provider.
markets are risk reducing strategies such as netting and improved settlement risk management.
Players that are judged by the market, as not bringing any value added through one at least of these three elements
But the main revolution has been the advent of multi lateral
will be marginalized. As electronic access gets cheaper and
execution combined with centralized clearing though a prime
easier in the future, platforms will have to justify their role in
broker. This added to margining capability and cross
liquidity gathering or back- end processing. As margining
collateralization across asset classes has allowed very active
systems makes control of risk limits easier and less capital
new entrants to the markets like alternative asset managers to
intensive, credit providers will have to justify in a more
enjoy an almost unlimited access to the market by delegating
exacting manner their superior processing and credit
credit management to a few key Prime Brokers that had the
enhancement capability. System providers will have to bring
technology to offer this service. Technology has allowed players
real benefits in terms of access, speed and strategy creation to
to effectively split each FX transaction into a credit based
retain the client interest. All the components of the future of the
operation and a trading operation if they wished to do so. This
FX market are almost certainly contained in these ideas, which
allowed a specialization of the “fittest’ participant, building on
are reaching out to other asset classes. The traditional
each players’ strengths (Market Making, Credit, Operations, etc)
separation between Buy side and Sell side will progressively
for the greater efficiency and overall good of the market.
give way, through specialization and automation, to a trading
Furthermore the credit decision for FX has become, with the
world where every player is the Sell side of some and the Buy
development of portfolio risk calculation (Span, VAR, etc) and
side of others.
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Risky Business: Improving Risk Management Strategies in the Online FX Environment Online FX trading is becoming an increasingly popular option for financial institutions, corporates, fund managers, hedge funds and so on. As the variety of players in the market grows, and the speed of transactions becomes quicker (influenced by new streaming technologies), the strategies and systems developed to cope with the RFQ environment are starting to show their age. Paul Ronan, Managing Practitioner, City Practitioners, considers some of the credit and market risks faced by banks in the rapidly evolving online FX environment and suggests ways in which these challenges can best be met. Paul Ronan
New Buy-side Players
Online FX trading has attracted a range of new buy-side players, with hedge funds, in particular, playing a powerful role in shaping the market. These new buy-side entrants are demanding but at the same time, often lack technological infrastructure, creating connectivity issues. Critically for sell-side providers, some buyside players are beginning to employ
Credit Risk
exhausted but an overall credit limit
The impact of streaming technology on
underutilized,
credit risk can be clearly seen. In the past,
manual reallocations of credit.
strategies, aimed at exploiting pricing inefficiencies in the anonymous markets. Streaming Technologies
The pace of change in the online FX environment is also being driven by STP and SER services. This is having a profound effect as streaming architectures
electronic FX portal, a seller usually
The increasing speeds of transactions,
imposed a carve-out limit. This was known
however, mean that credit check needs
to be an inefficient use of credit but
are now shifting from pre-deal to post-
considered acceptable whilst the volume
deal, creating a challenge for existing
of online clients was relatively low.
credit systems. To date, credit systems have played a largely passive role in the
“The increasing speeds of transactions, however, mean that credit check needs are now shifting from pre-deal to post-deal”
demands
for
credit-related
information.
With the traditional RFQ model, no problem
arose,
as
pre-deal
credit
checking could be factored into the price discovery. However, as the pressure has
that
customer
have
discovery, frequently occurring towards
electronic
now significantly faster.
increased, a carve-out limit might be
trading
coverage
checking has become parallel to the price
Now
environment. Crucially, transactions are
e-FOREX
traders’
and
ensure a risk free, one-click trading
january 2006
trading cycle, providing a response to
increased on RFQ response times, credit
require more control points in order to
30
highly
during the “onboarding” of a client to an
sophisticated trading technologies (e.g. algorithmic trading) as well as aggressive
necessitating
channels
the end of the discovery cycle.
<AD76A B6G@:IH q :L
Shifting credit checking from pre to post-deal has a further impact: the outcome ofthe credit check determines whether price streaming needs to be altered for the client, either halted or widened according to line usage policy. This in itself creates a tension for sell-side players as, while prices are streamed to clients at sub-second speeds, (via an increasingly wide range of platforms such as proprietary web portals, Currenex ESP and API trading) the streaming controls available to service providers are very often manual.
In order to minimise exposure to credit risk and prevent loss of trade (i.e. through delays in credit checking),
credit
systems
must
become
more
aggressive as well as more closely coupled to the trading system, thus forming a very active point in the trading
cycle.
This,
however,
entails
a
major
4 CTff\ba gb CXeYbe`"
architectural change as systems must be adapted to publish
a
continuous
stream
of
credit-related
information to trading systems (“publish subscribe”), at ever greater speeds and volumes.
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Risky Business: Improving Risk Management Strategies in the Online FX Environment
Market Risks: Regulatory Drivers
The EU Markets in Financial Instruments Directive (MIFID) has not yet come into play but when it does so, it could well impact electronic platforms and certain brokers (“systematic internalisers”) as these firms must, pre-trade, “publish a firm quote in those shares admitted to
“Not surprisingly, sellers’ worst nightmare is the creation of a liquidity bubble”
trading on a regulated market”, “on a regular and continuous basis during normal trading hours” and, post-trading, “make public the volume and price of those transactions and the time at which they were concluded”.
netting and trading strategy engines
Liquidity Bubbles
The
between the e-commerce flow and the
implementation
of
streaming
environment towards an order driven one price can result in multiple hits, anticipating the volume of demand is not
to real-time as possible …in a manner
always easy. Not surprisingly, sellers’
which is easily accessible to other market
worst nightmare is the creation of a
participants”. The Directive’s transparency
liquidity bubble.
requirements will put pressure on banks to aggregate, publish and archive far greater
This fear also places pressure on auto
amounts of information than ever before,
quoting
creating
those
mechanisms. For sellers using anonymous
institutions that fail to manage trade-
streaming channels, a strong sense of
related data efficiently.
market depth is required, if this aspect of
significant
risks
for
inter bank market.
technologies is moving the FX online market, creating fresh risk for banks. As
Information must “be made public as close
This will allow banks to implement
engines
and
their
control
“Efficient and often speedy hedging in the interbank market is required. Any latency or slow visibility of trades on the blotter constitutes a risk.” Reducing risk
In summary, to improve risk management
market risk is to be avoided.
within these markets, two key areas
Other Market Risks: Data latency
should be focussed on. Firstly, risk
In the world of online FX trading,
The Interbank Market
delivering data at high speed is a key
The increasing speed of trade flows from
greater integration to provide credit risk
ingredient to a successful service. Indeed,
e-commerce portals also, inevitably,
controls. Secondly, in an increasingly
delivering the right information to buyers
affects the service provider’s relationship
anonymous and rapid market, building
at the right time can often decide whether
with the interbank market. Efficient and
bridges between customer flow portals
a seller makes a profit or loses money.
often speedy hedging in the interbank
and the interbank channels becomes a
Data latency can result in arbitrage
market is required. Any latency or slow
necessity, in order to facilitate efficient
opportunities,
visibility
hedging. To a certain extent, the FX
as
a
client
spots
a
difference between the price offered by a
of
trades
marketing and trading systems need
on
the
blotter
constitutes a risk.
market also chases the sophistication and
bank and one of its competitors, and takes
transparency of sister markets, Fixed
advantage of the mismatch. Clearly,
The vendors in the interbank market have
Income and Equities. Much can be learnt
highly efficient pricing engines are a
recognised
from the systems and business strategies
must, if sellers are to avoid this trap.
terminals with API’s.
32
january 2006
e-FOREX
this
and
are
replacing
that have evolved within these sectors.
IFX Direct – a tried and tested FX trading solution
IFX Direct is a reliable, fast and accurate trading platform for all a client’s foreign exchange decisions. It is unique in putting EFP trading side-by-side with spot forex on one single screen.
In normal market conditions there is no dealer intervention; the system provides transparent liquidity combined with a sophisticated order-management system which can cope with complex orders such as contingents, OCOs, stop-loss and GTCs, which can be filled, settled and reported back instantly. This tried and tested forex trading platform from IFX Markets can be delivered to clients in three different ways, to provide whatever trading environment the client requires. The basic method allows clients to trade through the platform direct with IFX’s dealers, with straight through processing (STP) which can be delivered in a variety of formats from emails, through to file transfer protocol (FTP). The second method is as a White Label, which is aimed at IBs, FCMs and other client-facing institutions. It is branded with the logo of the institution. The institution itself is able to dictate its own spread and commissions with the end-user.
The API can be used in a variety of ways. At its most basic it is a price feed; but it can also be linked to third-party trading platforms, multi-bank portals, or automated trading systems (black-box) to name just a few. IFX can tailor these solutions to each institution, and can simultaneously offer more than one of them to a single entity.
For further information please contact: IFX Markets Ltd One America Square, 17 Crosswall London EC3N 2LB United Kingdom Telephone: +44 20 7892 0909 Fax: +44 20 7488 9326 Authorised and regulated by the Financial Services Authority
Thirdly, the Application Programming Interface (API) enables a third-party software system to be “plugged-in” at the front-end of the trading platform. Positions can be auto-offset, or the institution can use the IFX price engine, just as a feed.
Sponsored Statement january 2006
e-FOREX
33
E-FX: on the way to meeting the needs of the middle-market It used to be that the largest corporations got the most attention, but middle-market companies are now suddenly and pleasingly finding themselves courted for their growth potential. At the same time, web technology is providing the opportunity to deliver the sort of services and functionality that this market segment needs, at the right price. Mid market companies can go to the ball. Andrew Kidd, head of e-clients development, Europe, ABN AMRO andrew.kidd@uk.abnamro.com ig enough to make an impact, small
B
In fact, when it comes to FX, mid-market
enough to have room to grow, today’s
companies have definitely been cast in the
middle-market companies are the raw
role of Cinderella in the past. With largely
material for tomorrow’s global giants.
operational FX requirements to meet and
Providers, including IT suppliers and
smaller tickets, they were relatively
financial services companies, understand
expensive to service – and sometimes got
this and are increasingly targeting this
rather poor service as a result.
sector of the market. That was then, but a quiet revolution has Although
often
entrepreneurial
in
business outlook, mid market companies can appear conservative when it comes to adopting new technology and new working practices. This is frequently a resource issue: expenditure on systems
been taking place. While the move to e-FX trading was aimed at professional traders
“multi-banking is less of a draw for mid-market companies because they tend to have fewer banking partners and credit lines” The ability to connect to multiple trading partners via the web has been much
and large corporations rather than mid-
hyped as the ultimate end-destination of
market users, once introduced to the
e-FX; this is the model for portals such as
services, mid-market companies have
Currenex and FXall.
and advisory services will usually be
taken them up with alacrity. ABN AMRO’s
modest, and finance teams are also more
middle market clients are today trading
This may be attractive to the most active
thinly
mid-tier
some 65% of their FX tickets online – a
corporate FX users (earlier this year,
company1 probably does not employ a
migration that has taken place over the
independent research2 conducted on
full-time FX trader, and is unlikely to run
last three years. In the mid market sector,
behalf of ABN AMRO with (mostly larger)
separate treasury and finance functions,
we expect the use of e-FX to rise to around
companies in Europe and the US found
or have access to high-end treasury
80% of all tickets over the next 18 months.
41% using multi-bank e-commerce FX
spread.
The
typical
solutions).
management software. Developing the model
“when it comes to FX, mid-market companies have definitely been cast in the role of Cinderella in the past.” 1
E-FX has lowered trading costs for the banks and created efficiencies for their clients. Market competition and the advent of freely available, up-to-theminute indicative pricing has increased transparency and levelled the playing field somewhat for smaller participants.
Defined here as a company with a turnover of between 50 and 100 million euros
2
BDRC on behalf of ABN AMRO. Interviews were conducted with global and regional treasurers of 101 multinational companies in Europe and the US.
34
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>>>
Yet multi-banking is less of a draw for mid-market companies because they tend to have fewer banking partners and credit lines, and fewer and more operational (as opposed to treasury) FX needs. Mid-market companies generally also do not require a wide range of FX products. When ABN AMRO researched this market some three years ago, there was little appetite for FX options and the like. So â&#x20AC;&#x201C; in addition to more competitive pricing â&#x20AC;&#x201C; what do mid-market companies like about e-FX, and how would they like to see these services developing? Convenience, integration, customisation
While
larger
companies
typically
concentrate trading in a central treasury, mid market companies are more likely to have a distributed treasury model. For these local finance officers, who often cover a wide range of tasks, convenience and integration are key. So, a competitive price automatically quoted and visible onscreen to accept or reject, without the need to phone a dealing desk, is welcome.
january 2006
e-FOREX
35
E-FX: on the way to meeting the needs of the middle-market So too is FX pricing when it is presented as one step in the process of making a cross border payment, or initiating a cross border sweep for liquidity management purposes. “Embedded” FX pricing can be triggered for transactions/sweeps over certain
configurable
limits
(with
transactions below that limit being automatically converted). Respondents to the BDRC study agreed automated FX sweeps would help eliminate less active currencies and reduce the number of under-used bank accounts required. Managing FX at a transaction level will also be invaluable when it comes to demonstrating hedge effectiveness within IAS 39. And having all confirmations and reporting available in one environment for different business views, customisable by the user for the user, will greatly enhance efficiency. A single sign-on environment, that allows
Lean finance teams need flexible systems,
Integrated reporting that covers FX
an individual to access FX services from
so the ability to customise e-FX platforms
trading independent of the channel used
whatever point in a transaction, or from a
is also important to users. For example, In
to initiate the transactions adds further to
business “view” (for example, from a
order to ensure proper segregation of
the flexibility, as it allows companies to
trade, cash or investment management
maintain a comprehensive view of their
perspective), makes all this achievable
positions and still occasionally trade in
and this functionality is available now in
more advanced or exotic FX instruments
the latest integrated
than those typically offered online.
(such as ABN AMRO’s Access Online).
banking platforms
duties
without
creating
operating
difficulties, it may be convenient to have second signatories at a remote location, or to set variable trading limits and/or alerts, in addition to establishing discrete security profiles for different users. Looking ahead
Although integrated e-platforms, such as described above, are available in the market, they are by no means pervasive yet. This is an evolution, not a revolution underway, but the gradual adoption of this approach to managing FX will deliver real incremental benefits to users. Looking a little further ahead, we expect to see the model developed further to provide co-mingling of pricing and trading capabilities from a user’s chosen trading partners. This so-called “consolidator” approach is already gathering users in the retail banking environment for personal account management, where a lead provider collects and delivers third party information through a preferred front end. ABN AMRO's Chris Gonzalez and Jarno Zange also contributed to this article.
36
january 2006
e-FOREX
>>>
eFX - Unifying the Front and Middle office environments The progress made since the elimination of manual tickets continues to drive front office procedures forward as truly efficient STP is sought for all trading venues. Manual input of trade information is gradually being eliminated. Electronic deal capture has been achieved, albeit at a high cost, often each feed being built and deployed separately to cope with its particular characteristics. This type of platform is a completely
downstream systems from vendor changes
different
feed
and facilitates common front and middle
handling solutions in that the system
office processes for all venues. The range
‘understands’ the deal payload in the
of dealing venues has grown as follows:
animal
to
traditional
messages and the capability of the downstream trading systems, then uses business logic, rules engines and very fast software to create a single low latency
Internal Deals
There
was
and
always
will
be
a
proportion of internal deals that need to
blow-by-blow virtual feed of all deal
be captured directly into a deal-entry
negotiation traffic for all venues.
screen within the trading system. Internal deals will sometimes be used to move
Peter Kriskinans, MD of Option Computers
A
unified
approach
that
Resistance to this approach often comes
positions from one system to another or
from a fear of the risk involved in
from one location to another. A high
changing such a critical part of the
speed intuitive user interface is essential.
captures
system. However, once accomplished,
multiple feeds (rates, pre-trade and
banks see a massive reduction in the
Telephone Deals
post-trade) from all FX trading venues and
effort required to introduce new trading
Historically, trades have often been priced
presents ‘virtual’ feeds to the various bank
venues, trading models and new business
and
systems has been available for some time.
functionality as this approach isolates the
transcribed onto deal slips and then
38
january 2006
e-FOREX
executed
over
the
telephone,
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>>>
eFX - Unifying the Front and Middle office environments manually entered into the FX trading
First on the scene were single-bank
system by a trader or a clerk at some
customer
convenient point.
customer portals such as FXConnect,
Voice trading with
and
portals Currenex
and
multi-bank
followed
more
desk trading. High frequency trading requires a low latency end-to-end platform, market risk management and STP. This is often the catalyst for upgrading to a hardened STP capable platform.
brokers still continues and represents a
FXall
meaningful proportion of daily trading
recently by HotspotFX, Lava, ESpeed and
activity. Automated deal capture is
Bloomberg. Customers tend to request a
possible using broker supplied interfaces
dealable price (RFQ) or are provided with
Unified approach available today
like Direct Deal Notification (DDN) that
streaming dealable prices from provider
take the deal entered by the broker and
banks and then click to deal.
With the number of touch points between bank and counterparties increasing with eFX portals it is of considerable value to understand the entire flow of data, not just the confirmed deal ticket. The ticket is the final outcome of all interactions. In addition to the ticket, a mine of interaction data is available from each Reuters, EBS, DDN, single bank and multi-bank portal connection.
pass this across to the bank. These trading venues require more
“Over the past five years we have seen the arrival of a plethora of new and radically different eCommerce channels for FX.”
complex trading API connections for the provision of streaming liquidity on a pervenue or per-customer basis, the collection of ticket data and the exchange of post trade amendments, credit and static data. These portal API’s then need to be integrated to multiple bank systems such as real-time pricing systems to provide the customised bid and ask price, real-time credit utilisation systems, real-time dealer
Inter-bank Market
intervention systems to redirect exceptions
With the introduction of the electronic
to a physical trader and gateways to
inter-bank markets using Reuters Dealing
provide STP to the customer.
Direct, Reuters Dealing Matching and EBS Spot Matching systems, the provision of
Prime Brokerage and STP on the buy side
prices became much easier and quicker, and trade volumes increased to the point that some form of automatic deal entry became a necessity. The main business incentives for automated deal capture are increased
trade
accuracy,
integral
customer credit utilisation maintenance, timely update of trading positions and trading profit and loss accounts, and predictable
system
operation
under
stressful market conditions. As early trading systems could become very slow
The new landscape also demands that banks address increasingly sophisticated and demanding buy side customers in a highly competitive arena, and they must therefore consider what additional issues are raised beyond simply supplying a prime brokerage arrangement or bank trading platform. Some venues are addressing this issue by implementing Prime Brokerage over the existing venues such as EBS Prime. Others venues like HotspotFXi can provide specific Prime Brokerage API’s that can be
under peak load, many traders would still
used to divert all trades executed on
have to maintain manual positions in
HotspotFXi which are required to be given
order to perform their job.
up to the Prime Broker. Algorithmic Trading
Over the past five years we have seen the
Banks are now using black box trading
arrival of a plethora of new and radically
capabilities for both customer solutions
different eCommerce channels for FX.
and for their own proprietary and spot
january 2006
e-FOREX
The advanced information flow available as a result of harnessing these flows includes operations such as observing: • clients or black boxes logging on/off a liquidity venue; • incoming RFQ’s; • outgoing price streams; • black box prices; • prime broker give-ups;
eFX Multiple Channels
40
This data is usually of a different shape for each venue and is supplied through a different API. However, once it is normalised in real-time using a broker neutral ‘deal hub’ system, this data can extensively simplify flow management, algorithmic trading models, subsequent downstream integration, and serve as a source of customer relationship data. This new generation of ultra low latency systems shred, analyse, aggregate, assimilate and distribute many thousands of interactions per second, building instant archives of data that allow banks to overview across multiple feeds in real time.
• simultaneous pricing different venues;
requests
via
• client requests awaiting manual intervention or credit approval;
Global Solutions, Locally Applied
By combining global reach and local understanding BNP Paribas delivers a tailor-made service for our clients in foreign exchange. BNP Paribas London Branch is authorised by CECEI and AMF and is regulated by the Financial Services Authority for the conduct of its investment business in the United Kingdom.
The bank for a changing world
eFX - Unifying the Front and Middle office environments Build or Buy?
Banks have very skilled IT staff and can construct similar systems, given enough time and adequate budget, but given the large number of venues and API’s this is an endless task that requires domain knowledge, near constant updating and does not really add value to the bank. To help reduce risk, banks must choose a vendor able to demonstrate existing support for all the FX venues they may require, understand the bank’s trading system interfaces and have proven strong banking transaction knowledge. Any solution should be expected to provide demonstrable continuous high throughput, low latency, ultra-reliability; redundant configurations; have 24 x 7 support, and most importantly vendor systems should have solid reference customers at a similar size bank.
This information can be used to build up a complete picture of activity on a per customer session basis enabling the bank to understand the trading behaviour of
local level, and for the bank to benefit from seeing all its chosen information configured at a front office, middle office, compliance or management level.
the client or counterparty; how much time is spent servicing each client; why clients
Common trading floor and Middle Office
are dealing or not dealing; how often
processes for all venues
clients deal and on which venues.
It is time-consuming and expensive to integrate and test each liquidity platform as a separate exercise given that much of the work overlaps. Many banks are deploying specialised proven middleware to provide an abstraction layer. This abstraction layer is then integrated with the bank systems.
Unified streams of interactions and deals provide
valuable
information
where
individual sections within the dealing room and middle office can configure overviews of flow information specific to designated interest or client groups, e.g. a sales
team
information
over-viewing from
specific
all
flow
customer
groups; spot trader overview of particular currency activity, or a chief dealer wishing to overview all conversations with central banks
during
periods
of
sustained
intervention. The latest systems create the ability to configure many different views of the entire activity of the trading floor, at a global or
42
january 2006
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It may seem a daunting and complex task to try and implement a hub system, especially where eFX systems were previously implemented in a flurry of time-to-market pressures resulting in unmanageable convoluted process flows. In reality it is very straightforward as the API and transformation components are usually available off the shelf and can be implemented in either a ‘big bang’ or a phased approach.
Conclusion
Efficient deal capture is usually seen as the start of the information chain for most FX trading systems, these transactions being the life blood of the bank’s business. This is no longer the case with many sell side banks as the choice of distribution channels and their inherent integration costs mean that trade efficiency needs to be measured much earlier in the trade cycle. A unified approach provides data that will enable sell side banks to evaluate any channel and relate it to its overall business plan. Huge savings in cost and risk come from adopting a standard flow processing hub and the simplified processes that follow. There is no requirement for additional staff and the existing IT division can supply instant connectivity to any new trade source the front office chooses to bring online. There is less thinking to do when implementing a new venue as all the venues now look identical. There is usually zero impact on downstream systems so there is less risk of failure or service disruption. Thus a base for unified process change is created.
Broadening client connectivity improving pre-settlement processing
Nick Dyne, CEO of Logicscope
Friends of mine that are not in the financial markets are genuinely shocked at how bad trade notification is – they don’t call it that, they just think it strange that their bank can update their account for a cash point withdrawal more effectively than many firms can be updated having traded $several million. I know that the two situations are not strictly comparable, but there is more than a grain of truth in their observation – pre settlement is the forgotten age in the life cycle of a trade. Forgotten except in the Interbank market, Reuters and EBS make a reasonable effort as do eSpeed and the voice brokers. Frankly, few in the interbank market would tolerate a trading platform that didn’t have post trade notifications as a reasonably easy plug in. This article touches on why it’s so bad and what can – and perhaps more importantly – should be done about it.
he “why” is pretty easy. It’s a combination of Reuters and
T
Efforts to provide a post trade notification service
apathy. Reuters, because they developed Ticket Output Feed
Apathy is harsh but justified. For one, until recently the sell side,
(TOF) and through their dominance in the early 90’s managed to
did not see plumbing the clients back-office in, for electronic
get all the back office vendors to write to it. However, TOF suffers
notifications, as important. The value-add was considered to be
from being highly restrictive in the instrument types it can carry,
in augmenting the pre-trade environment (by offering better
and is subject to fears about copyright infringement (although if
tools, credit, pricing etc) rather than dealing with the relatively
Reuters acted then all the intellectual property barristers in the
unattractive post trade plumbing. Second:
Inner Temple would be in business for years given the number of
notable exceptions) that have made the effort to provide a post
third parties that Reuters has knowingly allowed to use it.
trade notification service have done so half-heartedly.
44
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those (with a few
>>>
The “traditional” approach is to develop an API and expect the client to develop to it – unsurprisingly, they don’t develop to it (they don’t have the skills or resources), so unless they purchase some intermediary products (like Deal Tracker Server from Reuters or BART from City Networks or our own TradeSTP client) the client is prevented from getting a quality of service that we all expect in our private lives. The notable exceptions have avoided the apathy trap and the Reuters trap. They provide interfaces to their clients’ deal capture or risk management systems and do not expect their clients to write to some API. Over the past couple of years, as we have rolled out TradeSTP for our partners, we have seen a change from the old TOF based serial interface so loved by all in the 90’s to a wide range of preferred solutions encompassing a wide variety of XML schema, and both custom interfaces to applications and middleware. The results of success can be spectacular. Unsurprisingly, if you offer a client an interface that he can plug into – he does! Not only do clients plug in, but they tend to trade more, and if our partners are to be believed, at wider spreads whilst increasing their loyalty. In a market where product differentiation is becoming increasingly difficult to create, something that can have three beneficial effects for not a lot of effort must be worth considering! The competitive versus collaborative argument
There is one client segment where the pre settlement issues are more complex than a simple delivery of trades with the occasional contra and an end of day reconciliation and that is fund managers – real and leveraged. The management of allocations presents a problem for all but a few banks. Indeed one very successful bank portal is successful because its post trade servicing for fund managers is so effective. There is no question that efficient pre settlement services to clients leads to improved trade flow and profitability, however, there are questions about whether the provision of such services should be considered competitive or collaborative.
BAXTER-Solutions Kft.
e-Mail: info@baxter-it.com | phone: +36 1 235 06 87
Broadening client connectivity improving pre-settlement processing
The competitive argument goes like this: If post trade services allow for service differentiation and commercial advantage – why share? Roll-out to your client base quickly and take advantage of your competitors’ sloth, take their clients whilst you can and devil take the hind most! (Hurrah!) The collaborative argument takes a longer term perspective. Trade notification is a necessary evil and one that all liquidity providers need to offer, it is therefore part of the essential service mix the professional market requires and clients don’t want to implement countless versions of their credit providers’ solutions but have a single pipe going in their system delivering all their trade notifications. As a provider of what is considered the world’s most advanced trade notification software, we are in two minds about the answer. So far, our clients have shown little interest in being collaborative, but that might be because they are early adopters and therefore naturally going for the competitive strategy. However, we can see the client side benefits associated with a collaborative approach. There are 4000 professional participants in the FX market, and on average they each have 10 lines of credit making the total problem 40,000 lines of credit need to be connected up. A competitive approach will take a great deal of duplicated effort to connect even half these relationships. A collaborative approach makes such a scale of implementation seem possible. The solution
If a collaborative approach were to be taken, what would it look like? And how would it be put together? For a start, there’s no point in only covering part of the professional market. Unless the solution covers all three client segments that need to be serviced (banks, investment managers, and large corporates), it will force independent solutions and therefore prevent the degree of collaboration required.
The service needs to have several
characteristics as necessary requirements. Given the sensitive nature of the relationships the trades reveal, the service provider(s) will have to be independent of a specific bank or broker (perhaps a “mutual” ownership?).
It would hardly be
effective collaboration if the service provider ended up competing on the pre trade side with its users! Ideally, it should be put in place quickly, using existing software and connections, and it should be capable of running over any type of IP network. It should obviously offer interfaces to plug in quickly and not expect clients to have to undertake any customisation. The component pieces can be put in place. For each client segment, a major provider can be identified, (indeed, the partners we are talking to represent connections to about 2000 of the 4000 participants) and specific client issues such as allocations and other workflow issues need to be dealt with. But putting the solution in place is probably the easy part.
In
addition, the major liquidity providers need to get together to form a collaborative group.
One or two banks probably
represent a joint competitive strategy not collaboration!
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Improving Customer flow quality: making best use of technology to monitor market making profitability Recent years have seen a huge increase in the volume of foreign exchange traded electronically. To date, emphasis amongst liquidity providers has been on securing volume. While many service providers have spent vast sums of money connecting clients to their services, some providers are beginning to reassess how they offer liquidity to clients, reevaluating, in particular, the quality of trade they receive. James Kemp, Managing Director, Stentra, takes a look at some of the challenges faced by liquidity providers and examines ways in which service providers can make best use of technology to monitor the quality of customer flow.
48
january 2006
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James Kemp jkemp@stentra.com
Evolution of the e-FX market
The question of whether electronic trading is to become a long term part of the FX business has long gone: even the briefest examination of other markets such as equities, futures, bonds, and now the emerging SWAPS market, is enough to convince the deepest sceptic that the spread of the FX market will continue to mature through electronic channels. The scale of day-to-day FX market liquidity has created opportunities for buy and sell-side alike, as well as intermediaries.
>>>
Where FX differs is in the fragmentation
prices from different providers, possess a
e-FX liquidity risk is not a new issue
of liquidity across channels, and in the
clearer view of the actual market price.
amongst the more sophisticated FX
depth that can be supported within those
Furthermore,
trade
liquidity providers. From time-to-time,
channels.
anonymously, facilitated, in particular, by
many, if not all, have questioned the
EBS
rationale of offering the more complex
Technology: a double edged sword
Prime,
the can
ability act
as
to an
added
services (such as SER APIs) to clients.
encouragement to opportunistic clients.
Nevertheless, the fact that key liquidity
Banks have spent many millions on creating the technological infrastructure necessary to provide execution services to clients: a broad range of options now exists for clients to enter the market including
banks’
own
proprietary
channels, APIs, ECNs, or exchanges. However,
the
proliferation
of
new
channels, the increase in transaction speeds made possible by e-commerce,
“While the majority of clients are highly professional, there are a number of more aggressive counterparties, intent on ‘picking off’ banks where pricing ‘mismatches’ occur.”
providers have been picked off by opportunistic clients has left many banks questioning or re-evaluating their quest for this flow. Impact of aggressive counterparties
Despite their relatively small number, aggressive
clients
have
had
a
disproportionate impact on liquidity providers’ views. Apart from the direct
plus the diverse methods of price delivery (e.g. RFQ, RFS and SER), appear to have
The fact that major service providers
P&L impact of any (bad) trade, a number
made service providers vulnerable to
sometimes
of other trends result from the impact of
opportunistic
disadvantage is not surprising: in the
speculative
scramble to acquire a share of the digital
confidence in an offering is undermined
FX market, liquidity providers have had to
as a result of occasional bad trades. This,
While the majority of clients are highly
focus on connecting to numerous clients
in turn, often leads to traders pricing
professional, there are a number of more
via multiple channels, most of which vary
themselves out of the market in order to
aggressive counterparties, intent on
in pricing and execution work flow and
reduce risk. However, this has the knock-
“picking
pricing
support a broad range of technologies.
on
“mismatches” occur. Increasingly, banks
Far less investment has been made in
opportunistic and good quality customers
find themselves at a disadvantage: clients
putting in place the more sophisticated
are discouraged, and the impact on client
may have equally sophisticated systems
controls
confidence in the liquidity provider can
and, as they frequently have access to
monitor the quality of flow.
clients,
keen
to
take
advantage of any price “mismatches”.
off”
banks
where
find
necessary
themselves
to
manage
at
a
and
effect
clients.
of
loss
Firstly,
of
flow:
trader
both
not be ignored.
january 2006
e-FOREX
49
Improving Customer flow quality: making best use of technology to monitor market making profitability The impact of speculative clients has
FX is a truly global business, operating 24
And it is not always easy to separate the
other effects: diminished confidence in
hours a day, 5 1/2 days a week: not being in
good from the bad - is a client making
ability to manage risk leads to liquidity
the market as the result of an individual
persistent requests-to-trade necessarily
providers either switching off, or reducing
trader failing to switch on his price
speculative? Or is he a bona fide
services to clients. Again, this can have a
contribution
customer who is unable to get the price
ripple effect, as relationships with good
spreadsheet, or because his PC crashes, is
quality clients are also potentially open to
unacceptable. Robust technical solutions
damage.
are needed to support both SPOT and
Both manual and automated real-time
FWD pricing, as each has its own,
monitoring and responses to multiple
Improving customer flow quality
distinctive
for
client, channel or overall market hits have
The chief impact of electronic trading
SPOT crosses and forward curves must
limitations. Ideally, a combination of
occurs to the operational infrastructure of
be
the front office: where this infrastructure
account the full end-to-end technology
has been neglected (e.g. lack of effective
distribution chain, not just the speed with
pricing tools or execution controls,
which the pricing engine can push out the
existence of inadequate reporting tools to
rate. Stability and control, combined with
monitor
close coupling of pricing and execution
client
trends
or
identify
exceptions in client behaviour patterns),
from
a
challenges.
carefully
optimised,
home-grown
Latency taking
into
services, is critical to any offering.
the challenges in reducing opportunistic Controls
Nevertheless, if the confidence of liquidity
In many cases, a trading bank’s ability to
providers and their willingness to expand
price is detached from the capability to
electronic
offerings
react and adjust to the market, or to a
unshaken,
effective
to
tools
remain must
be
implemented.
“Appropriate pricing tools (which maximise the reduction of poor pricing and delivery through execution service) are particularly essential.”
manual or automated responses should be possible, including the automated widening of spreads for predefined periods of time, the pulling of trading to a specific client or channel plus the ability to pull out of the entire market. Client monitoring
client behaviour will be more significant.
is
he wants?
Making
management
decisions
and
trading strategies on the back of the monthly FXall report does not provide a
particular client. In order to counteract
fast enough means of reacting to client
this weakness, better integrated tools are
and market conditions.
needed. For example, from the trader’s
accurate view of client activity both from
desktop it should be possible to view both
real time and historical data is essential to
where the trader is on each market and to
establishing a client’s intent, as well as to
control auto-trading and streaming levels
identifying speculative clients.
Creating a more
supplied to individual markets. Optimally, a
combination
of
pricing,
market
Provision of appropriate tools to sales and
obligations and levels, as well as market
trading
interest and positions should be available.
assessment of trading appetite amongst
Automated intelligent pricing is also
customers. Tools and data to support
desirable.
trading, sales and management are
Pricing
teams
can
help
with
the
required across different views and Hit protection
media, while the valuable information
maximise the reduction of poor pricing
While service providers want to be able to
generated from these sources must also
and delivery through execution service)
weed out undesirable customers, they
be tailored to support varying degrees of
are particularly essential. For most banks,
certainly do not want to deter the good.
usage and type of audience.
Appropriate
50
pricing
january 2006
tools
e-FOREX
(which
The Smart-Trade platform(s): a private virtual market inside the bank
In many banks and financial institutions, e-trading systems in place today are very static, linear and lack a lot of the flexibility and interoperability initially desired. Particularly, it is difficult for a bank to aggregate its entire tradable liquidity into one single virtual market and for traders to have a unique view of the aggregated market depth they can trade on, while controlling the quotes 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 orders be matched against an aggregated liquidity pool, according to customizable rules, and that can show a unified market depth for all markets (internal and external). Such a virtual market must bring a common access layer for all the types of liquidity, be adaptive to the constant changing cartography of liquidity sources, distribution channels, trading modes, messages types, instrument classes, client-facing and order-entry applications, while maintaining a unique and harmonized silo where the liquidity is maintained. In parallel, the core structure and architecture of the platform must support the changes that are constantly carried out on the delivery channels and on the pricing sources.
As a solution to this equation, Smart Trade Technologies has developed a private order-routing and order-matching platform that banks and financial institutions can deploy as a software within their infrastructure.
The Smart Trade platform is composed of one or several interconnected platforms, able to communicate with various external liquidity sources, deal with customizable orders types, rulesbased routing and execution conditions, message protocols, internal data referentials, client-facing and order-entry applications, symbology translation issues, external permissioning. The Smart Trade platform constitutes eventually a flexible single sign-on trading network, that the bank controls functionally and technically, integrates within its own IT teams and that remains stable and evolutionary over time. Its performance and throughput are in line with today’s and tomorrow’s requirements emerging from the highly demanding clients 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
For more information contact contact@smart-trade.net Paris/Aix-en-Provence: +33 1 44 50 19 19 New York: +1 212 618 63 83 www.smart-trade.net
Sponsored Statement january 2006
e-FOREX
51
Was this FX trade aggressive? Mark to Market Monitor (MMM) With the profile of FX Market trading activity changing dramatically over the last two years - especially with the advent of aggressive Hedge Funds systematic trading - FX Market Makers and Liquidity Providers have had to test repeatedly that their pricing remained both competitive and profitable. In order to do this, Market Making Banks needed statistics but also up to the minute dynamic information on customer trades and their own price flow. In response to a request from some of its Market Maker clients, BAXTER-Solutions Kft. developed a module that works as a trade blotter monitor. The â&#x20AC;&#x153;Mark to Market Monitorâ&#x20AC;? (MMM) module allows pricing and trade performance to be analysed on a realtime as well as historical basis. BAXTER designed and built the MMM tool in answer to
THE e-FOREX PRODUCT
the growing need to separate aggressive customer business from electronic mispricing.
52
january 2006
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Functional highlights
The functionality involves taking every trade visualised in a blotter and measuring it against benchmark prices at various time-frames immediately following the trade. After considerable testing, it was identified that 3 default interval readings would be set at 5, 20 and 60 second.
The fundamentals behind these values are that the estimated effects of various unsustainable trading practices like arbs, lineups or insider trading (trades made on the back of very large trade knowledge) show up particularly well on post trade short term market movements.
In order to make the system user friendly and effective even during busy market times, the results are displayed with simple colour codes: green-orange-red to indicate if the Market Maker is either “in”, “at” or “out” of-the-money vis-a-vis the benchmark price (generally the mid-market at the time interval).
This allows the “Flow” Traders to identify suspicious activity when lumps of red accumulate visually on their blotters. The next natural step is to use the tool to double click on the trade line in the blotter to visualise a “time & sales” series of price action before and after the Deal, enriched with a chart representing the price action with the trade pinned in its context. Following this, the Dealer can run a quick statistical analysis on the specific Clients/Platforms and respond adequately.
Market response
One of the side effects of the MMM usage has been to trigger specific currency-pair pricing to be re-examined after results were analysed from a quantitative Profit & Loss perspective. Given the change in the nature of the FX Business, it is no longer possible to deal with all clients on an equal footing. While many should be dealt with a service-conscious attitude, some clearly fall into the “market counterparty” category and should not be priced (or priced wider) during difficult market conditions.
This functionality was very well received and additional features have been added in time. The tools were designed to enrich the Client/Counter party information story and include the ability to examine a client's full trade history, profitability as well as to drill down to individual trades when required. The perspective gained from this simple and easily deployed tool has been mostly in the area of increased Customer knowledge and optimized pricemaking competitiveness. All in all, a positive impact on Customer service and ultimately on the Banks' FX trading profits
january 2006
e-FOREX
53
>>>
Extending Technology innovation to
Tri-Party Credit Analysis The nature of innovation is changing. In addition to technical skill and creativity, many innovations in financial services are now engineered with a deep understanding of business processes. For example, the automation of the tri-party give-up has reduced confirmation time from hours or days to real-time as banks have deployed new sophisticated networking and software products. Michael Laven
H
owever, the true innovation in this technology is not in its features and functions; rather, it is that the technology was designed and built to correct a business process that was inhibiting growth. The results are astonishing. By lowering the cost of trading through automation, the industry boosted the number of participants, the number of assets under management, the number of channels and consequently, generated huge growth in the number of trades.
Traditionally, executing banks involved in tri-party transactions faced major time delays. For example, a client may have ordered a trade and not received confirmation of the exact give-up price paid until the following day. This was due to in large part to system incompatibility. Furthermore, confirmations would be sent manually, which also introduced the possibility of human error. When summed up, all parties involved had an information gap that affected the ability
Defining the problem
to know their positions dynamically, which in turn reduced
Process innovations, like so many others originate with a problem. In the case of tri-party give-ups, the problem was how to make tri-party transactions more efficient by connecting the client, the prime broker and the executing bank in real-time.
trading volumes. No longer so. Prime brokers, their clients and
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january 2006
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executing banks now have interoperable, always-on connections through innovative network services such as Hotspot FXi, Currenex Prime Brokerage and Traianaâ&#x20AC;&#x2122;s Harmony service.
Traiana Harmony – Revolutionizing the Give-Up Process Traiana Harmony Message Center and Tri-Party Credit provide a secure, scalable service to manage the give-up process between prime brokers, executing banks and ECNs
Already adopted by the industry to drive volumes of FX trading, Harmony has transformed the give-up process, by streamlining tri-party processes, reducing costs and delivering superior client service. To find out more about Harmony, contact Traiana today.
London – New York – Tel Aviv www.traiana.com
London +44 (0)20 7614 3540
New York +1 866 760 2118
Extending Technology innovation to Tri-Party Credit Analysis
These networks enable real-time monitoring and reporting of
trillion in assets. In a TowerGroup research paper entitled ‘The
intra-day positions.
All parties can now connect seamlessly
Changing World of Hedge Fund Managers, analyst Matthew
using their own preferred method and format e.g. XML, Excel
Nelson estimates that hedge fund administrators alone will
files in email, etc. All this combines to speed up the give-up
spend $250 million on technology by 2008. Much of this will be
process, enabling more trading volume.
in invested in their trading platforms.
Lowering the psychological barriers
The power of timely, accessible and accurate information has the effect of lowering psychological barriers to entry for risk-averse institutions and lowering capital barriers to entry for newcomers
“Hedge funds, in fact, are in many ways driving financial services technology innovation and investment.”
because they can plug into those networks with less up-front technology investment. This confidence can be seen as banks
Hedge funds increasingly view foreign exchange as an attractive
swarm toward the hedge fund market, which alone accounted
asset class. According to the Bank for International Settlements
for more than $12.7 billion in new money in the third quarter of
Survey 2004, FX turnover rose from $1.38 trillion to $1.88 trillion,
2005, according to data compiled by Tremont Capital
from 2001 to 2004, with hedge fund trading playing an important role and is forecast to expand to $3.0 trillion by 2008.
Management.
This high level of interest is an obvious
As processes improve, innovation spreads
opportunity for foreign exchange prime
to other processes and across to other
brokers. Once relegated to a small, dark
asset classes. For example, innovations
corner of the trading floor, they are
in the tri-party give-up process are now being extended to credit analysis.
now
investing
in
automation
Previously, a manual calculation
technology to take a lead position
would have been made following the
in differentiating themselves and
give-up to determine whether the
moving up the value chain in client
prime broker was trading within the
service. Real-time tri-party credit
credit limit in the tri-party agreement.
analysis is crucial here because it enables brokers and executing
Internal control systems were costly,
banks to make better decisions more
slow and prone to error. Now it is
quickly. The ability to plug into a
possible to centralize credit calculations, through
similar
process
network reduces time-to-market and
automation
investment in additional resources. Industry
platforms and networks, so they are done as the transaction is occurring. This function gives the prime
analyst Dushyant Shahrawat writes in his report ‘Stocks,
Bonds,
and
Currencies:
Analyzing
broker and the executing ban an accurate credit position in real-
Automation of Capital Markets Across Products’ that automation
time. Executing banks can also set limits and create rule-based
moved from equities to bonds to foreign exchange, and
alerts that help manage risk more proactively.
each asset class has automated different processes to different degrees.
“As processes improve, innovation spreads to other processes and across to other asset classes.”
One can see how innovation can spread to different parts of a single industry. Indeed, 38% of financial services respondents in a survey done by The Economist Intelligence Unit (2005) declared that technology innovation would have the greatest impact on
Importance of Hedge Funds
The automation of the credit analysis process has resulted in increased confidence from the large financial services
their company’s business model between 2005 and 2010. Collaboration
institutions to expand their business to include more aggressive
Innovation, it should be noted, also comes from collaboration.
investors. Banks want more hedge fund business, but they want
Institutions like ABN AMRO, BNP Paribas, HSBC and JPMorgan
to be able to calculate risk with immediacy.
Chase increasingly work with technology vendors to define and agree on how technology can help define and address basic
Hedge funds, in fact, are in many ways driving financial services
process elements that would benefit everyone in the trading
technology innovation and investment. At a recent Wharton
universe. Their active engagement is vital and as they continue
Finance Conference, Dow Kim, Merrill Lynch executive vice
to work with the technology industry to examine and improve
president and president of global markets and investment
their processes, they will find ways to apply technology to make
banking, noted that 8,500 hedge fund managers control $1
better decisions, which will increase growth and profitability.
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january 2006
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For more information about ESP™ contact Currenex at sales@currenex.com or phone +44 (0) 207 400 6200 or +1 212 685 5950 Currenex UK Limited is authorised and regulated by The Financial Services Authority
Privacy Please – the attraction of anonymous FX trading Anonymity is one of the main advantages of electronic execution. A plethora of FX trading platforms today offer anonymity, helping firms to keep private and profitable.
allocation functionality, that can help firms
Who trades anonymously?
deal with an increasingly challenging
Hedge funds are the largest and fastestgrowing segment of the buy-side FX community. More than any other market participant, hedge funds are known for trading FX speculatively. According to a recent Greenwich Associates survey, 50 percent of hedge funds trade FX for alpha returns. Accessing large amounts of liquidity in the least disruptive way is a key component of their strategies.
regulatory environment. One of the key benefits to electronic execution: anonymity has been lost in the Harrell Smith is Manager, Securities
shuffle of operational efficiency and regulatory initiatives.
and Investments at Celent.
The ability to
remain anonymous – to one degree or another – has always been a key selling
T
he growth of the global foreign exchange market has been well-
documented, as has been the rise of electronic trading.
According to recent
estimates, electronic FX trading currently accounts for over 60% of spot volume in the inter-dealer community, and 43% of spot volume in the dealer-client market. Celent predicts that by the end of 2007, etrading adoption in the inter-dealer and
point for electronic trading across all asset classes. Today, almost all leading FX trading platforms provide some degree of anonymity, providing cover to firms who are reluctant to display liquidity, want to avoid market analysis and keep information leakage to a minimum, and can achieve cost savings via anonymous, sponsored access to inter-dealer platforms
dealer-client markets will increase to 90% and 60%, respectively, driven by greater standardization of technology through industry initiatives such as the Continuous Linked Settlement (CLS) and FIX.
With
execution having long-since become commoditized, firms are now turning to etrading as a “means to an operational end” – that is they are looking for technology with extensive settlement and
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january 2006
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“One of the key benefits to electronic execution: anonymity has been lost in the shuffle of operational efficiency and regulatory initiatives.”
Hedge funds have begun creeping into the inter-dealer market on a sponsored basis. EBS’ Prime Professional service allows hedge funds to access inter-dealer liquidity, while remaining anonymous to the market as a whole. Although dealer liquidity is the main attraction for hedge funds using EBS’ new service, the ability to trade anonymously is an enormous draw as well. The inter-dealer market has always had a soft spot for anonymous execution, whether through the use of voice brokers or via electronic execution. For the most part, inter-dealer electronic execution operates on the anonymous execution/ disclosed settlement model, a service offered by both Reuters and EBS.
However, dealer banks have little, if any,
For anonymous execution, Reuters also
incentive to trade on systems such as
offers a spot and forward matching
eSpeed’s FXSpot, which offers not only
platform, which sits atop Dealing 3000.
full anonymity but the advantage of a
The platform is a centralized order book
centralized counterparty – BGC (the
and counterparty information is given up
voice brokerage formally known as
post-trade.
Cantor Fitzerald voice broking). Dealers
maintain
strong
Why? trading
EBS. EBS, launched by a partnership of
is
the world’s largest FX market-making
universally strong, so there is no
banks and a major presence in the inter-
advantage from a pricing standpoint to
bank spot maker, is the largest inter-
trade
offers
dealer FX trading platform in the world.
standardized pricing to all participants.
EBS’ main product is EBS Spot, an
And while post-trade anonymity is
anonymous
certainly an advantage to all participants,
platform. As with Reuters, counterparty
it is not enough to dislodge established
information is given up post-trade.
relationships,
on
and
a
their
platform
>>>
credit
that
inter-dealer
execution
dealer banks from either EBS or Reuters. E-Trading Platforms – the Multi-dealer
“The inter-dealer market, has always had a soft spot for anonymous execution, whether through the use of voice brokers or via electronic execution.” Traditional buy-side firms are least interested in anonymous trading. With FX
investment
strategies
designed
primarily around multi-portfolio hedging, asset managers generally do not trade FX for alpha. As such, the ability to trade anonymously
is
generally
of
little
concern to traditional buy-side firms.
Market
FXAll. FXAll, owned by 17 banks, has a varied customer base, composed of corporations, asset managers, banks, and hedge funds. Until November 2004, FXAll did not offer anonymous trading. At that time, FXAll released Altair, a new version of its trading platform with 20 new features. The QuickFill feature of Altair provides anonymous trading, although FXAll claims that few customers use this function; this is most likely due to the relatively low number of hedge funds using the platform. FX Connect. State Street-owned FX Connect uses a pricing mechanism that is strictly RFQ, with no anonymous trading. State Street asserts that its intended customer base does not
Anonymity and E-Trading Platforms – the
wish to be anonymous
Inter-dealer Market
because it receives better
Reuters. Reuters’ Dealing 3000 relies on
prices
an RFQ model, with message broadcasting
know with whom they
of up to 32 participants.
are trading.
when
banks
january 2006
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59
Privacy Please – the attraction of anonymous FX trading As a result, FX Connect has not focused
Hotspot FXi. Hotspot FXi offers the best
Of course, this feature is only as good as
its
fund
environment for institutional firms and
the integrity of internal controls at BGC
community. However, FX Connect does
attention
banks by bringing liquidity in two forms:
(which still maintains an active FX voice
offer a feature called Quick FX, launched
banks stream executable prices into the
brokerage business).
in
directional
system, and buy-side clients submit
anonymity for customers wishing to
market and limit orders. All quotes and
However, eSpeed takes pains to assure its
transact single or block trades with up to
orders are displayed anonymously in a
clients that information about their
four banks in competition.
central
Counterparty
trading activity will never be shared with
information is given up to the prime
the firm’s voice brokers, none of whom
broker after execution. Hotspot FXi is
provide liquidity to the eSpeed platform.
perhaps most attractive to the hedge fund
eSpeed targets banks of almost all sizes,
community, who are comfortable trading
and to a lesser extent, trading arcades.
2001,
Currenex.
that
on
the
hedge
provides
Like FX Connect, Currenex
does not offer anonymous trading. The firm relies primarily on both disclosed RFQ and executable streaming price trading models.
order
book.
in a central order book environment. Conclusion
“As the inflow of capital into the hedge fund community continues, more and more firms will explore the use of trading platforms that offer anonymous execution.”
New Entrants
As the inflow of capital into the hedge
LavaFX. Citigroup-owned LavaFX seeks
fund community continues, more and
basically the same customer base as
more firms will explore the use of trading
Hotspot, focusing on hedge funds and
platforms
that
CTAs. LavaFX supports 24 currency pairs
execution.
However, Celent does not
and offers the same degree of anonymity
expect either traditional asset managers
as Hotspot, with counterparty identity
or larger broker-dealers to switch to a new
being disclosed to prime brokers after
platform simply for the sake of complete
execution.
post-trade anonymity.
eSpeed. While almost all electronic forex
Buy-side firms simply do not trade in a
trading platforms offer some degree of
manner that would warrant anonymous
anonymity, eSpeed’s FXSpot is the most
execution, and the sell-side appears
comprehensive in this regard. BGC (the
content with the Reuters/EBS duopoly –
entity
Cantor
for now. Nonetheless, the ability of most
is
the
FX trading platforms to offer at least
eSpeed
partial anonymity to their clients is telling:
formally
Fitzgerald
voice
known
as
brokerage)
counterparty to every trade.
60
january 2006
e-FOREX
it
comes
offer
to
anonymous
refers to this as “principal-to-principal”
when
trading – the buyer and seller never know
counterparty disclosure, the less said
trading
and
each other’s identity.
the better.
REGIONAL eFX PERSPECTIVE
Scandinavian FX – wired and getting more so By Andy Webb
Andy Webb
Scandinavia has historically enjoyed the reputation of being a region where technology adoption runs ahead of the curve. (Online banking was an everyday event there when it was barely a glimmer in clients’ eyes elsewhere.) By and large, this readiness to accept new technology has also been reflected in the region’s rapid adoption of electronic FX trading. As elsewhere, STP and more transparent price discovery have been major factors in this. The opportunities present in Scandinavia have also not been lost on the multibank portals, several of which have been recently making concerted sales efforts in the region.
A
s in other parts of the world, FX
also contributed,” he says.
trading in general has been rising
According to some, the growth in FX
steadily across Scandinavia in recent
activity has in some cases been country-
years. Some of this activity has been on
specific. “In view of its high-yielding
the back of trends common elsewhere,
currency, we’ve always seen a significant
such as the growing acceptance of FX as
amount of FX activity from Norwegian
an asset class in its own right. This has
clients,” says Daniel Darst, Head of
seen a region historically regarded by
Marketing at Saxo Bank. “However, we’re
many
now seeing similar interest coming from
as
primarily
a
stock-trading
environment, increasingly embracing FX
Sweden and Denmark as well.”
as a tradable. Apart from general factors, FX activity in
Daniel Darst
“In view of its high-yielding currency, we’ve always seen a significant amount of FX activity from Norwegian clients,”
62
january 2006
e-FOREX
The appeal of FX has been further enhanced
parts of Scandinavia has also been
by other factors according to Jesper Ronald
specifically driven by the Euro – or rather
Petersen, Head of Global Flow & Solutions
the lack of it. Sweden and Denmark’s
at Danske Bank. “Low bond yields and
delayed Euro-adoption coupled with
growing interest in overseas equities have
economic (and thereby also export)
growth across the region has inevitably
Scandinavian banks are still transacting
resulted in an additional fillip to intra-
an appreciable portion of mid-sized
regional hedging activity.
corporate client FX business at standard
>>>
fixing rates. This has been further boosted by the growing focus of many mid sized and
The size of Scandinavia’s capital markets
smaller Scandinavian corporates on FX risk
in relation to its volume of savings and
management, while larger organisations
pension assets makes investment outside
continue to play a major role. “I would
the region by asset managers inevitable.
describe the large corporate and asset
Real money managers represent the bulk
manager segments in Scandinavia as being
of these assets and are regarded by the
among our most sophisticated and active
banks that service them as highly
users,”
sophisticated
says
Mark
Warms,
General
instruments
Manager for Europe, FXall.
in
terms
used
and
of
both
strategies.
However, the sheer scale of their hedging activity often exceeds their comfort factor
Sellside/buyside segmentation
Most Scandinavian banks have a strong intra-regional
focus
in
their
FX
distribution to clients. A large percentage of these banks’ clients are mid-sized corporates. Collectively, this segment accounts for a significant proportion of non-interbank FX activity in the region. This contrasts with countries such as the UK where large corporates, conventional asset managers and hedge funds tend to be more prominent.
with the capacity of electronic platforms, so their larger FX deals are frequently conducted by phone.
Mark Warms
“I would describe the large corporate and asset manager segments in Scandinavia as being among our most sophisticated and active users,”
As elsewhere, hedge funds are an increasingly
important
part
of
the
electronic FX markets in Scandinavia. However, regulation has meant that they have had a rather slower start than in some other parts of the globe. “There have been legislative issues around not only their existence, but also their availability to investors,” says Kenneth
The size of this mid-sized corporate sector can pose a problem for banks trying to achieve efficiencies by encouraging a migration to electronic FX. These clients’
Steengard, Head of e-Markets at Nordea. “These issues have now been resolved in Sweden and are in the process of being resolved in Denmark. The hedge fund
lower individual FX volumes mean that a
market
large number of them have to be
dominated by Sweden, but it seems clear
converted to electronic trading before
that it will expand across the region over
meaningful scale economies can be
the next few years, which is one of the
attained. In view of their number, it is
considerations that has prompted our
obviously
investment in prime brokerage facilities.”
more
cumbersome
and
in
the
region
is
Kenneth Steengard
currently
“The hedge fund market in the region is currently dominated by Sweden, but it seems clear that it will expand across the region over the next few years”
expensive to accomplish this than with (for example) a small group of high
Others have seen similar signs of growth.
volume asset managers. In many cases it
“While as yet it is nothing like the activity
is also more difficult. Lower individual FX
you observe in centres such as London, it
volumes mean that the STP advantages of
is significant,” says Xavier Alexandre,
electronic
less
Head of Europe and Asia for Hotspot.
compelling argument for this sector than
“Scandinavia currently ranks fourth in
for large corporates, for whom it is
terms of global hedge fund activity on
essential.
Hotspot. However, we also see the real
trading
are
a
far
money sector in the region as having a lot However, when these mid/smaller-sized
of potential for us.”
corporates do go electronic, the margins are worthwhile. By virtue of their size, not
According to Danske’s Petersen this
many of these corporates have multibank
growth will only generate business for
relationships, so they are likely to be
those banks with the right solutions.
trading FX on a single bank portal. Their
“Hedge funds are a demanding client
expectations
be
segment that expects competitive pricing
particularly demanding either, as some
may
not
as
yet
and full STP as an absolute minimum,
would previously only have had the
before even considering a price maker or
“price transparency” of yesterday’s FX
electronic-platform,” he says.
Xavier Alexandre
“I would say that the percentage adoption of electronic trading in Scandinavia is higher than elsewhere in Europe,”
rates in the newspaper. In fact, some january 2006
e-FOREX
63
However, overall we still do a lot of FX business online. Some 70% of our FX activity is in swaps and we execute 7080% of these electronically. This is also partly driven by our cash management activities. We have a cash surplus of 65 bn SEK - that is too large to invest domestically and so a notable amount is invested in instruments such as foreign denominated commercial paper.” Despite the continued need for some phone dealing, banks are upbeat on the broader electronic prospects. “We are definitely observing appreciable growth in electronic FX trading across the region,” says Bjorn Lundvall, Head of E-Commerce Markets at Handelsbanken. “I also think we are seeing this growth among all sizes of corporate, especially on forwards, which are by far the most actively traded instrument on our platform.” Platforms
such
Scandinavian
as
market
Hotspot
regard
participants
as
among the earliest and most wholehearted adopters of electronic FX in Europe. "I would say that the percentage adoption of electronic trading in Scandinavia is higher than elsewhere in Europe," says Hotspot's Alexandre. "In comparison with some other countries, Scandinavians absolutely do not have a problem with the concept." Even technology vendors with a core
Electronic adoption….
As might be expected, adoption of
presence in other markets have noted the
electronic FX trading in Scandinavia has
growth in electronic FX trading in the
been rapid. For example, in Sweden,
region. Orc Software provides trading
unofficial Riksbank figures put the level of
solutions and connectivity for equity,
electronic interbank FX at close to 90%.
fixed income and derivatives markets, but
Electronic trading also accounts for some
also offers FX hedging capabilities via
30-40% of buyside FX activity by transaction
connections to various FX portals.
count, and 20% by transaction volume. “We have seen a noticeable increase in The discrepancy is caused by the need to place certain orders over the phone, as Stefan
Daberius,
Head
of
Markets,
Ericsson Treasury explains. “We use FXall, but
on
larger
and
more
sensitive
transactions we still tend to deal on the phone,” he says. “For example, we have a Stefan Daberius
“Some 70% of our FX activity is in swaps and we execute 70-80% of these electronically.”
64
january 2006
e-FOREX
electronic FX hedging in Scandinavia,” says Thomas Gidlund, Product Manager at Orc. “This has been particularly obvious in the case of cross currency equity arbitrage strategies, where the potential profit per trade is relatively
recurring hedging need of our commercial
small and FX represents the bulk of the
transaction exposure. That results in
risk. I think traders are increasingly
hedging trades in pairs as USDSEK that
appreciating the advantages of managing
are typically very substantial and therefore
their FX risk in real or near real time,
have to be done by phone.
rather than waiting until the end of day.”
>>>
Scandinavian FX – wired and getting more so …and its effects
“This
As elsewhere, a common concern among
FXConnect is pitching to large corporates,
Scandinavian banks was that increasing
who are not its usual client base,” says
adoption of electronic FX trading would
Nordea’s Steengard. “That aside, it could
impair
Personal
also be a tough sell in terms of
contact would be reduced, and in a highly
functionality, as potential clients already
commoditised environment, clients would
on FXall would have to move from an
client
relationships.
become largely price driven in their purchasing decisions. Fortunately, the
would
seem
to
imply
that
environment with streaming dealable rates to one without.”
reality appears to be rather different. “We took the view that putting a commodity business onto an electronic platform actually leaves more time for adding value in face-to-face discussions with clients,” says Peter Granqvist, Head of FX Sales at Swedbank Markets. “In practice, we have found that clients have responded well to this
concept.
Rather
than
simply
discussing price we have time to advise on strategy and potentially more efficient means of achieving their objectives.”
different aspect of client behaviour as a result of electronic trading – a sharp increase in activity. Some corporates have evidently found the convenience of instantaneous hedging irresistible. As a result, they execute FX trades as soon as individual exposures arise, rather than waiting until the end of the day or week and trading a netted amount. “We mostly notice this phenomenon among midsized corporates rather than the large managers,”
says
Nordea’s
Steengard. “They presumably feel that the convenience and immediate risk management outweigh the higher costs involved. The increase in activity when these
clients
switch
to
effort across the region with RTFX. Initial target clients were mostly smaller banks, but corporates are now also being approached. The company’s distribution network and existing presence should stand it in good stead, as should its
Bjorn Lundvall
“We are definitely observing appreciable growth in electronic FX trading across the region,”
adoption of the TWIST standard. Reuters also seems to be trying to use RTFX as a lever to generate more volume on RTFI. Bloomberg appears to be approaching
Other banks have observed a very
asset
Reuters has also been making a concerted
electronic
trading is significant – perhaps 20-25%
the task from the diametrically opposite direction, by leveraging its existing fixed income client base to stimulate FX trading on its Professional service. Bloomberg’s model also differs significantly from other multibank portals in that it is not currently charging the sellside banks for quoting on its platform. “The potential obstacle for both Reuters and Bloomberg is that the switch they are proposing to prospective clients isn’t very intuitive,” says Nordea’s Steengard. “For example, in the case of RTFI, why would a fixed income trader want to move from
Thomas Gidlund
“We have seen a noticeable increase in electronic FX hedging in Scandinavia,”
Bloomberg or TradeWeb to Reuters? However, on a more general note, FXall’s decision to charge the buyside fees has possibly opened a window of opportunity to other multibank portals.”
on average.” Whatever the impact of FXall’s charging Multibank portals
policy on the competitive landscape,
At present, FXall enjoys pole position
Scandinavian
among
in
platform have been pleased with the
Scandinavia. In the past, various other
results. Skandia Capital had been using
multibank portals have attempted to build
SEB’s single bank portal for three years
up their presence in the region, but with
before migrating much of its commodity
little lasting impact. However, this is
FX activity to FXall over the past few
starting to change, with both new and
months. Skandia took its time in selecting
long-established
a multibank platform, as it assumed
the
multibank
portals
multibank
portals
making a pitch for market share.
(correctly)
buyside
that
some
users
of
the
consolidation
Peter Granqvist
among multibank portals would be FXConnect currently appears to be using
inevitable. It therefore did not wish to run
its integration with SunGard’s Quantum
the risk of having to establish connectivity
treasury management system as a basis
to a new portal if its original choice
for its sales campaign in Scandinavia.
ceased to exist.
“putting a commodity business onto an electronic platform actually leaves more time for adding value in faceto-face discussions with clients,”
january 2006
e-FOREX
65
“We have achieved significant savings
Nordea has made a similar investment in
through price improvement by using
functionality for IAS39. This provides
FXall,” says Robert Celsing, President of
clients who are exploring hedging options
Skandia Capital. “The liquidity is good,
with the necessary underlying calculations
we can deal in the size we require, and we
for supporting their assertions of hedge
have also been able to achieve the level of
effectiveness. The IAS39 tool also has a
STP we desired. We still use SEB’s platform for overnight and minor spot same day trades, and for large spot deals and FX options we use the phone. We feel the balance we now have across single and multibank portals and the phone is
strong Scandinavian slant as a result of Nordea’s consultations with regulators and accountants in the region. Danske’s emphasis has instead been on ease of use and also on features that
about right.”
reduce clients’ internal administration. “Clients appreciate such facilities as block
Single bank portals
White labelling in the bank-to-bank sense is not common within Scandinavia. Apart
and split trades, which save them a lot of internal booking,” says Danske’s Petersen.
from Saxo Bank’s extensive white label relationships (the majority of which are
Banks have also made easy client
extra-regional) there is believed to be just
connectivity and STP a discriminating
one bank white label deal in existence
factor, with Handelsbanken and others
(between a London bank and a small
making their platforms TWIST compliant.
regional bank). Most Scandinavian banks
As a result, some banks feel that their
have instead opted to buy off the shelf
connectivity and functionality efforts have
vendor systems and customise them to
started to turn the tide away from
meet their clients’ needs.
multibank portals and back towards single bank platforms. The quality and nature of
Basic functionality is therefore fairly standardised
across
single
bank
platforms in terms of capabilities such as streaming dealable prices. This has left banks in the region with the problem of which custom features to add to ensure that they stand out from the pack.
bank relationships have also been an important factor in this. Many corporates do not regard FX trading as an isolated activity. Therefore, FX discussions with the
bank
often
also
incorporate
conversations about cash pooling, cash forecasting and electronic payments – all
Swedbank’s strategy has been to leverage
of which services banks can provide
its East European expertise (via its major
online through a single log on.
stake in Estonia’s Hansa Bank) to provide coverage of unusual currency pairs. “We
“I think the ability to compare prices on
have one click dealing available in pairs
multibank portals - especially when those
not commonly available elsewhere,” says
prices will be very similar anyway - has
Swedbank’s Granqvist. “We are also
ceased to be quite such an attraction,” says
prepared to quote these pairs in longer
Handelsbanken’s Lundvall. “Corporations
dated forwards as well as just spot.”
are
also
rationalising
their
banking
relationships, which means that the Nordea has taken a rather different approach by focusing on by focusing on analytical tools in addition to trading services. It has put together a set of pricing and analytical tools that are very specifically aimed at the Scandinavian market. “You often find that generic analysis packages and pricing models
Robert Celsing
“We have achieved significant savings through price improvement by using FXall,”
66
january 2006
e-FOREX
relationships they retain are stronger and likely to influence a preference for a single bank FX platform.” Nevertheless multibank
some
portals
banks as
an
still
see
important
ingredient in the overall client service mix.
either don’t cover this region-specific
“A proprietary platform with strong
angle at all, or do so incorrectly,” says
supporting research works well with the
Nordea’s Steengard. “As a result we have
SME segment,” says Danske’s Petersen.
seen strong take up of these tools –
“But you have to be able to combine this
particularly among large corporate and
with a strong multibank portal presence to
asset manager clients.”
service other client segments effectively.”
Scandinavian FX – wired and getting more so FX options
Furthermore, there is usually an element
As yet, FX options are a rare online sight
of strategy discussion involved in FX
in Scandinavia, but rising interest across
option
all client segments is likely to see them
accomplish by phone or face to face.”
trades,
which
is
easier
to
appearing there in the next year or so. Banks in the region are finding that FX
Automated trading and price improvement
options are now a commonly discussed
Scandinavia has been quick to pick up on
alternative to forwards in clients’ hedging
some of the latest trends in electronic FX.
deliberations. Banks such as Nordea have
For example, several commentators have
also seen strong demand in the past year
noted automated trading activity. “We are
for structured products that incorporate
seeing clear evidence of high-frequency
exotic FX options, as a means of
automated trading in Scandinavia,” says
combining yield enhancement and FX risk
Saxo Bank’s Darst.
management. “Though I don’t think many clients are quite yet ready to trade this
While much of this activity may be
sort of product (or straight FX options)
attributable
online, things are definitely moving in this
operations and hedge funds, some large
direction,” says Nordea’s Steengard. “We
hedgers are also expressing interest in the
are
to
concept. Skandia Capital is responsible
incorporate the necessary capabilities in
for hedging the FX risk of Skandia Life’s
our FX platform.”
$35bn portfolio. Although the hedging
therefore
already
planning
to
proprietary
trading
Jesper Ronald Petersen
“A proprietary platform with strong supporting research works well with the SME segment”
mandate is “semi-passive”, the size of the Some see the move to online FX options
portfolio
as a gradual process. “As yet, clients do
rebalancing hedges still generates a
not appear particularly interested in
substantial volume of trades.
trading
FX
options
online,”
means
that
extending
or
says
Handelsbanken’s Lundvall. “However,
“I think the automated calculation and
they are expressing interest in online
execution
option pricing tools, which they can use
rebalancing could be interesting,” says
prior to trading options with us on the
Skandia’s
phone. As a result, I think we will be
technically possible, as we could
adding
draw the necessary underlying
some
sort
of
FX
option
functionality to our platform.”
of
hedge
Celsing.
information
extensions
“It
directly
is
or
certainly
from
our treasury management Larger institutional investors certainly
system.
appear open to the idea. Although FX
automate strategy models,
options are a relatively small part of
such as trend following or
Skandia Capital’s overall FX activity, they
cost of carry. I think some
still represented some $3bn of its FX business in 2005. “Our option trading tends to be rather intermittent, but the
form
We
of
could
FX
also
trade
automation could possibly be the next step for us.”
ability to trade FX options online could be valuable, especially if it was possible to straight through process the trades,” says Skandia’s Celsing. Although Ericsson Treasury was one of the first corporates to trade FX options online some five years ago, Stefan Daberius doesn’t regard this as a critical capability. “It is more important to us for a platform to include most of our core relationship banks rather than to have the most technically advanced capabilities,” he says. “Our option volumes are also not huge and would be unlikely to exceed 10% of our volume by transaction count.
january 2006
e-FOREX
67
Scandinavian FX – wired and getting more so
Vendors have also realised the potential need to support this type of automated activity on the trading desk as well as at the portfolio level. “I think we will offer this sort of automation capability in the future,” says Orc Software’s Gidlund. “We already have the functionality to populate an FX order ticket with the aggregate exposure automatically, so automating the final step of clicking ‘send’ is not difficult. However, rather than simply automating the hedging of every single trade, it would perhaps be of more use to allow the trader to specify their own automated aggregation rules, based on time or size and perhaps also rounding.” However,
some
organisations
are
rather
less
enthusiastic about the concept of trade automation. “Technically, it would be perfectly possible to do this, but much of our hedging is still done on a forecasted basis (of the balance sheet),” says Ericsson’s Daberius. “That means we have to have a human element anyway in terms of determining the desired hedge ratios and other market factors. We couldn't practically replace that with an end to end automated process.” Making not taking
Finally, it is evident that the buyside in Scandinavia is also following the evolution of order driven FX markets with interest.
Technology vendors are already
responding to this interest. “We currently have links to five single/multi bank FX portals,” says Orc Software’s Gidlund. “We are now in the process of adding a link to Hotspot, as we believe clients will welcome the opportunity to post their interest.” Skandia Capital’s Celsing is certainly intrigued by the order driven concept. “The opportunity to make rather than just take prices is obviously attractive,” he says. “In general, I think a fee based model rather than paying the bid/offer spread makes good sense. Given the scale of our operations, the price improvement this makes possible could make an appreciable difference to the bottom line.”
E -ARKETS
%ASY TRADING COMPETENT TOOLS !N IMPORTANT GOAL WITH E -ARKETS IS TO IMPROVE THE CORPORATE TREASURER S &8 TRADING PROCESSES E -ARKETS OFFERS STREAMING CLICK AND DEAL FUNCTIONALITY AND STRAIGHT THROUGH PROCESSING TO SELECTED TREASURY MANAGEMENT SYSTEMS LIKE THE
47). AND /PUS #APITA SYSTEMS WHICH ARE WIDELY USED AMONG .ORDIC COMPANIES 5SERS OF E -ARKETS HAVE ACCESS TO A SUITE OF IN DEPTH ANALYTICAL TOOLS FOR RISK MANAGE MENT PRICING AND PORTFOLIO ANALYSIS ACROSS
6ISIT US ON WWW NORDEA COM E -ARKETS .ORDEA IS THE LEADING lNANCIAL SERVICES GROUP IN THE .ORDIC AND "ALTIC 3EA REGION WITH APPROXIMATELY %52 BILLION IN TOTAL ASSETS 4HE .ORDEA 'ROUP HAS A WORLD LEADING )NTERNET BANKING AND E COMMERCE OPERATION WITH MILLION CUSTOMERS
DIFFERENT TYPES OF lNANCIAL PRODUCTS &OR PRE TRADING BUDGETING AND TRADING STRATEGY PURPOSES E -ARKETS ALSO PROVIDES EASY CURRENCY PAIR MONITORING INCLUDING PRICE HISTORY CHARTING IMPLIED FORWARD CALCULATIONS AND ANALYSIS OF .ORDEA AND CONSENSUS FORECASTS
viewpoint 70
january 2006
Pulling in the reins offering liquidity on a selective basis
S
imply put, the liquidity mirage occurs because for all the enormous size of the FX market, it
actually supports less liquidity than is on offer on all the single- and multi-bank FX portals. The underlying interbank market may be showing a bid at a price in say 10 million EUR but this price is then used as the foundation for banks’ pricing engines which offer say 30 million at that price through multiple channels. Therefore clients with 5 banks’ offerings in front of them may be seeing EUR 150 million all based on the same 10 million EUR bid.
Clearly, this situation could lead to a “Black By Philip Brittan, Bloomberg L.P
Monday”-like scenario, in which a large portion of that phantom liquidity is hit simultaneously, and
There is a subtle yet dramatic
the 10 million EUR bid in the interbank market
change occurring in the FX
liquidity risk which has the potential to ignite a
world. Banks are taking
instantly collapses, leaving banks with catastrophic
systemic risk powder keg and at the very least would lead to a large credit crunch.
back control over the This scenario has not come to pass, and perhaps
provision of liquidity in the
never will. But the increasing leverage inherent in
face of increasing risks and
the liquidity mirage, combined with the ability of
decreasing margins.
liquidity at once through multi-bank portals and
Banks are taking control by pulling liquidity from multibank portals and focusing on channels that support a
buy-side customers to tap multiple sources of
APIs, increases the risk that it may.
Feedback loops The more common scenario is that interbank prices are constantly moving away – subtly, not catastrophically – from the banks’ positions as they are hit by customer demands on their liquidity.
direct relationship with their clients. And one of the major risks leading to this change
This problem has been further intensified by the rise of “feedback loops” in the market, where hedge-fund customers post prices on anonymous marketplaces, such as EBS Prime or HotSpot, that are in fact based on prices the hedge fund sees
is the “liquidity mirage”.
e-FOREX
coming from a bank’s own portal.
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.
inefficiencies in the banks’ ecommerce systems.
all of their positions on these exchange-like
A corollary is that banks have been pulling their
environments, and as they do so they can find
liquidity from multi-bank portals, particularly
that they are chasing in their own tails, as the
anonymous ones where the liquidity mirage is
liquidity they are trying to access is in fact their
most likely to be exacerbated and where the
own. Although trading volumes have increased
banks don’t receive any benefit from direct
in recent years, as increased transparency has
relationships with their customers. What’s more,
facilitated the trading of FX as an asset class in
banks trading on these multi-bank platforms
its own right, true liquidity has polarized around
have to pay commissions in an environment
fewer key providers.
where the thin margins don’t support additional transaction costs and the risks are high.
Narrowing of spreads A related phenomenon has been the massive narrowing of spreads we’ve witnessed in the FX market. This is the result of intense competition, especially on multi-bank portals, which have led banks to offer tighter spreads in order to see the flow they require. Lesser credits are now trading at top credit prices with no penalty.
Thus there is a growing feeling that current
Focusing liquidity on fewer channels The pendulum is swinging back, and we are likely to see banks working to change the perceived supply/demand balance by focusing liquidity on fewer channels, specifically their own Web sites and no-commission singlebank vendor channels such as we offer on Bloomberg.
spreads do not compensate banks appropriately for the significant liquidity risk and credit risk they take on. Wider spreads would give banks cushion to absorb the risk in a customer-driven position while retaining some profit.
To maintain a relationship-driven world, banks will need to offer innovative, high-value services to convince customers that they are better off bringing their needs openly to their bank rather than trying to go it alone on a multi-bank
One reaction to this is for FX to focus on its
marketplace. As Chip Lowry pointed out in the
relationship-driven roots. Many banks and
October Viewpoint, “best execution” is not
customers view FX in the context of their larger
simply about stacking up price providers and
banking relationship, which also includes
choosing the best one; that practice may in fact
custodial, treasury, or prime brokerage services,
work against the price taker.
for which the customer is more dependent on the bank and the bank has the opportunity to earn
Customers should be prepared to see wider
more margin.
We have witnessed a growing
spreads in the FX market, but should also expect
willingness of banks to turn away business that
to see a corresponding increase in innovation
they don’t see as “legitimate” or that is too
and value-add on bank Web sites and vendor
aggressive, i.e. “snipers” who simply arbitrage
single-bank portals.
viewpoint
Banks themselves have started to offset some or
january 2006
e-FOREX
71
Welcome to the real time ® EZCURRENCY technology TF Network, Inc. is a US based company that was established in 1998 in the State of Delaware. It primarily provides transactional (EZCURRENCY®, real-time trading) and informational (EZC ProCharts™, real-time charting analytical) technology. TFN clients are mostly at B2B level, including: Financial Institutions, brokerage houses in the US and abroad, professional money managers, etc. All technology is built following Banking and FDIC requirements and is available in several languages.
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EZCURRENCY® API is an interface to EZCURRENCY® trading platform that provides B2B customers with the ability to connect their trading systems and end users directly to the central platform. Through the API they can get tradable instrument quotes and the trading capability. EZCURRENCY® API provides a real-time online multilayered financial transactional and informational network with multiple clearing levels. EZCURRENCY® technology is the fastest real time data application available and is backed by advanced security features. EZCURRENCY® is fully customizable and complete with tools that provide flexible and precise solutions in Spot Foreign Exchange including:
72
january 2006
e-FOREX
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Sponsored Statement january 2006
e-FOREX
73
The e-Forex Roundtable Squeezing efficiencies â&#x20AC;&#x201C; where will the benefits of eFX be focused next? With H. Harry Moumdjian VP, Global Foreign Exchange Electronic Trading Services at Bank of America, Lynn Kennedy, Managing Director, FX Sales, at BMO Nesbitt Burns, Rita Saverino, Director of FX e-Commerce at Deutsche Bank, Ruth Mackaman, head of e-FX Marketing and Product Development at Brown Brothers Harriman and Nick Barker, FX e-Commerce Programme Manager at UBS. Up to now, the application of eFX
Kennedy: An opportunity exists to make FX
part of the Prime Brokerage services they
technology has really been concentrated
effortless for the client. In an ideal world,
provide to their clients that use them for
on the point of execution. What areas of
our technology talks seamlessly to the
credit
the FX pre and post trade environment do
systems of every client and we simply
However, there is still more room for growth
you think still offer possibilities for
upload trade information and send out a
by automating this part of the workflow
exploiting the benefits of automation?
payment. Possibilities for further growth
across client segments. For example, Real
in automation exist in e-Orders, e-dealable
Money accounts do not necessarily need
Options and e-Conformations. The norm
the credit facility of PB but do need to have
has become to simply be able to provide
third party notification, trade averaging and
on
those
trade settlement to be automated. Looking
differentiate
at the pre trade processes, there are some
themselves in this space will automate the
portals/ ECNs that provide pre trade account
full trade (start to finish) in addition to the
selection and allocation; however, there is
standard â&#x20AC;&#x153;mine/yoursâ&#x20AC;? capabilities.
still room for growth and standardization for
Moumdjian: There is a greater degree of variability among Pre-Trade automation requirements, while Post-Trade needs are more likely to be uniform across client segments. Pre-Trade features that have yet to realize the full benefits of automation
line
providers
execution, attempting
however, to
include the STP of transactions from client side order management systems directly into execution engines.
and
operational
efficiencies.
these processes both on the sell side as well Saverino: As electronic volumes grow, there
as the buy side.
Such processes
will continue to be the need for automation
coupled with post-trade STP will allow
of post trade processes such as trade
Mackaman: As eFX trading matures,
clients to complete the entire trade process
averaging, trade give-ups, trade matching,
secondary areas for automation benefits
with a single keystroke, or potentially invoke
trade allocations, and auto rolling of
include: pre-trade aggregation, post-trade
an entire systematically triggered process.
positions. Currently banks do this mainly as
allocation, real-time trade confirmation,
Rita Saverino
Lynn Kennedy H. Harry Moumdjian
74
january 2006
e-FOREX
Fundamental
functionality
As more and more execution venues become
the client’s order management system to send and receive trade details electronically.
including auto-confirmation, electronic
available to clients, it becomes even more
deal tickets and online settlement are basic
important that all executing banks have a
One efficiency that is lacking in the eFX revolution is a common interface between
needs of most customers.
standard and automated process to give up
the buy-side and FX providers. A potential benefit as the buy-side moves towards multiple bidding platforms is a standard
post-trade
>>>
electronic reporting, and interfacing with
And, clearly
online execution is required. Pre-trade
those trades.
needs can vary dramatically since these services need to be incorporated into the
interface to enable the buy-side to deal with multiple FX providers using a
client’s decision-making process.
common format over various platforms.
Kennedy: The busier the client, the more automation he or she needs. STP will win
Mackaman: We see an enormous variety in the degree and type of customer automation demands. particular,
need
Tokyo clients, in
extensive
post-trade
automation for confirmations (duplicate MT300s and spreadsheet confirmations)
Barker: To offer true efficiencies eFX
business from clients willing to pay for this
and settlements for custody and 3rd party
technology needs to provide benefits throughout the entire deal life cycle. At
convenience. We find this to be a common
FX (MT202s to the FX bank rather than
request by those clients looking to further
standing settlement instructions.) Global
automate their business.Our larger clients
continues to expand and increasingly complex products added. The pre trade
investor clients often require both pre-
have a need to consolidate the number of
trade
eFX technology requirements include those to support clients who are program
automated systems rather than sign on to
integrate their portfolio management
another proprietary site. The more we can
systems into the FX providers’ trading
traders and require market data and price
demonstrate that our system is adaptable
systems, net trade details and allocate back
feeds from numerous sources. Post trade requirements include the in-sourcing of back office functions.
to their own deal capture system (possibly
to the client’s portfolio system.
the point of execution eFX technology
post-trade
automation
to
through an API), the less manual inputs are required by the client and their own back office. The easier we make it for our client
Is there a broad consensus amongst your own clients about where in the trade cycle they would most like to see improvements in automation, or are some customers
and
is a direct result on how we simplify the dealing process from start to finish.
Barker:
There
seems
to
be
general
consensus amongst segments or groupings of clients but different segments of clients have different requirements e.g. high volume active trading clients are more concerned about a high performance streaming API and
Saverino: Broadly speaking clients want
real-time STP connections, whereas other
quicker trade give-ups, trade matching, trade
segments
allocations and trade averaging across all
requirement. As with traditional client
Moumdjian: Clients appreciate tailored solutions, and in our experience it’s rare to
their trades. They need this not only from
relationships these differences must be
their Prime Broker but across all of their
addressed, as the ‘one size fits all’ approach
find a one size fits all solution.
executing banks.
is no longer acceptable.
much more concerned about particular “pain-points” than others?
may
not
have
the
same
Ruth Mackaman Nick Barker
january 2006
e-FOREX
75
The e-Forex Roundtable
Rita Saverino
Lynn Kennedy H. Harry Moumdjian
As
corporate
The automation of Foreign Exchange
The latency issue has become critical for
governance burden continues to increase
the
regulatory
trading has two main advantages. Firstly,
some clients who have embraced program
with the arrival of standards such as
straight-through-processing reduces the
and model-based trading and data latency
Sarbanes
how
number of controls by eliminating all
in the e-commerce environment can now
important will it become to extend the
unnecessary manual intervention. Secondly,
make the difference between making and
benefits of FX STP and automation by
electronic controls can be monitored and
losing
integrating it into other processes and
documented automatically, reducing both
transactions, for example payments?
time and the risk of error. STP can only be
Oxley
and
and
IAS
139,
achieved through the standardisation of the Moumdjian: Automation brings several
transactional process between clients and
features
their executing banks, and of the settlement
useful
in
compliance
with
money
on
transactions.
How
important is the speed and quality of pricing engines likely to be in helping FX providers maintain competitive advantage and in what way will banks be looking to improve the robustness and quality of their rates?
Sarbanes Oxley, IAS 139 and other
processes
accounting and regulatory standards.
settlement banks and clearing institutions.
First, electronic processing can bring
Once the whole trade life cycle of initiation,
Moumdjian: Maturation and sophistication
standardization which makes the execution
execution, confirmation, netting, settlement
of pricing engines are essential for long-
process easy to explain and document
and
term success in the eFX and overall FX
and to confirm adherence.
information can then automatically update
business.
reporting is usually far superior to manual
all
changing, and legacy bank systems cannot
processes. Third, many systems provide
accounting processes.
Second, the
between
reconciliation, relevant
risk
clients
is
and
their
achieved,
management
the and
keep up with the leaner infrastructures of
controls around who can transact, who can settle and who are notified.
model-driven trading.
Banks continue to
Mackaman: eFX systems have become
shave milliseconds off round-trip times and
even more important in the light of
are
Kennedy: It is important that a clear audit
increased regulatory burden placed on
measures
trail is available and STP provides this
treasury departments by recent accounting
gap.
effectively.
and reporting rules such as Sarbanes
Automation will decrease
The marketplace is rapidly
operational risk and the manual processes
Oxley, FAS 133 and IAS 139.
could affect the integrity of the financial
electronic systems can help facilitate
transaction.
compliance with these regulations, much
While
of the burden still falls on the customerâ&#x20AC;&#x2122;s Saverino: The Sarbanes-Oxley Act seeks to
in-house information systems where much
improve the system of financial reporting by
of the required information resides.
incorporating to
risk
balance
management some
of
this
Clients understand this and are
working with banks to optimize trading relationships. This leaves banks and clients in a position to expand relationships as more robust engines go into production. Kennedy:
Our
pricing
engines
have
become very important to our clients.
reinforcing the checks and balances that are increasingly
Where initially a system failing was
series of accounting standards that limits the
important; STP by its true definition should
considered only an opportunity loss, it now
ability to net positions. This inevitably leads to
encompass the whole front to back process
can seriously affect the client relationship.
an increase in transactions and to an increase
including payments and not just sub-
Clients have to count on us to be up and
in the operating risks and financial costs.
sections of the process.
running with a competitive price and a
critical to investor confidence.
76
january 2006
IAS 139 is
e-FOREX
Barker:
It
will
become
>>>
Squeezing efficiencies – where will the benefits of eFX be focused next?
Ruth Mackaman Nick Barker
dependable payment. Integration of One-
discovery but also an applied process that
enhance our client offering with greater
Click trading and multi-bank portal pricing
involves post trade services such as real
advisory project work rather than a strict
has addressed latency issues in pricing.
time trade confirmation. Is Best Execution
automated relationship.
likely to play a key role in stimulating Saverino: Minimizing latency by configuring
efforts to improve automation in the FX
Saverino: Best execution is not only about
networks correctly and having an efficient
trading process and if so where will these
dealing at the best price; it’s about capturing
pricing engine is very important and will
efforts likely be focused?
continue to be very important.
the efficiencies in the whole trade cycle. Because commoditized products tend to be
As black
transaction
cost
sensitive,
other
key
box trading models continue to grow in FX,
Moumdjian: In today’s highly transparent
it will be critical for banks to constantly
FX market best execution is easier to find
optimize the whole price delivery cycle from
than ever before. Automation has allowed
how and where they source prices, to
clients efficient price-discovery options,
the price setting and delivery, trade
and seamless execution. Improvements in
Any post trade automation whether it is
acceptance and trade booking and finally
automation will allow clients to make
rolling the trade to a new date, multi trade
risk management.
necessary amendments to settlement or
averaging,
allocation instructions or add any special
cancellation and re-booking functionality
components in addition to the price are the overall speed and reliability of the platform, the speed of connectivity, the speed of execution, and the certainty of outcome.
trade
give
ups
including
instructions to the handling of trades
that allows a trade to be rolled to one date,
commerce environment are vital and
without
is what Best Execution is about.
pricing engines require constant oversight
rebooking processes.
to insure optimum pricing. However, service
approach to better execution is not
Mackaman: We agree that price discovery is
transparent in “price” alone.
vital to our global investor clients. Multi-
Mackaman:
Speed and quality in the e-
and quality of price “trumps” speed. Quality
cumbersome
booking
and
This value added
bank platforms have successfully delivered
of rates is paramount whether pricing is over a rate engine or from the trading desk.
Kennedy: Although FX is important to us, it is not the sole importance for our clients. It is
price transparency to the marketplace via their competitive bidding feature. However, we believe there is more to best execution
Barker: The speed and quality of pricing
often only a part of a larger transaction. The
engines is absolutely paramount and will
more automated we can make it for clients
continue to be a major differentiator.
the more they will prefer our system. Having
Further
by
a competitive price is a given, but clients
measuring the current effectiveness and
want ease in their trades and they are willing
looking at areas that will allow milliseconds
to pay for this convenience. One-click trade,
of channels, trade time stamps, audit
to be shaved off.
tight spreads and respectable limits in the
logs, and trade search/export features. In
majors are now a standard. Those unable to
addition, a demand by index managers and
Achieving Best Execution is another major
offer these automated solutions will be left
clients for benchmark execution has led to
consideration for many clients and some
behind. As automated dealing has become
trading platform variations to provide
definitions of it encompass not just price
more of a commoditized service, we look to
intraday fixing rates directly to the client.
improvements
will
come
than just price discovery and it is apparent that FX desks are striving to incorporate these with improved automation. Examples of features that complement price discovery are: real time confirmation through a variety
january 2006
e-FOREX
77
The e-Forex Roundtable Kennedy: As this requirement grows, we
Barker:
have found that information (to urge trading
providers need to constantly adapt to
decisions) has become quite abundant.
ensure they continue to meet client needs.
Research tends to be best retrieved (rather
Traditionally a lot of the research, flow and
than mass e-mailed) off our intranet site and
decision making tools have been delivered
Flow Info tends to be sent directly to
via a GUI.
customers due to its timely value.
increasingly looking for this information to
As
in
any
dynamic
market
Now we are seeing clients
be delivered via an API or via one Saverino:
Research,
charting
tools,
structured products, hedging solutions and
integrated
platform
that
they
easily
integrate with their own platforms.
other pre-trade services some examples of value
added
services
that
banks
traditionally offered their clients. Broadly speaking, in the systemic electronic arena
“Clients appreciate tailored solutions”
Investors,
Hedge
Funds,
CTAs,
and
electronic trading shops build their own internal research and trading models. However the latest market participants that offer on-line FX to the “retail market” do
Barker: Best execution efforts will be
offer their client base, market research,
focused around ensuring that the rates that
charting services, and risk management
the clients trade on are meeting their
tools to help the client make their
fiduciary responsibilities to meet “best
trade decisions.
execution”.
This can be achieved in a
number of ways and banks may need to
Mackaman:
support several methods of allowing the
tremendous interest in information that
client to achieve “best execution”.
In
enables them to make decisions in
terms of improving automation in the FX
constantly changing and complex markets.
Clients
have
shown
definitely
We have seen growing demand for flow
improvements that can be made to allow
data as well as a ramp up in interest on
clients to adopt “best practices” rather
trading ideas and research specific to
than “best execution”.
investment mandates.
trading
process
there
are
These best
This information
around
should be well organized and provided to
increasingly seamless integration with
clients freely and easily. Currency strategy
practices
will
be
focused
their own systems and a reduction in the human intervention required to trade FX.
is becoming one of the remaining factors to differentiate FX providers. Rather than producing academic research, strategists
Many new participants in the FX markets are
undertaking
transactions
more
requiring
complex
sophisticated
research and decision support solutions. Is
must
become
more
“there will continue to be the need for automation of post trade processes”
client
focused,
knowing the client’s needs in order to provide useful, timely information that the client can act upon.
With growing FX market volumes, do you anticipate the eventual automation of virtually all Risk Management processes and could you envisage a situation where the human element has been removed almost entirely from this equation? Moumdjian: The human element will always exist in the risk management
this creating a need to improve how the e-
process. Routine transactions will become
channel is used to provide sophisticated
more automated on both the bank and
research,
client
flow
information,
decision
sides,
but
risk
management
making support tools and trading ideas
decisions will always be necessary. People
and in what ways can you see FX providers
will not be out of this process, but what
meeting this challenge?
they do may evolve.
Moumdjian: Analytics are widely available
Kennedy:
over the e-channel and sophisticated tools
completely eliminated with STP and this
and flow information are also provided by
will become increasingly more important
most large institutions.
The challenge is
for fund managers and high volume buy-
navigating the abundance of information.
side clients. Algorithmic trading already
Detailed,
supports this type of automation.
easy-to-use
websites
create
Operational
risk
is
almost
efficiencies for clients, allowing them to Saverino: For the commoditized products
conduct research as they see fit. Even using e-tools, consultation with bank client teams is still necessary in complex transactions.
78
january 2006
e-FOREX
“Automation will decrease operational risk”
such as spot, swaps and increasingly more vanilla options, there will less of a human
Squeezing efficiencies – where will the benefits of eFX be focused next? involvement in both the pre and post part
pricing and risk management capabilities.
of the trade cycle.
The post trade
The remaining spot traders are increasingly
operational aspect of the trade which has
becoming flow traders and monitoring and
to do with booking, matching, and give up
reacting to the flows from different channels.
of trades will be fully automated.
STP will
continue to be the driver so that both the
Many customers look to their banks to
bank and the client will have a virtually
provide
hands- free post trade process.
The
example, fund managers may want to
transactional part of the human element
develop better integration between FX
will be less and less as well, and both
platforms and their own front-office order
banks and their clients build more black
management
box trading models.
settlement services such as CLS. Ultimately,
connectivity
solutions.
systems
and
also
For
with
should this be down to banks to finance or Mackaman:
We
have
witnessed
a
are there other ways providers can ease the
significant move towards automation on
burden for clients who may not have a large
trading platforms in this industry, and we
budget or resources to assist them?
haven’t seen the end of it. relationships
continue
However, the
Moumdjian: Competition in the market will
business. As part of client service and
drive vendors and providers to integrate
relationship management, FX providers
pre
would be well served to continue to
Standardization will drive the cost down for
Mackaman: It’s good business for the
maintain
their
all, but as I said it can be difficult to
customer and FX provider to partner in the
Even with 360 degree STP,
find a one-size-fits-all answer. Integrated
development of technical solutions. In
clients want to know that a trader or
solutions will become a differentiating
most cases, the cost of implementation is
relationship manager is there to help them
factor that will lead to greater market share.
funded by the FX provider with the
manage their risk. As markets continue to
Early providers will capture market share,
anticipation that it will be offset by a gain
evolve and become more sophisticated,
and this may help finance the development
of a customer’s share of wallet. CLS is a
the personal relationship between the
burden. In the end, participants on both
good example of a product that is
client and the FX provider will continue to
sides will end up sharing some costs.
prohibitively costly for the client to
“touch
customers.
to
“The speed and quality of pricing engines is absolutely paramount”
points”
drive
with
and
post
trade
operations.
be vital. The human element is especially
develop.
FX banks are providing third
critical during volatile markets and when
Kennedy: This has been a conundrum since
party CLS service without pushing the
the client requires discretion to work
the first system was installed.
Sell-side
development costs out to the clients. On
larger deals.
firms have no choice but to be part of the e-
the other hand, there are instances where
commerce
clients.
the client may pay a small portion of the
Barker: If you look at UBS over the last 5
Smaller institutions have an option to white
overall development costs for connectivity
years we have seen the number of spot
label another provider’s system and draw
solutions
traders decrease from around 80 to about
efficiencies from their economies of scale.
dramatically more expensive to build in-
30 today.
This efficiency gain has been
As more firms put a price on volume, the
house.
delivered through increasingly sophisticated
expense of this automation will be shared
Infomediary®, a communication platform
as designated in longer-term contracts.
that
evolution
or
lose
that
would
have
been
One example of this is BBH enables
customized
message
mapping and data translation. While there the
is a one time set up fee and maintenance
electronification of FX is one where clients
costs, the total expense to the client is a
will be more sensitive to their desk top real
fraction of the burdensome costs of hiring
estate
in-house
Saverino:
and
The
will
next
want
wave
to
streamline the FX component.
in
completely Although
communication
experts
for
development and support.
we saw the beginnings of this trend with the
“Speed and quality in the e-commerce environment are vital”
onset of some of the FX multi bank portals
Barker: This comes down to a client choice.
in the last few years, this will continue to be
There are banks willing to finance these
more of a theme as more if not all of the
connectivity solutions and many pursue this
Order Management Systems and Corporate
route
Exposure Management System, will be
themselves and provide bespoke solutions
asked by their clients to integrate FX.
often at minimal or no cost. If the client
Banks have to be flexible with their APIs and
chooses a “provider” then they may be
will need to be able to support multiple
constrained by what the provider is willing
connections into multiple OMSs and EMSs.
to provide; there needs to be some resale
This connectivity combined with the back
value in the work or service that they deliver.
end STP discussed above will give clients
This route may be more expensive but it
cost efficient access to FX.
doesn’t tie the client to one particular bank.
so
that
they
january 2006
can
differentiate
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79
Treasury Best Practice – the role of FX automation
>>>
Keith Hill
Best execution - a fundamental part of best practice Best execution may have become a fundamental part of best practice in FX trading, but there is still considerable disagreement about how to define it. Keith Hill, Head of Sales, EMEA at FXall, argues that it goes far beyond best price to encompass a wide range of factors from banking relationships through to compliance.
B
est execution is increasingly important for corporate treasurers for many reasons, including
the desire to enhance performance and save money, and the shift in the treasury’s role from administrative to strategic function. For treasurers, achieving best
However, while competitive pricing is an essential component of best execution, sophisticated treasurers are taking many other factors into account, including banking relationships, straight-through processing, compliance, and the management of FX flows.
execution has a direct and demonstrable effect on their company’s performance. While asset managers
The price is right…
are saving money on behalf of their investors, every
The FX markets are becoming more transparent, and the ready availability of market data and the emergence of multibank trading portals mean it is now easier than ever to identify and deal on competitive prices. Treasurers have embraced the multibank model – research from Greenwich Associates shows that of those corporates that trade electronically, that almost two-thirds (62%) use a multibank platform that allows them to receive and compare prices from multiple banks simultaneously.
cent a corporate saves on an FX transaction has an impact on the bottom line. Despite the considerable attention best execution has received from market participants, industry analysts and the press, there is still little consensus over what it comprises. To some, best execution simply means executing on the best price when sourcing multiple prices for a single transaction.
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– integrated equity and credit research – integrated equity and debt financing leading to a product-neutral view of financial solutions We do things differently by combining specialist expertise with a total perspective.
Handelsbanken Capital Markets www.handelsbanken.com/capitalmarkets
Treasury Best Practice – the role of FX automation
To achieve consistently competitive prices when using a multibank platform, corporates need to have a best practice policy in place that details when to compete trades, and how many banks to request prices from. Typically, a treasurer might request prices from two to four banks. This is enough to get a good range of prices that reflect the market at the time of trading, without opening the deal up to the whole market and thereby removing the banks’ incentive to compete for the deal. When it is most important to be able to trade a large amount quickly and discreetly, without moving the market, corporates will often decide that a trade can be executed most effectively by dealing with a single counterparty. This decision is affected by several factors, including deal size, time of day, market sensitivity, and the depth of liquidity in the currency pair being traded. Once this decision has been taken it is important to be able to justify it, to prove that the price achieved was competitive compared to the market rate at the time of execution, and that the executing bank merited the business. Online trading platforms have made this far simpler with reports that benchmark the price achieved against the indicative market rate, enabling users to prove they achieved justifiable execution even when dealing with a single counterparty. Comprehensive reporting that enables corporate treasurers to analyze their banks’ performance by product, currency pair, response rate and hit ratio really highlights which banks are prepared to go the extra mile for their clients. …but relationships are important too
For most corporates, best practice in foreign exchange is linked to banking relationships. Perhaps more than any other type of market participant, corporates have extremely strong ties to their liquidity providers. The supply of credit in the form of foreign exchange and money markets lines is just one component in a wide-ranging relationship that encompasses structured deals, advisory, corporate finance and M&A-related activities. Foreign exchange flow is sometimes used by corporates to reward banks for other services. For this reason, sharing out flow between providers can be an important criterion in the corporate definition of best execution, provided that the prices on which they execute are fair and justifiable. Trading FX as part of a broader relationship also has another advantage. If a corporate has a strong relationship with the provider they are trading with, they will often get much faster, tighter pricing than they would otherwise. Many participants who have traded both on anonymous and relationship-based platforms report that both liquidity and pricing are better when dealing through the latter, since relationship banks are more willing to execute large trades at tight prices when dealing with a known, trusted client.
Automating the trading process also makes it far simpler to comply with regulations such as the U.S. Sarbanes-Oxley Act. According to recent research by PricewaterhouseCoopers, more than half of corporations report that streamlining and automating controls can significantly reduce the cost of Sarbanes-Oxley compliance. It is also important that any vendor a corporate treasurer chooses in this respect has undergone suitable due diligence. An up-to-date SAS 70 certification from a reputable auditor is a key requisite. Over the long term, companies that stick to manual processes will find it increasingly costly to document and test controls to the standards required by the new legislation – another way in which a manual trading process ultimately costs far more than an electronic one. Internal dealing and netting tools deliver economies of scale
So far, we have looked at how to minimize transaction costs and optimize pricing on a deal-by-deal basis. The final component of best execution concerns maximizing efficiency by consolidating and netting FX order flow. Executing deals of ‘normal market size’ is much more cost-effective than trading frequently in tiny amounts. Many larger corporates are now developing regional or even global treasury centers, which allow them to centralize and consolidate internal FX flows before netting them and trading the net amount externally. Such centers demand 24-hour coverage from their banks and multibank portals, and require expertise in a wide range of emerging markets currencies. As well as delivering economies of scale, the trend towards centralized treasuries also gives treasurers tighter control over the trading process, making it easier to comply with regulations such as Sarbanes-Oxley. The introduction by the International Accounting Standards Board of IAS 39, which requires every hedge to be tagged to the exposure it is hedging, initially seemed likely to make it more difficult to take advantage of netting. Many companies currently are forced to do all their hedges externally on a gross basis in order to secure more favorable accounting treatment. As well as being more time-consuming, this significantly increases the cost of trading. Fortunately, solving this problem is now simple with new technology that enables corporates to net hedges and trade the block amount with their providers, before splitting the trade out again internally. In this way, they get the benefits of hedge accounting without sacrificing the cost efficiencies of trading on a net basis. Companies can invest to build this technology themselves, or use one of the solutions available through platforms such as FXall. Conclusion
Automating the way to compliance and better execution
When calculating cost savings, you need to look at more than pricing. Today, most corporate treasurers look at overall transaction costs when assessing best execution – these include pricing, the cost of trading and processing transactions, and the potential for costly errors. Electronic systems reduce transaction costs and operational risk by transforming a series of manual steps into a seamless, automated process.
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Best execution, then, is not about price alone. While pricing is important, so are overall transaction costs and the appropriate direction of flow according to banking relationships and credit exposure. Corporates are also starting to look beyond pricing and cost per trade to implement more effective ways of managing their FX flow. The online trading, reporting and workflow management tools that have emerged over the last five years have been invaluable in helping them to do so.
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e-FOREX
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eFX and Best Practice in the Treasury environment. Heather McLean canvasses the views of several leading international companies on the best practice advantages for their treasury departments of using eFX technology.
I
n treasury, showing best practice in the
Best practice was also unimportant for
use of electronic foreign exchange is
Lufthansa. However, this was because
now a vital aspect of day to day life.
when the company began e-trading, there
Increasing regulation is the main driver for
were no best practice guidelines available.
this, with the need for added transparency and traceability on every aspect of a deal.
Axel Tillmann, head of treasury at Lufthansa, says: “We were the first
However, many organisations did not set out one day with the intention of achieving best practice guidelines on eFX; for some, best practice has been a welcomed side effect of bringing eFX trading platforms into their organisations.
company trading with 360T, back in May 2001. We have helped 360T develop its system.” Yet he adds: “Today, best practice is very important for us. We share best practice with other DAX companies in a local treasury circle.”
Heather McLean is a freelance writer.
Although Bertelsmann’s treasury has achieved best practice through eFX, best
Online trading
practice was not the reason it began using
eFX is becoming more prominent in
the technology. Stephan Scheller, senior
people’s minds. This has led to a focus on
vice
president
for
treasury,
in
the
corporate treasury and finance division of Bertelsmann, explains: “It was not our aim to achieve best practice. It was our aim to achieve best work flow. The esystems and interfaces really help us to
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eFX best practice. Online trading is having a massive effect on the improvement of best practice, with best execution through added
price
transparency,
liquidity,
operational efficiency and flexibility, as
save time to spend on improving other
well as the ability to easily manage and
aspects of our daily work, such as
track
advising our subsidiaries. Time saving
Automated FX practices give treasury
was our goal, and best practice has been
departments the control over their trades
a side effect.”
and the compliance standards they need
deals
for
auditing
purposes.
>>>
Treasury Best Practice – the role of FX automation
to hit best practice targets, and to define
At Textron, trade details are automatically
those targets further. Lufthansa has found
passed from the FXall trading platform
being able to have up to 10 quotes on the
into the FXpress FIRSTTM system database,
screen at any one time has not only made
then directly from FIRSTTM into the FXall
getting the best price far easier, but it has
Settlement
also cut down on the number of people
electronically
required to trade, according to Tillmann,
Center,
where
confirms
the
Textron financial
details and settlement instructions with its FX banks.
providing further efficiencies. At Aegis, eFX has helped it increase best practice throughout the organisation.
Bob Hemstreet comments: “Having the ability to store settlement instructions in the system and pass them electronically
David Grinnell, group treasurer at Aegis,
through the FXall Settlement Center
comments: “We can handle everything
makes the process easier. It eliminates
with much more transparency, as we can
mistakes that can easily be made by
see things such as our netting and
giving details over the phone.”
aggregation
opportunities,
without
having to be more involved centrally. This
Royal
means we can build a much better view of
the Currenex platform for trading in
our trading requirements globally, giving
the
us a picture of how to improve our current
treasurer at Royal Swets and Zeitlinger,
trading practices.”
states: “Our goal here is to have state of the
Automated online FX trading has also greatly improved best practice at Textron. Bob
Hemstreet,
Assistant
Treasurer
Global Treasury Operations, says: “Our entire process including both FIRSTTM and
Swets
treasury.
art
and Bert
treasury
Zeitlinger Kors,
uses
Stephan Scheller
“The advantage of e-trading means we receive more quotes from more banks, versus transactions over the phone”
corporate
department
and
processes, policies and systems. eFX helps us in achieving efficiency in the trade execution process, being able to select the optimal quote from multiple banks at the same time, and in the confirmation process.”
FXall is much more reliable, time efficient, and cost effective. There is no wasted
Kors adds: “For a treasury department,
time on telephone conversations, the
eFX technology helps in the trading
accuracy of the information including
process, as it’s best practice in the
Axel Tillmann
trade details and settlement instructions
industry to use such a system rather than
is much more reliable.”
calling several banks on the phone.
“We share best practice with other DAX companies in a local treasury circle”
january 2006
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85
>>>
Treasury Best Practice – the role of FX automation
Now it’s just looking at Currenex on the
The most annoying piece of this was the
screen and selecting the best price from
paper based confirmations from the bank
your counterparty banks. Then you’re
that generally would come in days or
able to show the results because of
weeks later, which meant going back into
performance analysis and reporting, so
our system to confirm the details.”
you can analyse your counterparties in terms of the trades they’ve won and the
Swiss Postfinance uses 360T as its
number
preferred eFX platform provider, along
of
requests
they
haven’t
responded to.”
with FXTrader for spot FX. Achieving best practice is key for Swiss Postfinance’
David Grinnell
eFX allows the Bertelsmann treasury
treasury activities. The company does
department to go to market on lower
proprietary trading including FX, so finds
amounts. In the past, Scheller says the
eFX technology vital in enabling it to hit
company had to deal huge FX amounts in
best practice targets.
one ticket, but now with e-devices, it splits
“eFX allows us to show the whole range of qualitative decisions that you apply to a trade.”
its deals down to a series of lower amounts, which reduces the deal risk.
Markus Fankhauser, head of FX trading and sales at Swiss Postfinance, states: “Using eFX technology makes our work
Confirmation matching
very
comfortable,
particularly
for
matching and settlement. To back it up, Confirmation matching is a key benefit of using automated FX platforms. Not only
our platform providers will also call us if something particularly interesting is
is this electronic method far more
going through the markets. They all try to
efficient than checking confirmations by
give us the best advice, which allows us
fax or phone, it is also bringing the
to make best practice.”
industry up to the standards required by
Bob Hemstreet
“Our entire process including both FIRSTTM and FXall is much more reliable, time efficient, and cost effective.”
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regulators. Bob Hemstreet continues:
Bertelsmann uses 360T’s TEX and iTEX
“From a confirmation perspective, this has
platforms
resulted in significant time and cost
trading.
savings for Textron. Prior to having this
settlement, but currently no pre-trade
technology, we would confirm each
preparation or confirmation and netting
individual trade three times; Textron
facilities; these are being implemented
would prepare a memo to be sent to the
using Misys, which is involved in a
bank with the trade details, then we would
strategic alliance with 360T, through the
receive a phone call from the bank asking
first half of 2006. Yet eFX trading, even
to confirm details, and we would receive a
without
paper confirmation from the bank asking
confirmation and netting facilities, has
us to review the details and confirm by
improved Bertelsmann’s best practice in
signing and sending back to the bank.
many ways.
for The
external company
pre-trade
and has
internal gross
preparation
or
Treasury Best Practice – the role of FX automation
Electronic pricing allows the company to
auditors,
accept quotes at higher volume and
companies when we have done FX deals
and
to
our
subsidiary
simultaneously, which means more
on their behalf, and that we’ve used best
transparency and better prices. STP has
practices. eFX allows us to show the
also been improved, enabling the
whole range of qualitative decisions that
company to reduce the manual labour
you apply to a trade.”
traditionally involved in entering deals and correcting mistakes.
Kors
continues:
“Having
an
FX
automated system has also helped with Scheller outlines the best practice
regard to internal audits. It’s very
advantages for his treasury department
auditable, showing all transactions and
using eFX technology: “The advantage
histories. We’re aiming to achieve
of e-trading means we receive more
further efficiency through STP by linking
quotes
from
more
banks,
versus
transactions over the phone. Also, all the deals go straight into the dealing system, allowing us to achieve a high degree of security, as well as having the settlement instruction at the maturity of the deal.” Additionally, the trading
Currenex to our treasury management system, Baxtre, and then into our SAP platform. We hope to have that done in a year’s time.” Future improvements
system reports are making internal
Improvements to eFX technologies are
auditors extremely happy.
required, Grinnell believes. He wants packages to be unified with better automation, such as matching of FX
Auditing
On auditing, Bob Hemstreet adds: “Years ago there was a concern that we would find items in our yearly external audit
trades and reconciliation, which he says do exist but not necessarily all on the same platform. The improvement that Kors
that were not in our database, or perhaps
would like to see on Currenex is in the
were entered improperly. Today we do
confirmation process. Counterparty banks
not have that concern at all. We are
still
expecting and do receive a 100% match.”
confirmation to the Royal Swets and
insist
on
sending
separate
Zeitlinger treasury department, asking that Markus Fankhauser
“Using eFX technology makes our work very comfortable, particularly for matching and settlement.”
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eFX technology is extremely important
they be signed and returned. “To reach
in helping Aegis achieve its best practice
more efficiency, if we could all agree that
guidelines
in
The
the Currenex confirmation is adequate, it
company
uses
platform.
would save faxing a lot of paper
Grinnell says: “We have to be able to
backwards and forwards. A lot of banks
show both internally to our board, our
are reluctant to accept that though.”
auditing the
terms.
360T
Automation in Treasury – Facilitating Compliance with Sarbanes Oxley In recent years, treasurers of international companies have had to learn to deal with significantly increased volumes of regulation. The combined effect of Sarbanes-Oxley for SEC registrants and IFRS for companies in Europe has forced many companies to focus much of their scarce spare resources on compliance issues. This has certainly been the case for many finance functions, and the treasury department has proved no exception. Sebastian di Paola, Partner, PricewaterhouseCoopers Is it all worth it?
I
n parallel with their Sarbox efforts, treasury departments have
The cost of compliance with Sarbox has proved pretty
had to devote resources to integrating IAS 39’s complexities
staggering.
According to a recent survey by Financial
into their risk management operations and will now have to
Executives International, large public companies spent an
deal also with the additional disclosure requirements contained
average of USD 4.4 million last year on compliance with Section
in the IASB’s latest standard on financial instruments, IFRS 7. In
404 of the act. Commentators have been questioning for some
the meantime, more strategic initiatives, for example in the area
time whether real shareholder value is being derived from these
of treasury technology, are being left on the back burner while
initiatives, and whether the capital markets will end up better
efforts are focused on meeting the tight deadlines imposed by
off. Some non-US companies are now viewing the burden of
the new regulations. These efforts will not end there. Over time
complying with the SEC’s stringent compliance and reporting
companies will endeavour to further fine-tune their processes,
requirements, as outweighing the benefit of their US listing and
in order to reduce the cost of compliance. For many this may
there has been increasing talk of delisting from the US.
include replacing multiple spreadsheets or poorly integrated
few companies have even chosen to do so and the SEC is
patchworks of systems with more automated and straight-
now looking into ways to ease the compliance burden to stem
through processing (STP) solutions.
the tide.
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A
>>>
Treasury Best Practice – the role of FX automation
The question of whether the benefits of Sarbox compliance outweigh its costs is of course key, but in considering this question one should not lose sight of why these regulations have come into being in the first place. The genuine need to restore the confidence of investors and stakeholders in corporate reporting stemmed from major failures in both the US and Europe. Treasury has had its own share of disasters, many of which predate the Enrons and Parmalats by nearly a decade,
including
control
failures
at
Orange
County,
Metallgesellschaft, Barings and more recently AIB and NAB. Already back in 1993, a G30 study on ‘Derivatives practices and principles’ highlighted the need for a comprehensive and harmonised approach to accounting for financial instruments. It is this context which has spawned the regulations we face today, and it is difficult to argue that some sort of regulatory action was not needed. Figure 1 shows the impact of treasury activities on the financial As to whether these regulations meet their stated objectives or
statements and some of the related internal control activities.
whether they drive change more in form than in substance, the
Many of these will be key controls for Sarbox purposes and
jury is still out. However, it seems that recently the number of
accordingly will need to be documented and tested under
companies recognising that there is a silver lining to the Sarbox
section 404. All this attention is bound to put treasury in the
cloud is increasing. Some CFO’s are beginning to see that there
spotlight, a fact not lost on those more savvy treasurers who
is a route to regulatory compliance that encompasses significant
have used this focus as an opportunity for greater “air time”
value for finance, and thence for the company as a whole.
with the CFO and Board and to engage and educate senior management via discussions not just about internal control and
What do companies have to do to comply with Sarbox
Most of the focus of companies’ implementation efforts is on
accounting, but about how treasury really adds value to the business, a topic often poorly understood by non-specialists.
section 404 of the Sarbanes Oxley Act. This section requires an annual report by management regarding internal controls and procedures for financial reporting, and an attestation as to the accuracy of that report by the company’s auditors. In order for management to be able to provide this report, companies must undertake an extensive documentation exercise. This involves analysing processes with a view to identifying all controls which are key to ensuring the accuracy of information included in the financial statements and testing these controls on a regular basis to ensure they are operating effectively. This is easier said than done, as few companies have good process documentation, and even those that do, generally have not specifically analysed and documented their key controls, let alone determined how they will ensure these are working effectively.
Indeed
Sarbox
requires
mean for the FX hedging / dealing process? Firstly it means the FX process needs to be analysed, key controls identified and documented.
This is a costly exercise, but is all the more
difficult to undertake when the underlying activities rely on a mixture of manual and automated procedures, operating on a variety of poorly integrated systems and spreadsheets. In addition, if the front office, back office and accounting processes are fragmented or manual, then each critical step will require a key control and most of these controls are likely to be manual. Each re-input will require a control to ensure all data has been completely and accurately transferred from one part of the process to the next, for instance when information is
No longer is it sufficient to produce a set of reliable financial statements.
At a more detailed practical level, what does this concretely
that
companies
demonstrate that they have the controls in place to ensure that any errors are picked up and that assets are safeguarded against loss or material fraud. What does this mean for Treasury / FX processes
transferred from a front office system (which is still often a spreadsheet) to the back office system for further processing, confirmation and settlement, then on to the accounting department for the calculation and posting of accounting entries. Each of these controls will be key, meaning that the control must be documented and tested.
In the case of manual
controls, which the input controls are also likely to be, testing
Owing to the volume of risks and flows managed by the
them will also be a manual, and again time consuming, exercise
treasury function, treasury bears a significant share of the
based on statistically significant samples, with testing
Sarbox burden.
procedures carefully documented to demonstrate compliance.
january 2006
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91
Treasury Best Practice – the role of FX automation front when implemented, and subsequent testing focuses on making sure there has been no change to the set-up and that it is secure. This will generally be a far less costly exercise. Turning it around – how can SOX help with automation
And it’s not just about input controls: other
typical
control
activities which may be manual in nature include checks on aggregation of FX forecasts from business units, deal authorisation and limit monitoring, confirmation matching, documentation of hedges for hedge accounting purposes, verification of spreadsheetbased valuations of FX derivatives, and many more. In other words, the cost of compliance for a poorly integrated FX
process
is
significant
since
it
involves
complex
documentation, manual controls and manual testing of those controls. Processes which were inefficient and costly in the past become all the more so post-Sarbox. How automation can help with SOX compliance
It becomes obvious from the above, that automation is one of the answers to easing the SOX burden. Establishing, documenting, operating and testing manual controls is a much more costly exercise in the long run than doing the same in an automated environment.
Automated
controls
and
procedures
are
documented and validated when they are implemented. Thereafter appropriate controls over system change and procedures to ensure the control is still operating as designed are sufficient to ensure compliance. So automation is the best solution not only operationally, but also from a control perspective. Indeed processes which are integrated and straight-through in nature contain fewer key controls than the more manual equivalent. This is because once a system has been correctly set up, it can be relied upon to perform repetitive tasks accurately. The key controls when full STP is in place are therefore fewer in number.
Many treasurers have been looking for years to secure budgets for investment in technology to enable them to automate their treasury and FX processes and integrate them with forecasting and accounting, as well as with external banking solutions and with other partners. Treasurers will want to use the added focus on control as a basis for justifying the budget to do with technology what they have been wanting to do all along. And what about IAS 39?
For companies with listings in both the US and Europe, IFRS and Sarbox have created something of a “double whammy”. IAS 39 on accounting for financial instruments has had a significant impact on FX hedging processes, and here again, automation can help. For many companies which hedge FX risk on a centralised basis, IAS 39’s prohibition on hedge accounting for treasury centre netting has meant that a larger number of deals are undertaken externally, usually on a gross basis. This approach has been possible for some only because electronic dealing solutions enable them to route the larger volume of FX deals through to their banking partners without increasing the operational risk inherent in manual dealing and record keeping. In addition to reverting to generally more vanilla FX hedges, companies have tended to use less dynamic strategies than was previously the case owing in part to the burden of maintaining and updating hedge documentation. Strategies which involved recalibrating hedges in response to changing markets have suffered under IAS 39 owing to the complexity of changing hedge relationships, performing effectiveness tests and generating the resulting accounting entries. Treasurers have had to forego some flexibility and to go in and out of the market less frequently than they might otherwise. Automation should give greater flexibility here since systems deal better than people with these complex repetitive tasks. One consequence of IAS 39 is to take some flexibility away from treasurers. Putting in place well designed and well-configured systems could be a way of getting some of this flexibility back. Though companies must ensure they really understand the processes within the system to avoid this becoming a black box.
The focus is then placed on making the up-front
investment in system implementation and testing, ensuring the
Conclusion
system is correctly maintained and secure from unauthorised
Sarbanes Oxley compliance has proved a costly exercise and the corresponding value remains elusive. The cost of compliance will continue to be high for fragmented and partially manual processes. Companies wishing to improve their FX dealing processes by increasing the level of automation will find the Return on Investment for such projects easier to demonstrate now that SOX has made manual processes more expensive to run. Treasurers and their CFO’s should view the new regulation as a catalyst for driving through beneficial change to their treasury and FX processes, seizing the opportunity to reduce ongoing costs through increased automation.
access or change, and on controlling the critical first input. Take the example of confirmation matching. This is always a key control in the FX process since it provides the basis for verification
of
all
deal
details
against
the
external
counterparty’s data. If this control is manual, say by fax or email, then the process of ensuring the control works, is also manual and generally time consuming. If on the other hand the confirmation matching control is automated, as is generally the case with electronic dealing, then the control is tested up-
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Why Automation for IAS 39 is a must-have – not a nice to have Idealist in treasury love to talk about achieving STP (“straight-through-processing”), or having a one-stop single solution treasury management solutions (“TMS”) that does everything. While some treasuries have gotten pretty close to reaching this panacea for cash management or for Fx execution, the advent of hedge accounting rules across the globe have thrown monkey wrenches into the many plans for improved automation in treasury. In fact, the new requirements are forcing more manual processes for treasury which is not a good position in the post-Sarbanes Oxley world for having the proper financial controls. By Jiro Okochi, CEO & Co-Founder, Reval.com, Inc or US GAAP followers, the regulations for derivative
F
companies must follow proper documentation and hedge
accounting under FAS 133 is several years old, but ACG-13
effectiveness analysis to achieve beneficial hedge accounting
(Canadian GAAP), CTEN (Mexico) and IAS 39 (basically the rest
treatment. Under IAS 39, the requirements are more stringent
of the world) are very new and have put significant amount of
as it does not contain beneficial treatment of certain interest
pressure and paperwork on treasurers and accountants. There
rate hedges (Short-cut Treatment) and basic foreign exchange
are the unfortunate multi-nationals who have to report under
and commodity hedging (Critical Terms Match) that exist under
more than one standard as well.
FAS 133 and ACG-13.
While there are differences between the standards, they all
These hedge accounting rules impact all aspects of the
require companies to record the change in values of the
transaction workflow, from pre-trade analysis to post-trade
derivatives from period to period. To avoid P&L volatility due to
debit and credits. It also requires companies to be able to
these mark to market movements of its derivative hedges,
conduct a variety of quantitative and statistical analysis on both
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>>>
Treasury Best Practice – the role of FX automation
the derivative and the exposure every period, usually monthly
At Execution:
with some even conducting daily testing. All of these activities
1. At Inception Documentation: the rules require that the
and processes are perfect ingredients for the need to have a
company designate at the time of hedge execution that it will be
truly automated process, but it goes beyond achieving
applying for hedge accounting. Again, in order to prevent trading
operational efficiencies and becomes of strategic importance.
activities from being disguised as hedging, the “time stamp” designating the hedge to an exposure and identifying the risk is
The following are key areas within hedge accounting that would
key, otherwise a company could in theory wait until month or
benefit from automation:
quarter end to pair up hedges to exposures after the fact.
Pre-Trade Workflow:
The best way to record the time of execution would ideally be
1. Documenting Strategies: before entering into a derivative
through a system, where either upon execution via an
transaction, the risk or exposure that is being hedged has to be
interface to trading platform or exchange, or upon entry into the system, the time is recorded and a workflow
properly identified and linked to the corresponding
manager is initiated that would link the
derivative. References to sections of the risk management
policy
and
derivative to the proper exposure.
template
documentation to generic hedging 2. Prospective Assessment: also at
strategies are repeat actions and
the inception of the trade, the
should be automated.
company must provide evidence 2. Consistency in approach: is
that the hedge relationship has a
also required, i.e. a company
high probability of remaining
should
effective going forward.
use
the
same
prospective and retrospective Although an unusual accounting
assessments every time it enters
requirement
into a LIBOR cap to hedge similar
forward
analysis does enforce good risk
manual process leaves the company
management practices.
open to risk that one person may use a
It is perhaps
this area of hedge accounting that has
different technique to show effectiveness.
troubled most companies due to the lack of
This would be even more likely in a
clarity of methods to be used and due to the
decentralized treasury or subsidiaries reporting for FAS 133/IAS 39 separately.
where
looking proof is rarely needed, the
floating rate interest exposure. A
complexities of calculating the results, especially on a manual basis.
3. Exposure Management: even without hedge accounting rules, obtaining accurate and timely exposure information can
Some of the alternative assessment methods include statistical
be very challenging. The entire concept of hedging lies on the
analysis that shows high correlation between the derivative
premise that there is exposure defined, otherwise the company
and the hedge. Historical data or simulating data and running
is simply trading and hedge accounting would not apply. The
regression, slope, f-stat and t-stat analysis to show that the
challenge has been for the regulatory bodies to set up rules
correlation is high (R SQ> .8), that the relationship is inversely
that would ensure the exposure is real and that the derivative
proportional (between -0.8 and -1.25) and there are enough
hedge is an appropriate hedge. Therefore, exposures have to
data points in the sample set (typically >30) is the more
be highly probable of occurring and under FAS 133 that means
common approach.
within 60 days of the date the exposure is anticipated. Under IAS 39, its less clear, but in general the company most have
An alternate to this method is to conduct a stress test on the
evidence that it the exposure is highly probably, and for cash
hedging pair to see if the relationship remains effective in
flow hedges, that typically means showing a historical pattern
“worst case” scenarios. While either of these methods could
as proof. Manually capturing exposure data, limits the ability
be done on a manual basis, the calculation needs to be done
to aggregate exposure and also to prove the high probability of
consistently and regularly at the start of each period and would
the exposure from occurring for cash flow hedges.
best be done on an automated basis to avoid error.
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Treasury Best Practice â&#x20AC;&#x201C; the role of FX automation
Post-Trade:
3. Integration To The General Ledger: after jumping through all
1. Retrospective Assessment: the rules also say that not only
of the documentation and hedge analysis, the debits and
should the hedge relationship show effectiveness going
credits have to be calculated and posted properly. Constant
forward, but also to show that the relationship was indeed
adjusting has to be done as the derivative can change from
effective over the actual accounting period. This Retrospective
positive to negative (i.e. asset to a liability) and for cash flow
Assessment need not be the same method used for
hedges, the equity component (OCI under FAS 133, hedging
Prospective and can be as simple as showing the performance
reserve under IAS 39) has to be released as the anticipated
of the hedge as percent of the change in derivative over the
exposure becomes recognized to the balance sheet. All of the
change risk of the exposure, otherwise known as the Dollar
complexities and nuances would call for an automated process
Offset method.
to integrate to a general ledger.
Under the Dollar Offset method, the ratio must fall between
Conclusion
80% and 125%, and any result outside of that band would
By looking at the high-level transaction workflow under IAS 39
result in disqualification with the entire change in value of the
or FAS 133, it is evident that the requirements are time
derivative going straight to earnings. If Dollar Offset method is
sensitive, time consuming and complicated to conduct on a
not used, then statistical approaches can also be used. Again,
manual basis. Most treasury management systems have failed
the
performed
to deliver the proper hedge accounting module due to the need
consistently and every period, which would best be done
to have accurate derivative pricing modules, historical market
automatically.
data, complex assessment calculators and a GL module that
retrospective
calculation
needs
to
be
can handle the new standards.
So for most treasurers the
2. Measurement: to add to the confusion, the actual
choice is either a manual process of spreadsheets done outside
measurement of ineffectiveness is a standard calculation
the TMS or to find a best of breed solution with interfaces to
regardless of which assessment methodology a company
capture the executed derivatives and exposure information
uses. For options, the calculations are more complicated and
simultaneously and to run all of the periodic, consistent
several different methodologies exist. As the measurement is
calculations with processes every month or quarter end. If ever
ultimately the amounts that go to the balance sheet and affect
there was a need to have straight-through processing, the hefty
earnings, this should be done automatically to avoid human
requirements under the many derivative accounting standards
error and to provide the proper controls under Sarbanes Oxley.
would certainly be a prime candidate. For more information please email info@reval.com
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e-Forex Case Study
Case Study
Ravi Chopra
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january 2006
For most corporates, speculative gain on FX activity is not a key part of the corporate business model, so the pressure is always on corporate treasury to reduce the costs of processing FX transactions. At the same time, anything that frees up treasury staff from manually processing FX to focus on more strategic risk management activities is also welcome. Ravi Chopra, senior treasury manager at Juniper Networks, explains to e-Forex how Juniper accomplished both these objectives by turning its FX hedging activity into a straight through process. FX hedging
F
or most corporations of any size, improving STP in payments and receivables has long been a major objective. By contrast, introducing STP into FX transactions has historically been a rather lower priority. However, for corporations with even a relatively low level of FX exposure there are a number of areas of FX activity that can benefit from STP, including international payments, subsidiary funding and of course FX hedging. At Juniper we have implemented STP for all three of these processes. (An illustration of FX STP in the international payments process is in the July 2005 issue of e-Forex - "Integration of FX STP and automation into other processes".)
Although Juniper had collaborated with Bank of America in achieving FX STP for international bulk payments, we also wanted to focus our efforts on improving our FX hedging process. There were a number of reasons for this. One of the most important was that FX hedging is already relatively complex so if numerous manual operations are also required then the whole process becomes extremely unwieldy. This unwieldiness results in a number of quantifiable additional costs. The more predictable of these costs include the time taken to input data manually, which results in more value added treasury activities being neglected. (Just making it through the month end close becomes
The three FX activities in question inevitably involve extensive interaction with banking systems, so consultations with banking partners - especially Bank of America - have been a key ingredient in determining the most efficient way of achieving this interaction.
e-FOREX
the singular goal of all treasury personnel). Less predictable, but much more alarming, are the potential losses that can be sustained in the case of human error, such as accidentally mis-keying a trade for the wrong amount and/or currency.
>>>
Treasury Best Practice – the role of FX automation
For each manual step in the current FX hedging process we asked ourselves a number of questions: what value did the manual intervention provide, what calculations were required, and were we just checking FX pricing? Depending upon the answer we would then decide whether or not it was possible to eliminate that manual step. For example, while we could not eliminate initial data entry, we could certainly dispense with the manually re-entry of static data, such as settlement instructions. By the same token, decisions such as whether or not to hedge required a human element, while repetitive calculations such as netting did not.
Another important STP incentive for Juniper or any other growing company is the need to institute processes that are scalable, but that do not require a commensurate scaling up of headcount. The ideal situation is to be able to accommodate expanding transaction throughput without expanding payroll. Furthermore, given a certain amount of planning, achieving this scalability through FX STP is not extortionately expensive. The starting point
Juniper’s existing FX hedging process involved a large number of manual steps. FX exposures were manually aggregated from spreadsheets e-mailed into treasury, before being manually rekeyed into the cash forecasting and balance sheet modules in the treasury workstation. Grouping and netting of these exposures were also done manually, as were the actual resulting trades – which were transacted over the phone, with the resulting trade details also being manually keyed in. Trade confirmations (phone and e-mail) and settlements were also manual, as were the recording and posting of the resulting accounting entries. Obviously, a process as manually intensive as this had a number of major drawbacks. Firstly, it was extremely slow, with month end hedging typically taking three days to complete. It was equally error prone – perhaps unsurprising when you consider that data entry involved no fewer than six keying in activities. The energy expended on this inefficient process (and related corrections and reconciliations) could instead have been applied to the far more important task of determining a strategy for dealing with long-term FX economic risks.
We also considered the investment in technology that would be required to automate the FX hedging process. It became immediately apparent that this was smaller than might be expected – for example, relatively simple programs using Web technology could be used to collect, collate and net subsidiary data. The new FX hedging process
Based upon our analysis of the existing largely manual FX hedging process, we designed and executed an STP replacement. This starts by obtaining information on the various FX exposures online, via Web based templates that feed directly into our treasury (FX) workstation, Green River Computing’s Orbit. Orbit then aggregates the exposure information and sets up the appropriate trade(s). These are pushed via a secure ADI data transfer to an online FX multibank web portal, where they are executed with approved counterparty banks. Juniper currently uses FXall for this purpose, but any one of a number of multi or single bank portals, such as Bank of America’s FXtransact, would also be suitable for this purpose. These completed trades are downloaded back into Orbit via the same secure ADI route, with any transfer errors being automatically flagged by Orbit. Once these trades have been downloaded to Orbit, they are locked and saved and therefore cannot be changed by the trader. FXall’s “Settlement Center” module is used to record all trades, whether they are done online with FXall or over the phone, and thus effectively acts as a third-party trade confirmation agent. Orbit automatically recognizes those trades executed on FXall
Apart from absorbing too much of the time of a leanly staffed treasury team, knowledge of this type of manual process is not easily transferred to other personnel. This inevitably created problems around holidays, sickness, or personnel moving to other jobs. Finally, the existing process was simply nonscalable and would have been unable to accommodate the company’s global growth and expansion. What to change?
As a first step in our move towards STP of FX hedging we undertook a detailed review of the existing manual process flow, with the overriding rule/objective for the new process that we would key in data only once.
january 2006
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99
This reduction in manual activity, coupled with system features such as the locking of completed trades, also represents a significant controls
improvement
as
regards
in
internal
Sarbanes-Oxley
compliance. The integration of systems possible in an automated
environment
streamlined
both
has
also
settlement
and
accounting. Orbit has been configured so that, where necessary, settlement dates automatically trigger the release of the appropriate wire transfers to Bank of America for execution. At the same time,
Orbit
automatically
writes
e-Forex Case Study Case Study
accounting entries to a flat file that is
100
january 2006
in
turn
automatically
uploaded
to
and greys them out to indicate that manual
Juniper’s Oracle ERP system, which spares
confirmation is not required. The ability to use FXall
accounting personnel from having to re-key this
as a trade confirmation agent (even for any manual
information.
trades) means that it is no longer necessary to check trades in two separate systems in order to submit
Overall costs have obviously been reduced both
confirms. Particularly where trade volumes are
within
substantial, this not only saves time, but also
personnel have also been freed up to devote time
significantly reduces the risk of errors.
to strategic value added tasks, rather than
and
outside
treasury,
and
treasury
mundane operations. This in turn has obviously To ensure appropriate segregation of responsibility,
benefited staff motivation and retention. Finally,
a member of treasury who is not authorised to
the new FX hedging process is scalable and
trade confirms any manual trades. In Orbit this is done in a trade confirmation screen, and in FXall via
therefore ready to accommodate future growth in FX volumes and the range of currencies traded.
the Settlement Center. Value
The member of treasury authorised to confirm also issues settlement instructions to the counterparty
Apart from the benefits outlined above, one of the
bank via phone or FXall as appropriate. All
most gratifying points about the FX hedging STP
settlement instructions are standard repetitive
project was how little it cost – less than $20,000.
approved Juniper delivery instructions, which
Furthermore,
cannot be changed without the written approval of
maintenance and FXall access are minimal. As a
senior management.
result, the annual time saving for traders, treasury
the
annual
costs
of
system
analysts and accounting personnel has resulted in The benefits
The new FX hedging process has netted a number of significant gains, both for Juniper’s treasury and the corporation as a whole. Prominent among these gains has been the drastic reduction in the
a payback period of no more than six to eight months. These savings could also be reproduced for most treasuries with more than minimal FX activity, making this sort of an STP project an eminently worthwhile undertaking.
time taken to complete the monthly FX hedging process – down from sixteen hours to one hour.
As a modest first step, if a treasury group does not
The time required to complete confirmations,
have any budget for a treasury workstation, it
netting and settlement has contracted even more
could still implement some straight-through
dramatically – from four hours to ten minutes.
processing in FX hedging by using spreadsheets to upload trades into an online FX portal. Apart from
Data is now keyed once, rather than six times,
more efficient order execution, this will also offer
so the probability of keying errors has also
other benefits such as the ability to auto-confirm
been reduced.
these trades using the confirmation and settlement center feature provided by portals like FXall.
e-FOREX
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THE
e-FOREX
FORUM
eFX Technology powering the growth of new trading opportunities With Mark Davies, CEO of Misys, Global Managed Services, Farid Naib, CEO of FNX Solutions, Brian Maccaba, CEO of Cognotec, Mike Thrower, Director of Marketing at Wall Street Systems and Rustam Lam, Managing Director of Townsend Analytics, Europe.
Is the current pace of innovation and uptake in Electronic FX being driven by the sell-side or buy-side and if the traditional role of FX technology vendors has been to connect each side together, does the answer really matter to them anyway? Davies: The current pace of innovation in Electronic FX trading is driven by the sell side, specifically trading portals. While the buy-side clearly benefits from technology advances and expanded instrument offerings, it is the sell-side that gains the most by offering state-of-the-art trading platforms. In addition to securing a competitive advantage, innovative sellside technology providers also achieve new sources of revenue. The newer technologies have been able to support immediate trade execution, competitive multi-bank bidding, broader instruments, wider tenors, anonymous trading and credit enhancement through prime brokers. FX technology vendors have been prominent in supplying solutions and more importantly bringing both sides of the trade together. Naib: In today’s market, FNX innovation on both the sell-side and buy-side is being driven by the buy side’s needs. The buyside is increasingly demanding a more streamlined eTrading capability with better price transparency, more product coverage, and more services leading to innovation on both sides to meet this need. Development is being served equally on both sides, so, in the end, it does not matter which side is driving the innovation.
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Mark Davis
“Two areas where technology would improve integration of the full deal lifecycle and abate STP bottlenecks are FX confirmations and Standing Settlement Instructions”
Maccaba: The uptake in electronic FX has been driven by the availability of new technical solutions, without doubt. In the absence of the technical infrastructure, the increase in bank-to-bank and margin and retail aggregation trading (which have the two most dynamic areas of growth) wouldn’t exist. However, to an extent it’s an academic point – the reality is that both the market and the vendors benefit. The next growth area - the emerging trend in ‘black box’ algorithmic trading - is also technology-dependent. Thrower: Without doubt, in the past 18 months the buy side have embraced eFX in a big way. As this is such an important market segment for many financial institutions, and hence very competitive, the sell side firms are battling to offer the
>>> killer eFX solution to both attract new and retain existing client flow. For vendors like Wall Street Systems, who have a major stake in both sides of the FX market, delivering innovative eFX solutions that span the whole transaction lifecycle, from price discovery through trading to confirmation is key. Furthermore, leveraging the best in web-enabled technology and service oriented architecture enables our clients to muster the key building blocks to a successful eFX architecture. Lam: Innovation is being driven by both sides, each with differing agendas. Also complicating matters, there are a number of alternative liquidity models that have sprung up, each catering to different specialty needs, further fragmenting the FX space. The sell-side has a need to explore and provide appropriate methods of interaction with their liquidity pools, from simple ‘request for quote’ through to streaming and tradable multi-bank prices. The buy-side – and especially the hedge fund and high frequency traders - are driving the requirement for access to deeper third-party portal liquidity. Increasingly, access to liquidity - be that request for quote, streaming prices or ‘ECN’ type liquidity - really depends on the profile of the end trader – including credit, trading style, frequency, and size. One of the major challenges (and advantages) for the vendors is to provide all of these in a controllable and usable fashion for both the sell-side and buy-side participants. Choice of FX provider can be influenced by more than just the provision of the latest pricing and execution technology. Many clients are also looking for automation of the full deal lifecycle. Are there still some areas of the trade cycle where automation falls short and technology could improve integration and STP bottlenecks? Davies: Two areas where technology would improve integration of the full deal lifecycle and abate STP bottlenecks are FX confirmations and Standing Settlement Instructions. In both cases, faxes and phones are still used by a significant number of institutions. A number of institutions have implemented an electronic treasury system such as Misys
Treasury Plus to reduce the STP bottleneck. Automated treasury services can also provide a standardized confirmation matching process and the ability to store and retrieve any number of SSIs in a variety of industry standardized formats. Electronic treasury systems truly create an STP process that minimizes trading errors and settlement fails. Naib: Yes, there are still some areas of concern within the life of a trade, with the majority of STP bottlenecks being encountered on the back end or clearing side. Some concerns relate to how clearing firms interface with their clients’ systems. Another typical concern is the need to maintain many different accounts for clearing. Many buy-side firms trade a variety of products and currently their crossproduct needs are not being fully met. Maccaba: Much of the focus of STP has been in the post-trade environment. However, the focus has now switched to pre-deal processes and the emerging capability to integrate pre-deal decisionmaking into electronic trading. This requires a degree of flexibility in the banks’ technical infrastructure so that APIs [application programme interfaces] can be connected to support pre-trade automation. Some order management systems for instance do not allow API connectivity, however Cognotec’s has been developed with precisely this flexibility in mind.
Farid Naib
“Many buy-side firms trade a variety of products and currently their crossproduct needs are not being fully met” Lam: The FX market was an early adopter of electronic trading; as a result a number of disparate proprietary protocols and processes were built throughout the trade cycle. However, the industry is now gravitating towards ‘industry standard’ protocols like FIX. Continuous Linked Settlement
and
requirements
risk
have
management
gained
greater
prominence as well. As a result, there is need for consolidation and standardisation within each part of the trade and STP process to work more efficiently. The arrival of new corporate governance standards such as Sarbanes Oxley and IAS 139 has highlighted many of the benefits of automation in helping treasurers meet compliance. Do you expect to see increased demand for integrated tools
Thrower: We have seen renewed interest from our clients and the market to move the focus from trade execution further along the transaction lifecycle. Both buy and sell side firms are looking to automate the whole transaction lifecycle to reduce operational cost but also to meet regulatory pressures, address compliance issues and to provide greater transparency. Sell side firms are extending their eFX offerings to enhance and expand their client value proposition. Our analysis suggests that there are many sell side firms that are not there yet. The focus here is on confirmations, matching, settlement, netting, revaluation, risk; a broad set of functionality. Few technology vendors are positioned to be a one-stop shop for all this – making integrated client-centric solutions with a common look and feel problematic.
that add compliance to the Straightthrough Processing path and how much of a challenge is it to develop these? Davies: There is no doubt that integrated compliance tools will become standard requirements treasurers
as
demand
more STP
and
more
from
their
vendors and financial institutions. The systems along the entire value chain need to be operationally compliant with SOX and any financial risk associated with the value chain needs to be mitigated for IAS39 compliance. Treasurers are now in a situation where they are responsible for ensuring compliance in both areas, so they are learning to ask the right questions of their suppliers to help them determine the best solution in terms of functionality and compliance.
january 2006
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THE
e-FOREX
Naib: This depends on the level of oversight and regulation that comes into play
for
funds
in
the
future.
The
imposition of regulatory requirements and reporting will undoubtly create a need for additional technology as part of the STP process. On the corporate side,
FORUM In order to improve client retention, many FX providers are starting to extend their e-channel service offering, horizontally with more value-added services and vertically with more instrument coverage. How can technology providers assist them with this?
regulatory requirements and reporting are increasingly seen as a standard part of STP
and
technology
vendors
have
learned to address this. Maccaba:
The
impact
of
the
new
standards has varied according to the market segment. In the corporate area it has had a significant impact which has spurred
participants
into
upgrading
systems and procedures, and drawn their focus away from foreign exchange
Maccaba: The evidence we have is that single-bank trading platforms are experiencing a new lease of life, as banks have shown they are able to fully satisfy clients’ demands for the competitive prices (initially found only on multi-bank portals) on a single platform. Where there is increasing demand it is for higher quality value-added services such as pretrade information (including analytics and risk management) and faster execution. Overall, we’ve found that FX providers are upgrading and customising their core facilities in order to differentiate their offering from competitors and to retain existing clients. Broader instrument coverage, where it has been added, we believe is tending to attract new customers such as institutional investors.
trading. However, in the longer term with the right tools and controls in place automated trading will lead to greater transparency, higher levels of STP and help ensure better compliance. Thrower: Compliance has always been part of our straight-through processing model. It is through such integration that firms
can
achieve
true
operational
efficiency and reduce their total cost of ownership. By spanning the whole transaction lifecycle, encompassing both the internal and external workflow, Wall Street Systems have been able to work in partnership with many of our clients to achieve +99% STP. More fundamentally, as FX providers move into other asset classes, they will find that the regulatory compliance challenges can often be different and in many cases more onerous. To have this in mind when embarking on designing the appropriate web architecture is critical.
Brian Maccaba
“The next growth area - the emerging trend in ‘black box’ algorithmic trading is also technology-dependent” Davies: Technology providers are motivated to provide flexibility in adding new services and instruments in order to grow in this marketplace. Single instrument coverage is no longer useful to most providers because new instruments are coming out all the time. Treasurers have already started to demand the ability to manage exposures of all kinds, execute deals, confirm them, and create cash and accounting flows. Likewise, specializing in a single service offering is very limiting these days. Customers are looking for value added services to enable straight through processing, limit risk, and lower the number of systems they have to integrate with. The greater the depth and breadth of services a vendor offers the more value treasurers will place on their services.
Thrower: As well as moving further back in the transaction lifecycle, going cross asset class is key to the agenda for many FX providers. For some technology players, this is a step into a new world, having been focussed solely on FX historically. For Wall Street Systems and for our clients, cross asset class is business as usual. We have been supporting tier one firms with their interest rate and fixed income e-solutions for some time. The challenge for many FX providers however, is to get the various business silos working collaboratively. Often these businesses, and their internal IT functions, have been managed and run as separate business units. The challenge for these firms is to move from a productcentric mindset to a client-centric mindset. This is harder than it might appear.
Lam: Because FX has traditionally been an unregulated market, the trading components and risk and compliance management are often very different in nature. We’ve seen an increasing need and opportunity for real-time risk (‘value at risk’) analysis and the simultaneous ability to monitor and adjust buy-power or margin based on this in a seamless fashion. In response, the latest version of RealTick features an integrated, real-time risk management tool called the TAL Risk Analyzer
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Naib: Most sell-side firms develop asset class fiefdoms internally. Technology providers can help them develop a unifying cross asset class front end through the ability to interface with different legacy systems within the organization and thus provide the buyside with a more unified system. Technology providers can also assist sellside firms in the development of more robust offerings that provide more downstream capability.
Mike Thrower
“As well as moving further back in the transaction lifecycle, going cross asset class is key to the agenda for many FX providers.”
>>> Lam: At many banks and brokers, the ability
functionality as well as pricing, offers the
to offer more instruments is constrained
most in gaining a competitive edge and
due to a ‘siloed’ history in terms of both the
market share.
technology and the business model. However, clients and end users are increasingly seeking the ability to trade multiple markets simultaneously--often from a single portal. What’s more, they want advanced technology that will allow them to utilise trading techniques and strategies common in one market and to apply these into another market – either as a new single asset trade (FX) or a real-time conditionally linked trade across two
Lam: The adoption and development of algorithmic trading in the FX markets will be an important driver for both the sellside and buy-side communities. One of the challenges lies in the differing liquidity dynamics and microstructure for an OTC market and exchange versus an ECN-type market. Firms with pricing engines that can provide smarter pricing and/or algorithmic execution – either for internal desks or externally for clients - will be able to price, manage and derive greater order flow across a broader profile of users with differing risk profiles.
markets (such as an ADR trade requiring a stock trade AND resultant FX trade). For the Rustam Lam
firms that can facilitate multi-product execution, the ability to offer a multi-asset class trading platform like RealTick provides a competitive advantage, because clients
“The adoption and development of algorithmic trading in the FX markets will be an important driver for both the sellside and buy-side communities”
can seamlessly analyse and execute trades from a single platform. And it provides a cost-effective solution for liquidity providers who want to offer advanced order types and trading
capabilities,
tremendous
but
resources
lack
the
required
for
development in house.
of advanced eFX technology, for example the provision of faster and more robust engines,
revolution in terms of the provision of onetouch executable streaming rates. This has widened the gap between the “haves” and the “have-nots” – the “have-nots” are falling increasingly behind. The new
In what ways do you think the application
pricing
Maccaba: There has certainly been a
will
create
new
opportunities for competitive advantage
competitive margin is not between the
Davies: As in all business environments the
time efficiencies online trading offers over telephone
orders.
It’s
between
one
counterpart offering an execution speed of 300 milliseconds and a competitor who is
Thrower: For some buy-side customers,
efficient will drive out the inefficient. This is
speed is essential – it is often the rationale
especially true in FX trading, where an off
behind their trading strategy – i.e. spotting
market price, a late quote, or a few incorrect
arbitrage opportunities and exploiting
settlements can rapidly effect the business
them. So scalability and performance
profitability and reputation of the buyer.
needs to be built into the technical
The result is that arbitrageurs, dissatisfied
architecture of the eFX platform. This is not
customers, penalties and late charges
something that can be added as an after
quickly punish the un-savvy. Conversely,
thought. Scalable n-tiered architectures
the price-makers with sophisticated pricing
don’t grow out of traditional two-tiered
engines,
their
architected systems – they need to be
positions, broad instrument offering, and
designed from inception. Our n-tiered
intimate knowledge of their customers and
architectures have been proven for tier one
their credit quality will overpower the weak.
volumes.
This has been demonstrated over and over
moment is the latency and variation of
again as inefficient dealers have been
supplying market prices directly to clients
driven to exit the market.
and portals, which creates arbitrage
control
Davies: Standards are the single most important agent driving STP. TWIST has played a pivotal role in the past few years in designing open standards that facilitate straight through processing by effective integration of treasury systems with FX trading platforms.
able to transact in 100 milliseconds.
amongst the FX sell-side?
meticulous
Standards such as FIX and TWIST are very valuable in increasing levels of STP. How might they play a more strategic role in the market, perhaps by broadening the appeal of online FX and drawing in more active buy-side participants?
of
Another major issue at the
opportunities for some very clever people Naib: Simply, the faster and more robust
on the buy-side.
the engine, the more likely a client will
inefficiencies need to be dealt with,
be willing and desiring to use that
particularly in the extra price distribution
electronic platform. Robustness in terms of
steps required to get to portals.
We believe that these
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FIX’s contribution to furthering STP is the development of technical specifications for electronic communication of FX trade-related messages. Standardized messages and connectivity allow a transaction to be entered once and properly flow through to all the participants in the transaction chain with minimal processing errors. The widespread adoption of standards in foreign exchange trading will accelerate the rate at which new technology is embraced, benefiting the entire industry. Naib: The equity world has lived by the FIX standards for many years with demonstrable improvements in liquidity as a result. The rest of the product markets will follow suit and pick a standard. The greater the adoption of standards, the more easily firms may enter the market, increasing the overall liquidity of the online FX market. Maccaba: FIX is extremely important – it’s enabled active equity players to fully engage with foreign exchange as an asset class.
FORUM This has been a key factor is enabling the
One of the strengths of FIX is its balance
huge growth of the US markets as FIX is
between standardization and flexibility.
the dominant standard of the traditional
The FIX protocol will continue to act as a
fund market. All together FIX has been a
force behind increasing automation in the
vital strategic initiative.
FX market. However, the FIX protocol is one of a number of standards that will
Thrower: If you reduce the number of
eventually play an important role in the
times an FX trade is touched, not only do
future development of the market.
you improve operational efficiency, but you also reduce operational risk. If you
Naib: Perhaps not requiring but certainly
can use standards like FIX, TWIST, FpML
encouraging standardization, perhaps
to establish a common language, a lingua
through lower pricing. The use of a
franca, you can eliminate the need for
standard protocol like FIX lowers the cost
trade capture for both sides of the trade.
of doing business.
In a complex multi-client, multi-bank market, where margins are thin, such as
Maccaba: Yes, increasingly the buyside
the FX market, using a common language
evaluates counterparties not just on
to integrate with many counterparties can
availability of prices but also the quality
deliver
for
and content of their online offering. We
a
are now where the cash management area
common language, and hence to embrace
was a few years ago. The buyside
standards, becomes even more apparent
increasingly wants to guarantee minimum
when looking at a multi-client multi-asset
standards in terms of their electronic
class trading environment.
trading environment, as a result the bar is
major
participants.
efficiency
The
need
gains to
speak
continually being raised and potential Lam: The fragmentation in the FX world
counterparties have to meet the minimum
has not only led to many different
threshold to remain in consideration.
specialties among liquidity providers, but also to a disparate variety of interface
Thrower: Yes, we see this already. If I am a
languages. Part of the consolidation
buy side firm I don’t want to talk FIX to
process in the FX space is the adoption of
bank A, FpML to portal B, a proprietary
standards
with
protocol to bank C and TOF to bank D. This
different providers and liquidity pools. FIX
is just a major overhead. I want my FX
has recently played an important role,
providers to speak a common language.
owing to its ease of adoption and its
XML helps to some extent, but there are
existing presence in both buy-side and
still too many XML-based standards and
sell-side firms for a variety of other asset
also many proprietary protocols out there.
classes. The adoption of FIX also eases
The challenge for the FX providers is that
networking
some
with so many potential standards, they
providers discount FIX traffic and lower
still need to speak multiple protocols to
implementation costs.
support their clients.
Do you expect to see more buy-side
Lam: I think it’s fair to say that at the
clients applying a minimum technology
moment the FX markets are playing
threshold to their counterparties, for
catch-up with regard to FIX, compared to
example requiring that they be FIX
other markets’ adoption. A number of
protocol compliant to promote STP? If
counterparties will want continue to see
so,why?
this evolve further.
to
ease
interfacing
constraints,
as
However, FIX is
merely a messaging protocol; it does not
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Davies: Yes, because proprietary and
take into account the liquidity dynamics
customized protocols are increasingly
provided by differing pools of liquidity, be
being viewed as inefficient, costly to
they within a single asset or spanning a
manage, and prone to risk.
The FIX
consolidated view across asset classes.
protocol provides messaging specifications
Certainly the buy-side will look to adopt--
which facilitates electronic communication
or require their sell-side brokers to adopt-
between counterparties and also plays a
-technology and tools that brings real
critical role in end-to-end STP.
business and/or competitive benefit to
>>> offerings became more standardized, the importance of unique technology fell to the point that third party vendors were increasingly used to lower the cost of technology. Alliances will take place based on which third party vendors provide cutting edge e-trading technology, stability, and a more robust system. This will act to remove the technology barrier to entering the market, as you will be able to buy needed technology.
Mark Davis
“Standards are the single most important agent driving STP.”
them – either in the pre-trade, STP or post-trade process. But while FIX might be the current minimum technology threshold, we foresee the development of advanced technologies that can handle
Maccaba: We will see more banks buying “best of breed” technology solutions from a smaller, consolidated number of vendors and then customising key modules, rather than building from scratch. The technology is now so advanced that there are fewer banks reinventing the wheel, and more banks putting their competitive dollars into customisation and differentiation.
the specific demands and idiosyncrasies of the FX market. With the entrance bar to providing eFX services now raised so high, is it likely in the future that more FX providers will partner with best of breed technology suppliers
to
share
the
burden
of
providing the next level of buy-side requirements and if so what form might these alliances take? Davies:
FX
providers
are
already
partnering with best of breed technology suppliers. This is a major trend because the banks, for instance, finally realized that it doesn’t make good business sense for them to develop their own solutions and maintain them into perpetuity. They need to concentrate on creating new value-added services, because most transaction
based
services
are
commodities. In order to offer these services, they need to have the best technology available and get it to market quickly. Development takes too much time, money, and effort. Buying off the shelf solutions and ‘white-labeling’ them is a much more efficient way to bring new services to market. Naib: More and more FX providers will contract for eFX technology. This has happened in other markets where initially home grown technology gave an advantage but as time went on and
Thrower: Outsourcing technology to a best of breed supplier has always been a way to reduce time to market and reduce IT costs. We see both the FX market and the vendor community consolidating. This is causing the market to increasingly revolve around a smaller number of players year on year. This consolidation enables the remaining technology providers to invest greater amounts in R&D and to bring new and innovative products to the market. It is also enabling the tier one banks to leverage their technology investments by white-labelling to other financial institutions. This is becoming a very small market – despite its size – if that’s not contradictory! As the challenge for ever deeper functionality is felt from both the buy and sell side, the choice of which vendors to select also becomes more challenging. Taking a best of breed approach is critical for FX providers seeking to offer the best technical solutions to their clients. It is with this in mind that Wall Street Systems earlier this year forged an alliance with Cognotec. Under this arrangement, Wall Street Systems brings the best of breed post-trade solutions, while Cognotec provides the market leading e-trading solution. Under this partnership, financial institutions can deliver the most efficient, functionally rich pre- and post-trade solution to an ever more demanding client base.
Lam: We see this as happening already. That said, the question of tactics regarding a buy, build or partner strategy is always there for the sell-side. FX providers gravitate into two groups; those that want to maintain and control the whole process including the technology platform, and those that decide to concentrate on positioning their liquidity activities to service clients and add value to their shareholders. For the latter, technology companies can provide core and constantly evolving capabilities that relieve them of the burden of developing, maintaining and operating a best-ofbreed trading platform in house. This is especially so as buy-side traders increasingly look to execute in multiple asset classes from a single platform. And it is much faster and easier for a technology provider to migrate their trading capabilities in other asset classes to FX than it is for a liquidity provider to try to add this new capability to their existing proprietary platform.
Farid Naib
“Most sell-side firms develop asset class fiefdoms internally” Consolidation amongst some FX providers is starting to take place. What impact might this have on technology vendors and will their future growth prospects largely revolve around servicing the connectivity, integration and trading needs of existing FX market participants or will the arrival of the new wave of players be likely to create significantly new and exciting business opportunities? Davies: Consolidation should lead to expansion of the services offered and integration between various services/ systems.
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This is what we see with most financial institution mergers today. The real winwin comes when, rather than selecting just one of the two offerings, the services are merged to create the best of both platforms. This benefits both existing users in terms of continuity and the market in general with a broader capability. Fewer providers should mean greater efficiencies of scale for the vendors, enabling them to invest in offering new services and technologies to attract and retain customers.
Brian Maccaba
“We will see more banks buying “best of breed” technology solutions from a smaller, consolidated number of vendors and then customising key modules,” Naib: Any consolidation is invariably painful to technology providers. The coming wave of consolidation will create new competitive challenges for technology providers, which will be offset by the still vibrant growth in demand for eFX technology and the expansion into other asset classes. Maccaba: In my view, the consolidation in the marketplace is overstated. The market has grown in absolute terms and automation has allowed the communication channels between large and small banks and margin traders to be opened up. As a result, the market has changed shape – there are new, more defined roles, and as a result more niche players – this has replaced the old order of every participant trying to do everything. For instance liquidity provision has been uncoupled from distribution, allowing some participants to offer key liquidity in a smaller range of currencies while outsourcing the rest under a white labelling agreement.
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FORUM Thrower: Liquidity is becoming more focussed around an ever-smaller number of FX providers. It is a special technology firm, with a unique value proposition that enables its tier one clients to innovate and capture market opportunity that will win in this market. For technology providers, we need to be able to offer a broad range of technology solutions, from trading through operations, from integration to functionality. At the same time, tier two and regional banks are also carving out their own niche. Here the focus is on their long term client relationships and deeper business integration, and on providing a local spsecialised service. eFX plays a role in this segment also. We are seeing banks at all levels drive forward with their etrading vision – its not just about the top five. There is is always room for new players that are really focused on providing top-notch, value-added services to their clients; in the end, client service generally wins the day in the long haul. Lam: We believe the current consolidation and imminent industry change will lead to greater choice, benefit, competition and different models – both access to liquidity and commercial. For technology companies like RealTick who are brokerneutral, the flexibility to provide different commercial models could lead to increased opportunities. While we have seen relatively new entrants into the market on the liquidity side, providing ECN, streaming and other types of liquidity access, the market’s exploration and interaction with differing types of liquidity pools is still ongoing. Technology vendors are in the short term more likely to be driven by client demand for access to all these differing pools. In such a highly competitive market as FX, providers are constantly under pressure to improve the latency, stability and flexibility of their online FX transaction platforms and services. Going forward, where do you expect technology suppliers to be asked to focus their research efforts to develop the next generation of eFX solutions? Davies: The wave of the future is to provide solutions that are easily deployed, and easily integrated with existing and future technologies.
Rapid deployment is becoming a real differentiator in selection processes, whether it’s a broker, bank, or corporate making the decision. Delivering software functionality as a service (aka ASP) by nature is easy to implement because there is little or no IT infrastructure requirement, beyond having an Internet connection. The other need is for easy integration with other systems - the more the suppliers provide plug-and-play, the more they will sell. Developing products with 100% straight through processing as a goal is going to be essential in the next generation of eFX solutions. Naib: The next wave of innovation for technology providers will most likely be focused on solutions that provide: • Better connectivity through flexible interface tools
more
• More Cross Asset Class services • Further delivery of STP for the management of a trade’s life cycle Bottom line is that that FX providers will continue to pressure technology suppliers to expand the concept of STP, which will ultimately create new and innovative business opportunities.
Mike Thrower
“Outsourcing technology to a best of breed supplier has always been a way to reduce time to market and reduce IT costs.”
Maccaba: There have been three key price delivery models over the last decade. The first, request for quote, will in our view become almost redundant over the next two years. For several years we have seen Indicative Streaming Models which offer
streaming rates in screen, but have a RFQ pricing engine in the background. This is an intermediate technology as it offers only the appearance of price streaming, and often lets clients down when prices prove to be unavailable. The latest price delivery model – Executable Streaming Rates – offers true streaming rates at guaranteed prices. These can be executed at a single click with zero latency. The market is currently in the course of moving to this model as the active and margin trading community demand the time and transaction efficiencies it offers.
Rustam Lam
“The fragmentation in the FX world has not only led to many different specialties among liquidity providers, but also to a disparate variety of interface languages.”
Thrower: Wall Street Systems see three key priorities for the future; expanding lifecycle coverage, going cross asset class in a client-centric model and doing these two with highly scalable, performancedriven solutions. The technology vendors that crack this will be key partners for the FX providers of the future. Lam: Multi-product trading, advanced order types and management and the application of algorithmic trading are increasingly gaining traction. Technology providers will need to respond in a number of areas including, where appropriate, providing consolidated views of market activity and liquidity. This will require their systems to be scalable, have the ability to cope with exponentially growing quote rates, and be able to present complex capabilities to the user in a functionally relevant and easily usable form.
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Online Technology - a key differentiator for Trading arcades and prop shops
Heather McLean is a freelance writer.
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In the late 90s, when the London International Financial Futures Exchange (LIFFE) was forced to change from an open outcry to a fully electronic exchange, arcades were born. The closure of the Liffe floor meant that over only a few months, there were literally hundreds of traders looking for a desk to trade from. Small companies sprang up in London, where the market has now reached saturation point. From the UK, this model has spread across the world, and it is now eyeing up FX as a tasty new liquid and volatile market.
>>> Once trained on an electronic FX
In a trading arcade, traders will
further use of the infrastructure it
platform, traders have two main
commonly pay a seat fee, accept
is already paying for to connect
choices on where to take their skills.
reduced commissions and split profits
to
Either to a trading arcade, where
with the house, in exchange for a seat
Archelon’s investment and provides
traders work their own account, or a
in a trading room with the technology
diversification
prop shop, where the trader works
and resources they need to enable
Koltes, the managing member at
the shop’s account. FX is spreading
them to work their own account.
Archelon Group, states. In return, the
through the electronic trading rooms of the globe.
exchanges.
This of
balances
income,
John
new arcade traders at Archelon will Proprietary shops
be given the infrastructure, capital,
For the more skilled trader, it may be
clearing arrangement and admin
possible
cover they need to support trading.
to
win
a
place
in
a
proprietary shop. Prop shops take on traders to work its own account. Because of this self interest, prop shops tend to invest a lot of time and money in sourcing the best traders, training them, and providing them with state of the art technological tools to aid their trading. Ray McKenzie
There are a myriad of hybrid versions
Ray McKenzie, director of FX products
among prop shops and arcades,
at
Exchange
depending on how the founders want
(CME), explains: “In the futures world,
to invest in their traders; an arcade,
the number of these prop shop and
for instance, may cultivate better
arcade firms are growing very fast.
traders by increasing their training or
The models are good, and they can be
investing in their kitty.
Chicago
Mercantile
applied over multiple asset classes.
John Koltes
“It’s a combination of technology and deals that makes you attractive to people as an arcade,” Koltes explains. “If you’re providing someone with technology that can give them an
Maybe just one year ago these
Achelon is a prop shop hybrid; while
advantage over the competition, you
companies weren’t involved in FX at
its prop shop employees trade FX
should be able to offer them less in
all, but they are now becoming major
already, the firm is in the process of
payment
players.”
setting up a trading arcade to make
business faster and better.
for
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do
111
Online Technology - a key differentiator for Trading arcades and prop shops If the technology is automated and allows the traders to do very fancy things, it can be very valuable for them. They’re the ones making money.” What’s best for the FX trader?
Arcade quality varies wildly, Shaun Downey, director at Oasis Research, a specialist technical analysis business focusing on FX, says. Some are no more than a clearing business and do not care whether they make money or not.
Others are run with more concern for the traders though, he says and the best of the model err towards the prop shop format. “I’d definitely say the prop shop model was best for the FX trader,” Downey comments. “Arcades are scalping for two or three ticks. But you need to have a calm environment and decent technology
Christopher Morris
and software with fast updates. Sharing screens and updates, as happens in many arcades, is not conducive to good work.” Saxon Trading is a prop shop, and
“We passionately care about the trade, so we educate the trader. We give him access to a psychologist, the best market information and direction if he’s not being successful, to increase his ability to trade.”
that is the only way to be according to Christopher
Morris,
development
director at Saxon Trading.
Morris comments on eFX: “In recent times, it’s become easier to trade in an e-environment. With the various platforms now available, we can trade online and manage risk in a
Shaun Downey
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more effective way. For eFX, what’s
>>> really improved the e-environment is
McKenzie continues: “Our equivalence
Changing the marketplace
platforms such as FXall, whereby
product converts futures trades into the
Prop shops and arcades have changed
banks collaborate together so trading
cash equivalent. This takes away the
the marketplace, Larry Schulman,
can be done in a more efficient way.
mystery of futures trading for people
founder of Chieron Trading, agrees. He
that don’t really understand futures, so
says there is more liquidity in the
traders more familiar with hedge funds,
market as a result of them, and that
for instance, can see the liquidity and
will make customers of the big banks
transparency’s there, making them feel
begin to look for alternative ways to
more confident to trade.”
trade in vanilla areas.
It’s
certainly
opened
up
those
opportunities in terms of counterparty trades. As the FX market develops electronically, it has allowed more participants to understand a little better the nature of individual risk,” Morris
continues.
“Before,
that
couldn’t be done; FX trading was for
Changing the sell-side
people with huge balance sheets. But
Prop shops use fast and nimble
the development of e-FX trading has
technology that in some cases is
led to greater understanding of risk and better due diligence, making it easier to trade.” Impact of eFX technology
superior to banks. This enables them to make fast changes when required, which in turn is forcing banks and other platforms, like Reuters, to change the way they work so they keep up, McKenzie says. “The buyside and sellside
are
converging,
because
Larry Schulman
banks’ customers, the prop shops and arcades, have their own expertise in FX technology and algorithmic models, changing the old way to trade FX of
“They are no longer held hostage to that one pool of liquidity as they can get pretty big deals done outside of the banks now,” Schulman states.
sitting at a spot desk and waiting. The
Pat Kinsel
buyside is becoming more savvy in the
eFX trading will become a big area for
sellside marketplace, so the sellside is
prop shops and arcades, Downey
having to be more like the buyside
states, because the flurry of e-trading
to compete.”
houses working the futures markets has all but destroyed the volatility that
Pat Kinsel, senior currency trader at
asset class needs to be attractive. He
Interbank Group, adds: “Technology as
explains: “As arcades have become
a whole is improving the average
bigger, they have dominated certain
trader's abilities. The e-FX trader now
futures contracts with so many people
has access to better charts, analysis
after one tick, so killing volatility.
tools, more instant price feeds, and
Before its demise, Refco was looking
constant or instant news on the internet.
at moving into the spot FX market for
People are no longer trading blindly or
arcades, because of the liquidity
without the proper technical tools. They
there.”
have the ability to educate themselves unlike any other time period.”
Downey continues: “Arcades and prop Kevin Parker
shops have to go into FX and spot FX,
eFX technology is opening up FX
Kevin Parker is an account manager at
because the liquidity and volatility has
trading in prop shops and arcades,
hybrid
gone from their other markets, in the
making this asset class simpler and
Xconnect Trading in the City of
European
London. He agrees banks are changing
especially in spreads. They shouldn’t
more accessible to traders with little FX experience. Algorithmic trading is a big trend in arcades and prop shops, McKenzie states. “One of the biggest things we see going on today is
prop
shop
and
arcade,
the way they work, looking at eplatforms for trading FX that will enable them to package up the small
interest
markets
and
be able to dominate the FX market as it’s just too big for them.” John Howard, independent consultant
algorithmic trading, for statistical
bits of business that they never used
arbitrage. Systems are looking at
to be interested in. “They’ll be
Financials, agrees that the volatility of
stocks and trying to buy stocks on the
hoovering up all the small tickets into
the markets currently dominating the
variant between stocks. It’s very easy
bigger
arcade scene is diminishing, opening
to modify and apply to FX.”
comments.
tickets
in
no
time,”
he
to arcades and prop shops at JH
the door for eFX trading:
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Online Technology - a key differentiator for Trading arcades and prop shops “Some would argue that rather than
fractionalised
being a benefit to the market by
widespread and diverse, so you have
and
platforms
are
providing liquidity, that the arcades
to go for bespoke solutions to be able
are systematically killing off the
to trade FX electronically.”
opportunities in the instruments they
John Howard
trade. I would say that it is likely that
This makes a Catch 22 for traders and
FX, being hugely liquid and less time
the progression of eFX in prop shops
zone sensitive than futures markets,
and arcades, Parker states. “It’s very
will become a key focus for the
rare that you’ll see a trader change his
arcades over the next two years.
trading tool and trading button, which
Given the enormous existing depth of
is why arcades offer different front
liquidity in the majors, whether we
ends to suit different individual
will
of
preferences. FX isn’t so mobile
out’
because it’s proprietary, making it
see
the
opportunities
same being
pattern ‘arbed
remains to be seen.”
hard to trade.” However, Parker adds that many platform vendors are now
Parker says the eFX online
adding eFX-specific functionality to
trading environment still has
their technology, so the future could
a long way to go. “The FX
be bright for eFX in arcades and prop
trading
shops.
market
is
still
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Automated trading solutions – the FX trading of the future Back in the year 2001, when our first retail client developed and ran his strategy in a fully automated way, it seemed like a technological miracle. Since then system trading and fully automated execution became buzz-words in the trading industry. Nobody is asking the question of why system and automated trading maximizes trading revenues and efficiencies, but what software does it best. There are two major groups of strategy users: sell-side and buy-side users. Sell-side are strategy developers (vendors) and brokers; and buy-side are institutional and retail traders. In this article we will discuss how system vendors can implement their trading systems and how retail and institutional Dr. Anna Becker, co-founder and CEO Strategy Runner
traders can automatically execute these strategies.
How to implement a Trading
2) Script Language IDE
System
(Integrated Development
Suppose you have a well defined algorithm of your trading system. You should now choose a software platform for your system implementation. The software tools can be divided in three major categories: 1) Raw API solutions, 2) Script language IDE and 3) Strategy-Oriented API suites. Let’s see what each category of tools can offer and what kind of needs it suits better than the others.
Environment)
1) Raw API solutions
Disadvantages: The disadvantages
Description: Provide basic functions such as getting data feed and sending orders. This solution is provided by most of the major Forex brokerage houses and some independent software companies such as TradeRobot. Advantages: The only advantage of a raw API solution is its low price. Sometimes, you can even get it for free. In most cases it’s a FIX compatible protocol for sending orders and a proprietary API for data feed.
Description: Provides a relatively simple way for creating the strategy logic using proprietary scripting language. known
Script
The most
Language
is
EasyLanguage from Trade Station. Advantages: The major advantage is fast a development time. You can also debug and back-test your strategy with historical data.
are slower order execution speed and script limitations. Very often it becomes impossible to implement a trading strategy in the exact way it was planned, because of missing features in a particular script language. While this solution is suitable for most traders, it is important to check if it fits your demands for speed and versatility. 3) API suites based on high level program languages
Description: Provides a simpler way to program your strategy Disadvantages: The disadvantage of a raw API solution is a very
than that of the raw API method, however, it is still relatively more
long and costly development course which normally takes
complicated than Script Language IDE. The best known solution
several months to one year. You might not only need to build
from this category is the Strategy Runner product suite.
your own connectivity level, but also monitoring, back-testing, logging and risk control utilities.
Advantages: It provides fast order execution times and the versatility of a raw API. Strategy Runner product suite also provides fast and
We would advise this solution only for big IT department(s)
accurate tick-by-tick back-testing, live user-friendly monitoring of
wanting to build their own automatic trading infrastructure.
strategy performance and strategy-oriented risk control tools.
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Automated trading solutions – the FX trading of the future Disadvantages: The only disadvantage of this approach is that one has to be proficient in high level programming languages such as C++ or Java. The solution is best suited for an IT department, which wants to use third-party strategy automation solutions. Independent system developers and traders may consider ordering implementation of their system from Strategy Runner’s strategy development department. Figure 1: Strategy Runner Architecture – 1) strategies are executed on SR
Automated Execution of Trading Strategies
In the previous section we discussed different implementations of trading strategies. If you have implemented your system with a
Server, 2) Clients can monitor their performance through SR Console
Strategy Runner - Strategies developed in third party applications:
raw API, then your automation will be as hands free as you have
Strategy Runner’s TPAK is a software package that provides
designed it. However, if you chose other implementation tools,
automation of strategies developed in third application such as
now comes the question – how
Excel, TradeStation etc. As in the
do you want your strategies to
case
be executed?
applications strategy developers
of
other
client
based
have to run both application that There are multiple platforms
generates signals and TPAK itself
that
signals
to transmit this signals to SR
originated by your strategies to
Server; TPAK is different from
your live account, taking away
other client side application in the
the need to place these signals
way
manually; all these companies
originated, they will automatically
use the “Hands-Free trading”
be distributed and executed on
slogan that has become one of
each subscribers’ account.
can
transmit
that
once
orders
are
the leading terms for strategy automation tools.
For
Strategy
Developers
it’s
hands-free from typing in the Some companies offer the
orders, but not hands-free from
individual trader automated
your application that generates
execution of his strategies on
signals, and not hands free from
his
your
live
account
brokerage whether
of his
his
at
the
choice;
strategies
are
developed using their native API’s or in third party engines (e.g., TradeStation, eSignal,
TPAK
application.
For
Strategy Subscribers it’s handsfree from typing in the orders, additionally it’s hands-free from application that generates signals, and finally its hands free from your SR application (SR Console).
MetaStock, etc). Let’s examine this "hand’s-free trading" concept by looking at the Strategy Runner solution in detail. Strategy Runner - Strategies developed in SR API:
The Strategy Runner server at the broker's site originates and executes the trades generated by all strategies, in all their respective subscribers' individual accounts. Each individual subscriber can monitor and control the execution of their
Figure 2: The TPAK flow: (1) Application that generates signals & TPAK – (2)
strategies through the Strategy Runner Console. As indicated in
SR servers – (3) live account(s)
the previous sentence “Each individual subscriber can monitor” – where the word is CAN, and not HAS TO.
Summary
As we illustrated in this article there are many automated trading How hands free is it? It’s hands-free from typing in the orders,
solutions for both buy side and sell side users. We believe that
also it’s hands-free from using an application that generates
future of FX trading lies in system trading and futher automation
signals, and it’s also hands free from your Strategy Runner
that will both empower institutional traders and strategy
Console application.
developers, and level the field for retail traders and investors.
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Traders Workshop Slippage Greg Michalowski, Vice President of Trading at FX Direct Dealer, talks about Slippage in Foreign Exchange trading and how to minimize its impact. Slippage defined:
In this situation, it would not be unusual to
Slippage can be defined as the difference in
have slippage on the trade. The order of events
rates between where a market entity desires to
clearly outlines the reason for the slippage.
execute a trade/order and where the trade/order is actually filled. It occurs in Stop and market
1. The market is 1.1800 bid
orders. For example, it is 8:29 a.m. EST and the economic data release change in Non-Farm
2. The data release causes the market to sell
Payrolls (NFP) is to be released in one minute.
off rapidly in a market that has suddenly
The market is trading at 1.1800 – 1.1802 and
become very thin and wide
stable. You have your Sell Stop at 1.1795. 3. The first electronically generated price At 8:30 a.m. NFP is released and is much
fractions of a second after the release is
stronger than the market’s expectations (a
1.1790-97
situation where the EUR would weaken and the USD get stronger, leading to a lower EUR/USD price). In the space of the first few seconds after the initial headline, the bid on the EUR/USD drops from 1.1800 to 1.1790, to 1.1785, 1.1784, 1.1782, 1.1775 and 1.1765, before rebounding and continuing on a volatile up and down trading pattern with a downward, market bias. What happens with your Sell Stop order at 1.1795?
4. The electronic Sell Stop at 1.1795 is triggered when the bid hits 1.1795 or lower. In this case the bid that triggers the order is 1.1790 5. A Market Order is sent electronically to sell at the market (really at 1.1795 or whatever the market offers) 6. If the best electronic bid is 1.1790… 7. The Order is filled at 1.1790 (Note that the price could even be worse than 1.1790 should the price change again ) So, if a Sell Stop in the EUR/USD at 1.1795 gets filled at 1.1790, it results in a five (5) pip slippage. Market overview:
Slippage occurs in other markets besides the Forex market. In order to get a better handle on the concept of slippage, it would be helpful to understand how pricing, market conditions and volatility affect these markets, especially in foreign exchange. 12-13-05 FOMC Announcement One-minute Chart
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One of the most misunderstood concepts of
>>> trading is where and how FX pricing originates. Like an inverted funnel, traders receive streaming prices from a dealing platform like FXDD, who in turn get their price streams from several major banks. Depending on the bank, they may receive liquidity from several sources, but ultimately the feeds that they provide downstream are derived from the interbank matching platforms EBS or Reuters.
EBS executes the vast majority of interbank volume in the Euro, Yen, and Swiss pairs, while Reuters’ strength lies in the GBP, CAD, AUD, and Exotics. The banks, which are prescreened for bilateral credit, can enter or deal upon bids and offers in the matching platforms. The feeds that the banks send out very closely mirror the prices on these two matching platforms.
Tips on preventing Slippage:
Slippage is a fact of trading. It is inevitable but it can be FXDD and similar retail platforms receive continuous pricing
managed. By understanding why it happens, you can minimize
regardless if they are traded upon and then send this retail
its impact.
pricing to its forex customers. So, as prices change at the banks, retail clients receive pricing that as a result of
1. Select a broker that has reliable feeds. In volatile markets,
consolidation, competition and technology, are not much
prices can change up to three times or more per second in the
wider than those in the interbank market.
interbank market. 2. Don’t trade during economic releases such as employment
Certain situations, such as economic data releases or
statistics or during volatile markets unless you’re willing to
geopolitical meetings, may cause uncertainty and volatility in
accept slippage.
markets creating what is known as ‘gapping markets.’ The overriding characteristic of such markets is a temporary lack of liquidity, or a ‘thin market,’ resulting from fewer people being willing to place bids/offers.
3. Use risk management: don’t overexpose yourself. 4. Be aware of the actual market through various price sources. Retail pricing in volatile markets should reflect closely the interbank market. If unexplained spikes (or
When there are more buyers and fewer sellers, prices increase;
irregular variations) occur, you should question your broker.
conversely, when there are fewer buyers and more sellers,
Note: a few pip spread is normal but having 5-10 pips away
prices decrease. For example, if you want to buy at a price and
(on major currencies) from the interbank pricing is not.
there are no sellers, the market will gap until sellers appear;
Much depends upon the state of the market at the time.
you may complete the trade at the next best price. Therefore,
5. There are several key indicators of how a reputable firm
the lack of participants translates into market uncertainty,
should transact business, which should result in less
which leads to wider spreads and more volatility.
slippage:
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121
REPRINTS PRINT OR WEB VERSIONS
Traders Workshop
Slippage a. Provide reliable and expeditious execution. b. Prices are streaming and executable. c. Offers a fast round turn on execution time. d. If you hear complaints about a particular firm, pay attention and investigate further. e. Check if your broker has a retail platform with liquidity that can be scaled to encompass institutional customers. f. Check if your broker provides, or has the ability to do so, liquidity to third parties (e.g.,
hedge
funds
and
institutional
investors). This indicates a secure and stable firm since itâ&#x20AC;&#x2122;s difficult to obtain vast liquidity. g. Technology that delivers accurate pricing is more reliable. Stops and Trailing Stops should reside on the server, not on your desktop. h. Provides
executable
and
reliable
pricing during volatile markets; if filters are involved, you will miss all the prices in between. i. Check if your broker has a good working relationship (i.e., established credit lines) with top-tier banks. j. If possible, visit your broker -- get to know who you are working with. Slippage conclusion
Markets,
especially
those
that
trade
electronically like the forex market, are not static and are therefore subject to slippage. Experienced traders understand the conditions when slippage is most likely to occur, and either avoid trading during periods of extreme volatility or accept it as part of the risk/reward trading profile. As a market maker, FX Direct Dealer is committed to providing all our clients with transparent market liquidity at all times.
To order reprints of any article in e-Forex or request further information please contact:
Although slippage can occasionally occur, it is a direct result of market volatility and an increased risk/reward profile. If you feel that your market liquidity is any way being manipulated or in any way not congruent with
Tel: +44 (0) 1225 868 947 Fax: +44 (0) 1225 868 998 Or e-mail: Helen@Aspmedialtd.com
fair trading practices at market prices, you should not hesitate to you to speak with your liquidity provider.
Case Study e-Forex Case Study 124
eFX technology – helping to minimise the problem of Slippage at Aspect Capital e-Forex talks with Anthony Todd, CEO and Robert Wakefield, COO at Aspect Capital, about the problem of Slippage and how automation and electronic FX trading technology is helping them minimise the problem. Can you give us some examples of how and when Slippage is likely to occur?
At Aspect, we believe slippage is only part of the problem. If we assume that slippage is only the cost of execution then its main drivers will be a function of trade size, liquidity and price momentum. It is therefore important that the trade sizes are appropriate for the given market. A trading desk’s ability to take advantage of liquidity
Anthony Todd
and price action will determine how
Robert Wakefield
effective it will be in driving costs Gentlemen, why is Slippage a
For these reasons, Aspect has
down.
At
Aspect,
we
are
concern to your firm and in what
heavily
developing
continuously improving the tools
way does it impact on your FX
its Electronic FX platform. Our
and technologies that we provide
trading operations?
objectives were to reduce trade sizes
the traders with, to help them
and achieve transaction anonymity
improve their decision making and
through direct market access.
automate the execution process.
What methods do you use to
Would aiming to minimise slippage
monitor it?
in volatile trading conditions be
Monitoring transaction costs is not
good enough or can orders slip for
only about checking a report on
reasons other than volatility?
The performance of any trading strategy
is
frictional
impacted
costs
by
associated
the to
slippage. Traditionally, slippage has
invested
in
been the main focus of any systematic
trading
houses.
At
Aspect, we are not only concerned about slippage but also about the entire
cost
or
‘true
cost’
of
implementing our strategies. Some costs
may
be
visible
and
T+1 to evaluate where you did well or less well. At Aspect, we like to know how we are performing in real-time, as the market moves. This allows us to change our
Badly implemented strategies will lead
to
excessive
costs
and
therefore degraded returns. Trade slippage can occur for a variety of
trading to suit the current market
reasons.
transactions costs’ elements that
conditions. We still look at reports,
constant pace of electronic market
are more subtle and less easy to
however,
to
growth mean that many of the
measure. An awareness of the real
understand the market dynamics
slippage’s variables are now more
cost of achieving a given position is
and to provide traders with the
controllable. It is not just about
ultimately what drives whether a
tools and technologies to help
controlling your trading operations
trade is as profitable as it could be.
them make better decisions.
in volatile markets.
measurable, but there are a few
january 2006
e-FOREX
as
it
is
crucial
Technology
and
the
In
what
ways
has
your
choice
of
electronic trading platform and use of trading
technology
assisted
you
in
minimising the impact of Slippage?
During the past five years, the rapid growth of electronic trading has provided a wealth of opportunities, especially to systematic traders. Firstly we have been able to disintermediate the middle man in most of our transactions. This allows us to respond faster to changing market conditions. There is also no information leakage to the market as a whole. However, the main opportunities come from an increasing ability to monitor the markets and respond in real-time to changing events. At Aspect, we have made a significant investment in this area. We have a dedicated team of six technology and research professionals that sit in the trading room, working with the traders. This blend of technical capability and market experience is critical in a modern trading room. For the first time, we see a realistic path to considerably reduce transactions costs; and we are already making significant progress in this area.
system iteratively. In FX specifically, there are a large number of systems from different liquidity providers. The technology we deployed in the trading room allows us to automate the decision making process giving us sub second reaction time to change price and liquidity dynamics. We believe that in a trading environment, a bespoke system will deliver a better solution.
execute are all designed to achieve best execution. To that extent, we are agnostic as to who makes the price upon which we will eventually trade. In this way, there is no doubt that the continuing evolution of FX towards an “exchange model” will significantly reduce the complexity and cost associated with achieving best execution. Do you think that with the development
Is your choice of counterparties and FX
and use of advanced e-trading technology
providers influenced in any way by
coupled with new trading styles, Slippage
whether they have reputations for best
can ultimately be prevented or will it just
order execution?
become less of an issue?
We do not execute a lot of volume through voice brokers anymore. Best execution is certainly a key component for our traders. The technology we deployed and the algorithms we currently use to
We believe that the ‘true cost’ of implementing a trading strategy can be substantially reduced. There is nothing in our experience so far that leads us to conclude otherwise.
Where would you like to see improvements in current e-trading technology to help deal with the problem?
When we started, we reviewed many third party systems. We finally opted for a bespoke in-house solution for all of our front end interfaces. Whilst there are some great systems available, none could really fulfill all our requirements in terms of asset class coverage nor could they give us the flexibility to develop the
january 2006
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125
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>>>
The e-Forex Interview
The e-Forex Interview
With Christian Baudoin, global head of e-Forex at BNP Paribas.
The “e-space” is growing bigger each day with new users, new requirements, new products and new channels. With a landscape in constant motion, it is essential to be able to rely on a 24x5,
Christian, as the leading foreign exchange bank in France, BNP
dedicated team with the widest e-expertise, capable of rapidly reacting to market evolution. The e-Forex services team is involved in many areas such as business development, support, promotion and distribution and risk management. The team contributes to the fine-tuning processes and orchestration of BNP Paribas e-FX strategy. We do this with the ambition of establishing BNP Paribas as one of the best and most efficient e-FX providers.
Paribas has made a very significant investment in developing your e-commerce products and services. Was that driven by direct response to client demand or is your strategy based around trying to anticipate your clients’ future requirements and providing eFX solutions to cater for these? BNP Paribas has been an early adopter of e-commerce,
Your client web site, FX Dealer, provides a full range of online currency services. Can you give us an idea of where you’ve recently been working to extend the functionality and features it offers?
participating in the launch of several multi-dealer platforms while implementing our own proprietary portal FX Dealer. With more and more customers adopting electronic channels, we have increased our investment in the “e-space”, to be able to respond more efficiently to client demands. BNP Paribas services a large range of customers with various electronic FX needs. Some of them were quick to embrace electronic channels and understand the benefits, rapidly becoming more and more demanding of products and functionalities. Partnering with the most demanding clients has enabled BNP Paribas to stay at the forefront of innovation and cater to future requirements of our global customer base. As a result, our FXDealer portal is constantly being upgraded with new features. You’ve recently formed a dedicated e-Forex services team. What prompted that decision and what do you aim to achieve with this initiative?
The content and functionality of BNP Paribas' FX Dealer portal is constantly being expanded, much of which is now driven by customer feedback. Indeed, the latest enhancement to the functionality is the customisation of the live spot prices display. Customers can now select how they view the live tradable prices coming directly from BNP Paribas' traders. The full list of currency pairs can be edited by the customer, so that they can view only the currencies they require. Alternatively, customers can specify currency blocks, such as USD majors, Euro Crosses, Asia, Eastern Europe and Latin America. In addition to the live bid & ask, when detached in its own window, customers can format the display further by requesting information including the open, high, low and close, as well as the percentage change on the day. But, probably the most powerful piece of functionality is the capability for customers to create and maintain their own list of cross rates, for which live prices are displayed.
january 2006
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127
The e-Forex Interview –
with Christian Baudoin
We reported in our last edition on how your own domestic market
We are currently working on upgrading our FX options platforms
seems far less commoditised than many elsewhere and that this
with one project on “live pricing” and another project on “deal
places particular emphasis upon bank relationships, which typically
execution”. We plan to release the first one by the end of the first
are very long term in France. Is the arrival of eFX likely to change that
quarter of 2006 and the second one in the course of the same year.
emphasis or the nature and way these relationships operate?
Going forward, we will increase our investment in Management Information Systems (MIS). By providing us with a detailed analysis
I do not think the “ vive la difference” reported in the October
of our electronic business, MIS will enable us to improve further our
edition of e-Forex will live forever. Indeed, the French buy-side,
offering and better service our customers. We are also expanding
like everyone else, is attracted by the benefits of the electronic.
the usage of algorithmic tools for proprietary usage and to offer
But this does not necessarily oppose a “relationship” way of looking
pre-thought out and auditable strategy for customers.
at business. In many cases, an efficient e-offering reinforces the relationship between a bank and its customers. However, some
Your bank has had a presence in FX prime brokerage for more than
customers still prefer to conduct their business traditionally despite
two years. Do you see it as a long-term growth market both
the emergence of the electronic channels. This is where the long
domestically within France and internationally and if so, where do
term relationship angle comes to play, we regularly update those
you see the interest coming from?
customers with the evolution of the electronic markets to keep them abreast with the changes and we hope to start e-relationships at their convenience.
The size of FX prime brokerage will continue to grow with the market and as long as credit-related price gaps exists. It plays a complimentary role in the e-FX value chain and allows the lesser-
Online-specific volumes in France are rising quickly. How much of this do you think is attributable to French corporate activity and do you anticipate that further volume increases will be mainly driven by
known participants in the market place to leverage onto a more competitive playing field by using prime brokers. The growth is coming form all directions but most of it is internationally driven.
the corporate sector or will the adoption of the e-channel by other buy-side clients and non-bank FIs, start to have a major impact?
Acting as a primary FX market maker has clearly become too expensive in terms of investment and capital allocation for many
The evolution of the e-landscape in France is in line with what is observed elsewhere. French corporates continue to be attracted by the e-channels but non-reciprocal bank demands are growing more rapidly. However, the bulk of our expansion is coming from outside France, a trend that is likely to continue. Being active in 85 countries, BNP Paribas has long had a very strong franchise in emerging markets – it is one of the oldest banking institutions in Asia, and is one of the top five traders in emerging market currencies. What plans do you have to leverage your e-trading capabilities in the emerging markets and extend your eFX services around the world? Indeed BNP Paribas is the leader in the emerging markets with a rare capability to settle more than 140 currencies through our global
smaller banks. Where are these smaller institutions going to be looking to derive their margins in the future? FX market making has clearly become a giants’ playground not only in the terms you pointed out but also in terms of the risk warehousing. However, the smaller institutions have been working with the primary FX market makers to source liquidity directly, electronically or via the existing price discovery channels. As long they have clients and good portfolio management, there will be a place for everyone. All participants will have to run faster, but in the end the good ones will still give good returns to their shareholders. How do you see the eFX market evolving in the next couple of years? Is it likely to be shaped by consolidation amongst online FX
network including of course Asian currencies. We are already
providers coupled with the arrival of increasing numbers of new,
distributing our liquidity for some of these currencies on our
more active, buy-side trading participants such as Hedge Funds?
Proprietary Channel and Portals that we participate in. We will enhance these before the end of this year with increased coverage
The market place will not stand still for long. In recent years, we have
on more regional currencies like SIT, LVL, LTL, HRK, EEK and TRY.
seen the convergence of the electronic platforms front GUI to offer
We will continue to do so wherever there is client demand.
streaming executable quotes. More recently it has been the ability of
Under our FX Dealer proprietary portal we offer a unique suite
clients on the buy-side to plug in their APIs directly into the liquidity
of comprehensive tools on more than 140 currencies. This is one of
pool of the larger market makers or into electronic market places
the most visited sections of the portal.
directly. Black box trading by buy-side clients is starting to make its impact on the tools that market makers use to gain new business.
BNP Paribas has also developed a strong franchise in currency
The volumes in this exclusive arena can be large and have the
options and derivatives. Your FX platform, FX Dealer, already
promise to provide the growth to the markets. Clients will go where
incorporates derivatives functionality in the form of research,
they can find providers who can accommodate their business and
historical volatility, and strategies. Are you planning to offer online
give the appropriate level of service. BNP Paribas, the bank of a
order execution for FX options and what are your other areas of
changing world”, will continue to offer its customers the best of the
investment going forward?
electronic as long as it brings value to all.
128
january 2006
e-FOREX
Danske Bank – always open for FX 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
Danske Trader
The online tool for FX spot, outright and swap transactions for a
international growth.
wide range of currencies, Danske Trader provides consistent streaming prices and a host of other valuable FX execution
Key figures from our 2004 annual report show:
services such as Quick Trade, split and block trades. • Total assets: DKr2,078bn Individually configurable, Danske Trader is extremely flexible and intuitive to use. Danske Orders is a part of Danske Trader,
• Shareholders' equity: DKr61bn
and allows users to view, place, amend and cancel profit and loss orders 24 hours a day. Individual settings mean you can
• Solvency ratio: 10.2%
receive notification of order execution via email or SMS, and • Subordinated debt: DKr34bn
track all your orders on the deal log.
• Core earnings for 2004: DKr12,682m
Easy access at all times and a high level of control are crucial factors built into Danske Trader, whilst Straight Through
Danske Bank – always open for FX
Processing and a high level of transparency, coupled with the
Within the realms of FX we offer a dedicated team focusing on
ability to view price streaming online, mean that you need never
global flow 24 hours a day. High-tech access to our services is
miss an opportunity.
available through all channels – Danske Trader, Reuters Dealing, and of course, by phone.
For further information please contact: Danske Markets Global Flow and Solutions Jesper Ronald Petersen, e-mail jrp@danskebank.dk or Claus Holmark Asved, e-mail cho@danskebank.dk Reuters DANO/DANX +45 3334 1003
Meet us at ACI Forex in Bremen from March 31 to April 2 2006
Sponsored Statement
Danske Bank is voted no. 17 FX Bank in the world and no. 1 in Scandinavia (FX Week/ RISK Magazine)
Ja Oui Si Hai Ne Yes
Eurex is now fluent in FX futures.
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