Cognotec has added to its product range by releasing a new Fund Manager module which is available on its AutoDeal+ platform. Separately, the company has announced its first adopter from outside the banking community. Broker/dealer Refco Capital Markets has started to roll out AutoDeal Lite across its operations in London, New York, Chicago, Singapore and Vienna. Cognotec has also made relatively minor adjustments to its core product offering, one of which may turn out to be significant as the number of institutions auto-quoting increases.
The Fund Manager module marks Cognotec’s push into the top tier of the banking world, and adds to what John Beckert, president of Cognotec Americas and global head of sales for Cognotec, terms, “our comprehensive suite of products aimed at meeting the needs of all segments of the market”.
The module has been developed over a long period of time. Beckert explains that it was a lengthy job because Cognotec decided to build it to meet the needs of the global community. “The module supports US, European and Japanese market conventions on netting, this meant that we had to build it to 150% of specifications to get everybody’s requirements in,” he says. “The good news from this extra and arduous work is that we have provided global applicability enabling banks to trade across all products with straight-through processing (STP) and protocols configurable by customer and region. It brings it all together in a really integrated way.”
Fund manager users can automatically aggregate by currency pair and bulk into forward requirements. They can also execute the spot transaction separately to the forwards. This is is also fully configurable, explains Beckert, so that the user can execute one or other of the legs automatically depending on the currency pair. Users can also allocate pre- or post-trade, meaning, he says, “workflow efficiencies to both sides of the value chain”.
Cognotec sees the new module as providing for the top tier banks with fund management clients executing over 100 trades per day, specifically in terms of the efficiencies it brings. It also adds another level to what Beckert terms, “the shades of tools” provided by the company’s core product.
Shades of Tools
“The market is segmented in many ways,” he continues, “Which means you have to provide different services for different segments. All of our offerings have been built to be scaleable and flexible, something that is demonstrated by the different channels we provide around our core product. These service every institution from the biggest – with the Fund Manager module – through the ‘middle market’, to the retail end of the spectrum.”
Beckert sees particular value in meeting the needs of those users towards the smaller end of the market chain, in that CTAs, high net-worth individuals and smaller hedge funds all benefit from the transparency, efficiency and STP that he claims the Cognotec system brings. “Bringing price transparency and the benefits of STP to that end of the market is a natural evolution in FX – similar moves have occurred in the equities space,” he claims.
“I also believe that the smaller participants in the market have big growth potential because of the benefits associated with the scalability of our technology. It is an area where that technology can get full leverage to bring the cost benefits normally associated with the larger players of the market.”
Cognotec is now also breaking out into a new market segment via a deal signed with Refco Capital Markets to provide the broker/dealer with the AutoDeal Lite system.
Beckert sees the Refco deal as an example of what Cognotec’s technology can do for those serving the CTA-type client segment. “Not only will Refco and its clients achieve the benefits of STP and auto-trading, they will also create huge efficiencies using our margin management module,” he says. “In an organisation dealing with a large amount of margin customers, automatic, real time credit and margin checking speeds up the dealing process immeasurably.
“Refco’s clients can also follow the market much more closely, with the streaming rates provided, and also leave orders using the order management module,” he continues. “This, in effect, is bringing the professional market to these clients and opens up another type of client to Refco – one that traditionally has not got involved in FX as an asset class.”
Gary Weiss, SVP, Refco Group, says, “AutoDeal Lite has enabled us to offer our customer base a cutting-edge, online foreign exchange service with a range of additional functionality. We can offer live two-way streaming price quotes, order placement and margin management, intraday account management and risk management tools – all on an automated basis – thus gaining significant cost and efficiency benefits. Importantly, we enjoy full STP – a fact which is essential for us and our clients.”
Using trade APIs built in by Cognotec, clients can auto-price and execute off equity transactions. The company is also looking at the possibility of linking its margin management tool to the order management module to enable the automatic execution of stop-loss orders when margin limits are hit. Currently the system alerts the margin provider that a client is approaching its limit.
Meeting Future Regulatory Issues?
At a recent seminar held by Profit & Loss (see pages 21-32) it was widely agreed that to fully automate the process of trading, auto-quoting and execution is a necessity. Many banks are now auto-quoting their customers in up to $25 million in the spot markets, as revealed in the Profit & Loss Bank Guide to e-Services (Profit & Loss, February 2002). There have been concerns raised in some quarters, although they are regularly rebutted by banks, that there is potential for heavy losses if a bank should be hit by a number of clients at one time.
Specifically, it has been argued that if a trader is being hit by anything up to 10 clients at one time, any of whom could execute – without dealer intervention – up to $20 million, the potential is there for a large position in a market moving against the bank. Banks have tended to shrug off these concerns as they have market risk limits in place for their traders, and the chances of such an event taking place are relatively low. However, Profit & Loss has learned that some in regulatory circles have expressed concerns about the level of market risk that could unintentionally be taken on by a market maker, especially in volatile market conditions.
Amongst a slew of product enhancements in recent months, Cognotec has provided the basis of what could be a solution to this issue in the form of a market minder product. In this, the trader is alerted by a window to exactly how many clients are currently being auto-quoted, thus allowing the trader to intervene manually to adjust the price to one or more clients.
Currently, auto-pricing is more about getting the ability to the banks to be able to provide the service, but looking further down the line, and with increasing regulatory interest in the FX markets, this could become more of an issue. Beckert declines to comment of the possibility of the enhancement meeting possible regulatory needs; however, he does acknowledge the benefit to the trader.
“As with all of our products, we try to make it user-friendly, and with this we are adding a layer of protection for very busy traders,” says Beckert. “This again is scaleable – different institutions have different market risk parameters – and demonstrates our commitment to meeting the needs of all segments of the market.”