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Electronic Trading and Internet Use by Foreign Exchange Professionals

A report by Greenwich Associates

In Greenwich Associates’ recently released FX e-commerce report, “Electronic Trading and Internet Use by Foreign Exchange Professionals”, the banking consultancy found that total demand for electronic trading is expected to grow to at least 55% in the near future.

“Furthermore, in terms of volume, online traders expect to almost double the proportion of volume they trade online in two years, from 13% today to 22%,” according to partner Woody Canaday.The Greenwich report studied current and emerging trends in electronic FX trading and information services in February and March 2000 with 498 corporations, fund managers, banks and other financial institutions globally. Nearly 60% are using the Internet for information and advice, and an additional 25% are considering doing so.Of those trading online (estimated as one in 10), users cite direct dealing, speedy execution, online confirmations, direct links to relevant research and indicative prices as their preferred features.

However, the largest percentage of users, nearly 60%, say they are using the Internet for information and advice. Users of multi-dealer systems have indicated a high willingness to compensate for advice by either paying a wider spread, guarantee a level of FX trading volume, concentrate business with fewer dealers or by paying a fee for advisory services. Few, however, favoured paying commissions.The report also found that of those clients currently trading online, the vast majority of accounts (84%) would prefer a multi-bank system to a single-bank system. The most popular models are those run by a consortium of banks or by an independent, third-party provider, while virtually none of those surveyed favoured the idea of a buy-side exchange network.

However, two in five smaller accounts that are currently trading online indicate that they would prefer single-bank systems.

Nearly nine out of 10 of those trading electronically trade spot majors, while about half of the respondents trade spot minor and forward majors online, and a quarter trade forward minors. Longer dated forwards are the most popular products amongst customers who say they would trade it online if it was available, followed by FX swaps.

“Although more than half of online traders continue to cite easy access to research as a key benefit of trading online, two in five also cite speed of execution and convenience. Significantly, one in three cite an increase in productivity, while one in four cite deal tracking, straight-through processing, reduced errors and other cost efficiencies,” says the report. Relatively few ‘ one in eight ‘ say they have lost the benefits of personal contact as a result of on-line trading.

Clearly, accounts that use Internet foreign exchange services spend less time on execution and settlement and are able to allocate their time more efficiently to value-added activities in the analysis and pre-trade phase of transactions,” the report adds.

Two in five accounts that are considering online trading (24% of accounts) cite security concerns as a major stumbling block to trading online. Three in 10 are concerned about increasing their reliance on one bank. One in four fear receiving a less favourable price online, a negative impact on their in-person relationships, poor systems performance during volatile markets or some technical issues. One in five say they haven’t been marketed a system for online trading.

Andy Awad of Greenwich notes that, “Internet trading will never wholly replace traditional trading activities as our research shows that customers who currently trade online remain reluctant to execute large, structured, or exotic trades online. The telephone will continue to be an important medium for salespeople to add value and to assist in executing large and complex trades.”

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