For the second year running, Profit & Loss and Lepus have joined forces to produce a comprehensive survey of the FX trading systems market. Geoff Katesexamines key trends over the past year and offers advice to financial institutions thinking of upgrading their trading systems.
The financial trading environment has developed remarkably rapidly over the past year, shaped by both consolidation in the banking industry and advances in communication technology. Vendors have responded accordingly, extending their systems in terms of both product coverage and functionality.
One significant effect of this development race is increased uniformity among competing systems. Although it is doubtful that the vendors would see things this way, their systems offerings are converging. Vendors have to be highly responsive to market changes – and the near-universal move towards e-trading among banks has encouraged software firms to move en bloc towards real-time automated front-to-back transaction processing across multiple instrument classes.
An important point to remember when reviewing the following matrix (see pages 20-32) is that the information presented is based purely on vendor responses to our questionnaire. We have not validated their claims; thus the survey should be used only as a comparative guide for banks to assess the overall shape of the market. The table can also be used to help banks draw up a short list of potential suppliers without having to go through an extensive amount of preliminary research.
However, it must be noted that the listed vendors comprise only those that returned the survey before press time, who were willing to participate and who were deemed by Profit & Loss and Lepus as appropriate. Our aim is to cover the major market players and give a fair representation of the market as a whole, not to publish a comprehensive directory of every available FX system.
MODIFICATIONS FROM LAST YEAR
The consolidation noted above has led to a few structural changes to the survey itself. We have categories systems in three classes, as opposed to the five used last year (see Profit & Loss, April 2000). These are:
• pricing, analytics and calculation engines
• Internet-based trading systems
• front, middle and back office applications
We have also added a number of questions to the survey this year to reflect new priorities among banks. In particular, the e-commerce section has been greatly extended to include information on issues such as provision of live bid/offer prices and auction-style trading (competitive bidding).
WIDER INSTRUMENT COVERAGE
One clearly visible trend is that vendors are expanding the range of instruments they aim to cover. Patchworks of specialist best-of-breed solutions are giving way to universal systems that can handle almost any tradable product. One driver for this trend is customer demand – the trading environment is increasingly a cross-product one, with banks vying to offer diverse services to increasingly sophisticated clients.
Technology advances have also played a role, however, by allowing the rapid deployment of new products within a single general framework. Component-based software engineering standards make it relatively simple to add in new instruments and analysis tools as required. Many vendors are switching to such technology and thus navigating around the need to determine precisely which and how many non-standard instruments they should code in to attract customers.
Exotic instrument coverage has improved dramatically since last year – nearly all vendors surveyed now cover at least one of the main exotic derivative classes. Instruments such as spot, forwards and FX swaps are standard, and now almost every vendor covers NDFs; however, only half support EFPs.
Of the 23 vendors who participated in the survey, six of them – FNX, MBRM, Murex, Kalahari, NovaPlex Technologies and Barra – claim to handle all of the instrument types listed. Bloomberg also has a high level of instrument coverage, supporting all instruments except time-dependent exotics.
Arcontech, in contrast, does not cover any specific instruments – instead it is positioning its City Vision offering as a general toolkit for internal systems development. OMR Trading Systems covers all standard instruments, but most of its exotics are still in development – as they were last year. However, the vendor is now offering EFP support, with NDFs in the pipeline.
Several systems offer comprehensive cover of financial instruments, but are weak when it comes to commodities. Fenics Software and Wall Street Systems have not significantly changed their instrument coverage at all from last year. AFA Systems’ new Muskateer Plus product is said to be ready to launch in spring of this year, while Principia Partners ‘Principia Analytic Systems was launched last December. These products ‘success depends on future market trends. Commodity trading is experiencing a high level of growth at the moment. If banks move towards integrating their commodity and financial trading operations, as some have done, these systems may find their market diminishing.
Front Capital Systems covers all instruments except for soft commodities and base metals. Financial Software Systems ‘ Spectrum application offers similar instrument coverage to last year, but has added precious metals. Anvil Software ‘s new system, Denarius, was released in February and will also cover all instruments except commodities – although these are in development. Those currently available today include FX spot/forward, fixed income futures, cash, repos, bills and CD instruments.
DerivaTech’s new system, also launched in February, covers forwards, FX swaps and NDFs. It boasts strong coverage of OTC options, with nearly all exotics. Commodities are supported, but not money market instruments.
THE E-TRADING REVOLUTION
The move to e-trading has had large implications for systems vendors over the last year. Of the 23 systems surveyed, 17 now offer an online chat facility. This proves the ever-increasing importance of channelling real-time information between traders. Only half of those questioned offer auction-based competitive bidding, but most have RFQ facilities or streaming.
Just over half the vendors surveyed now have an automated confirmation and settlement system. This suggests that straight- through processing is no longer purely an operational concern, but is being built into trading systems. This not only reduces the time taken to confirm and settle trades, but also reduces the error rate within banks – so–called operations risk.
The majority of systems now also have client reporting in the form of email confirmation and statements, as well as clients being able to view their positions online. Nearly all offer integrated portfolio risk analysis with a drill-down capability for identifying particular risky trades.
VAR MOVES TO THE DESKTOP
In terms of risk management, while most systems offer real-time portfolio risk tools, only 36%of those surveyed offer real-time VaR. Of those vendors that do not offer real-time VaR, only AFA Systems answered that this area is under development. Other vendors claim that while their system doesn’t offer such services directly, they can be integrated with third-party VaR applications. This may become a growing area, since banks are beginning to move towards providing VaR on traders’ desktops.
The vast majority of the systems use multiple calculation engines on different boxes. Most support real-time feed interfaces to the usual suspects: Reuters, Bloomberg and Bridge Telerate. The Triaxia system is an exception, only reading data from the client’s internal data sources.
SUPPORT AND INSTALLATION COSTS
The average time taken to implement a system can range from 10 minutes in the case of Monis Software ‘s XL range to 18 months for AFA Systems. Average implementation times (or claimed times) seem to range between three and six months. Although the time taken to make a system fully operational has decreased from last year, it is still not fast enough for many banks. The e-commerce environment we are presented with today moves ever faster, making time-to-market an essential priority. Many banks are no longer interested in a six month implementation period – 90 days can be considered as a new standard. If a system cannot be operational within three months, then first mover advantage is lost.
In general, vendors are realising the importance of having a 24/7 support desk. However, some smaller companies are still only working with an emergency service. In the future, this may become a determinant for banks, as help desks and constant support become critical factors.
In terms of scalability, the systems vary tremendously. At the top end of the scale, OMR Systems claims its biggest client is processing approximately 1.5 million trades per day. Fenics claims the number of trades its system can process is infinite. The smallest systems seem to deal with around 200 trades per day, though many vendors declined to reveal the maximum number of trades per day they could process.
Vendors were also unwilling to discuss software costs, but those who did disclose this information were asked to quote costs for a small single site, a large single site and a global site. Prices for a global site range from £650 per month per station to over ?3 million for a global site. Cognotec simply charges a monthly fee and a transaction charge. Although there is a wide variation in prices charged for systems, low price tends not to be a critical factor for many banks when deciding upon which system to implement. Other factors such as reliability and scalability take priority. Vendors are also beginning to realize the importance of being linked to third-party software. These aids to integration within banks can make a particular vendor ‘s software more attractive. Reuters, Bloomberg and MKI were the most common vendors to be linked up to, although Midas and Murex also featured.
As can be seen, there have been many changes and advances made since last year. With the introduction of more Internet- based trading systems, the competition within the market has increased with more vendor offerings than ever before. Three vendors fall into the Internet-based category this year, but this number will undoubtedly continue to grow. It is also predicted that the coming year will see more consolidation in the vendor market. The fragmented FX vendor market is likely to follow in the footsteps of the risk software market, which has experienced a large number of mergers over the last year. This possibility only adds to the difficulties of selecting a system. Hopefully this article and the following survey will help make the decision slightly easier.
Geoff Kates is managing director of Lepus, a management consultancy specialising in a number of areas including e-commerce, trading systems, client management, risk, equity and credit derivatives.