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Portals: Distribution in an Electronic Age

With as many as seven multi-contributor platforms having been announced since the beginning of the year, market participants are aligning themselves behind one, two or all of the FX trading hubs currently being developed. Julie Ros looks at which models will succeed in attracting enough liquidity to outstrip the competitors and what it means for the industry at large.

Understanding just where the electronic age will take us, and how it will change the industry depends very much on the partnerships that are being formed among the world’s largest banks. Just as the formation of the EBS Partnership transformed the spot FX industry in just a few years’ time, the partnerships and alliances that are now springing up, look set to change the shape of the foreign exchange market as it currently stands.

But just what role the second and third tier banks will play as the market develops around a handful of these multi-bank initiatives, which ones will survive, and who will reap the benefits ‘ remain questions that will be answered only with time.

From multi-bank initiatives such as FXall and its new competitor (the “Atriax” consortium reportedly being formed by Chase Manhattan, Citibank and Deutsche Bank), to the single bank initiated multi-contributor models offered by both State Street and Bank of New York, to the buyside-led CFOWeb and Currenex, the banking industry is taking one of several approaches to the multitude of ventures on offer.

The two approaches being adopted are a) sign up for anything and everything, or b) take a measured approach. The winning strategy seems to lie somewhere between these, with those in the first camp gambling that a chip on every number will undoubtedly pay-off some form of dividend (either directly or by eventually getting absorbed by a larger venture), while the latter approach involves committing capital to a handful of projects.

Some suggest that the rationale behind the first approach may also be that, even though it’s costly, it does give those banks a very good idea about what their competitors are doing. Still others say such link-ups enable banks to scrap their own in-house projects in favour of the consortia approach, whereby costs and technology development are shared.

But what about the second and third tier banks ‘ those that cannot afford to commit the capital required to become a partner in a consortium? “This sector probably has the advantage in that they can wait for the big boys to battle it out, while they wait and watch which pool will have the most liquidity ‘ and jump in at the end of the day,” says one e-commerce manager.

Peter Mesrobian, global head of FX at Bank One in Chicago, says, “We don’t see the bank-sponsored models as a threat to our business, as they simply represent another vehicle for delivering our services to our customer base. We’re telling our clients that we’re happy to consider any of the products on the market that they are interested in, and that we will make a business decision on participating in a platform based on our customers’ desires and the overall economics.”

The Models

Rumours of an alliance between Chase Manhattan, Citibank and Deutsche Bank to create an online FX trading service targeted at large corporates are all but confirmed, following a leak to the press last month. The alliance, dubbed Atriax, was not officially announced by the partners; however, sources close to the venture say the details released are accurate, indicating that some actual documents may have been leaked, but that as of mid-August, contracts between the partners had yet to be signed.

The banks were rumoured to have planned a September announcement, and want to have upwards of 50 international banks online before launch. Reuters is reportedly going to provide the IP network for the service, which is due to launch early next year, with a full range of products slated for Q3.

Until Atriax hit the press, FXall had been the platform getting the most attention. The venture, which now includes 13 partner banks, is headed by interim CEO Phil Weisberg of JP Morgan’s e-finance unit LabMorgan, and chairman Paul Kimball of Morgan Stanley Dean Witter.

The idea behind FXall, much as that of Atriax, is to provide a single point in which clients can access prices, research and forecasts from any one of the banks that they have relationships with. The partners say clients will have 24-hour, low cost access to view and trade in spot, forwards and options across all tradable currencies. FXall says it will also provide online order entry, routing and monitoring, with complete straight-through processing (STP), and aims to establish industry-leading back office protocols as well.

The service is targeted at large multinational corporations, institutional clients, fund managers and hedge funds. The technology is being developed both in-house and with outside vendors. FXall will undergo a phased rollout with the first deliverable due towards the end of this year.

“There were a lot of sceptics to this initially,” says Weisberg. “But the group we’ve assembled is the fastest moving group of banks I’ve ever seen. We want to get this right from the beginning, so when we launch we will arrive at an industry standard solution very quickly.”

Many say FXall was a pre-emptive measure aimed at the imminent Chase/Citi/Deutsche announcement. The big three were certainly noticeably absent from most of the multi-bank initiatives announced to date, and some sources say they have even selected a CEO tapped from a prominent fund management company (rumoured to be Dan Moorehead, formerly of Tiger Management); however, this could not be confirmed.

While both FXall and the rumoured Atriax have yet to launch, one bank-side initiative that has made it to market is the platform operated by State Street, which has opened its four-year-old FX Connect service to multiple contributors. Deutsche was the first to sign on to the system, which to date has nine banks, including State Street, online. Stephen Smit, managing director of Global Link (Europe), says ABN Amro, Deutsche and SocGen are currently live on the system, while another 10 banks are currently installing or evaluating the system. Smit says State Street will approach additional banks based on client requests.

FX Connect is available via Global Link, which serves as State Street’s central platform for introducing new e-finance applications and services for institutional investors. FX Connect, which is run over a private network, operates as a “digital phone call”, whereby a client selects the banks it wants prices from, and then requests a price. The service provides research and trade execution services to more than 250 asset management firms, in 20 countries. The system also provides post-trade clearing and confirmation services.

Partner banks face a one time, up-front charge for installation, followed by a transactional charge and a monthly usage fee that covers the cost of maintaining the platform for clients.

“We are endeavouring to add value to our client relationships by creating interfaces between our clients’ in-house systems and FX Connect,” says Smit. “We recognise that our clients may use up to 25 different institutions, which is why it’s important to rollout a multi-bank product.”

“But FX Connect is only one component in our strategy. Ultimately, the Global Link platform will be a portal for all our products, including equity and fixed income transaction tools, so we’re trying to integrate our services across all asset classes,” he adds.

Another bank-side initiative is that offered by the Bank of New York (BNY) and AVT Technologies, which have formed a joint venture also aimed at the fund management community. MarketMarque, which was announced on 6 July, provides partner banks with the technology currently being used by BNY’s iFX Manager clients. The Internet-based service is live with a number of clients, and will migrate towards an independent service provider in the fall, when a new Web site will also be launched.

Five leading European banks have meanwhile banded together to form an e-marketplace for treasury and capital markets products that is targeted at the mid-market corporate sector. The venture, which is being referred to as Five Banks, includes Banco Santander Central Hispano, Commerzbank, RBS, San Paolo IMI and Société Générale.

The electronic platform is due for launch in Q1 2001, and will provide online access to the pre-trade, trade and post-trade services of the five participating banks. Initially, the system will offer FX spot and forwards, interest rate derivatives and fixed income services over a private network.

While only State Street is live with a bank-led multi-contributor service, a couple of buy-side ventures have also begun live trading.

Currenex, which was developed by a Silicon Valley-based software company, launched on 27 April with a service that provides auction access for CFOs, corporate treasurers, investment fund managers and agencies. The company boasts two high-profile customers in Intel and MasterCard, saying it sees as much as 97% of the latter’s business. Since its launch with 14 AA-rated banks, the venture has revealed several of its partner banks ‘ ABN Amro, Barclays and the Royal Bank of Scotland (RBS), and is now up to 25 participating banks.

Currenex’s FXtrades service is a Web-based exchange that supports 200 currencies in spot, forwards and swaps transactions, which can be integrated into clients’ settlement systems. The service also offers a full audit trail, transaction history and a reporting capability.

Karen Steele, vice president of marketing at Currenex, says the Web-based portal was developed in the belief that the evolution of the FX market will be business-to-business foreign currency exchanges, delivering multi-bank trade execution, confirmation and settlement.

Meanwhile,, which launched on 27 June, was developed by Palo Alto, California-based Integral Development as a business-to-business e-commerce portal for corporate treasurers and fund managers. The Internet-based portal is free for end users, but banks must pay a fee to access the system, which provides independent pricing for treasury products, portfolio analysis and management, and direct online trading of swaps, caps and floors, forward rate agreements, FX, loans and deposits and cash instruments.

CFOWeb works on a “reverse auction” pricing basis, whereby buyers post the price at which they want to buy an instrument and participating banks will try and match at the best price.

Internet vs Intranet

There is a split between those opting for private networks and those launching directly on the Internet. FXall, State Street and the Five Banks initiative ‘ are all using private networks for delivery (with Internet-based components planned for later release), while Atriax (via Reuters IP network), CFOWeb, Currenex, MarketMarque and a new venture called Hotspot FX ‘ have chosen to launch over the Internet.

The Internet continues to pose security and time concerns in many people’s minds, although some predict that the current pace of development means that these considerations won’t be long-term problems.

For the time being, both approaches have merits. “Performance is an issue when talking about public networks,” says State Street’s Smit. “Have you ever tried to get into your Schwab account when the Nasdaq has dropped 300 points? This is certainly what’s behind our rationale for running over a private extranet. With the Internet, there is currently no guarantee of delivery.”

At this juncture, Smit says State Street has no immediate plans to move its service onto the Net. “We are Internet ready and recognise that ultimately we will want to migrate onto the Web, but for now, our clients seem happy using the private network,” he says., another bank-led initiative that covers the currency options market, is also opting for a private network from the outset. “We have no illusions about the future,” says Dirk Ward, CEO of “We are starting with a private network, but six to 18 months down the road, we believe the Internet will be our primary focus. The Internet will become a much more attractive place, but right now, user satisfaction over the Internet versus real-time dedicated boxes shows that you cannot compete yet on the Internet ‘ it would be like having one hand tied behind your back.”

Another consideration is that, while banks have the resources to fund these very expensive developments, clients don’t have the same capital to invest in upgrading their systems to cope with the latest Internet offerings.

“Clients will never enjoy the full benefits of Internet-based trading portals until they upgrade their systems,” says John Key, European head of e-commerce at Merrill Lynch in London. “Banks have very good infrastructures in place with very fast Web browsers. But the average client in Europe still has a long way to go to have the latest in browsers and Internet connectivity.”

However, the BNY/AVT venture was built with the Internet in mind from the beginning. Based on the same technology as BNY’s iFX Manager, which was among the first Internet-based FX trading systems offered, MarketMarque officials say the Internet provides fast, secure access to dealing on line.

“A lot has to do with the client’s own comfort level ‘ and I think they’ve come a long way in a short space of time,” says Jorge Rodriguez, head of global FX derivative sales at BNY. “Our system is aimed at the investment management community, which is a highly sophisticated group that has a history of using the Internet to post research and provide access to their clients’ portfolios. A number of our clients have invested in technology to improve firewalls and speed up their connections, and are now comfortable moving their trading activities online.”

The new environment

“From both a bank and client standpoint, electronic trading provides two benefits ‘ it’s a) cheaper and b) more efficient ‘ because it is a lower risk business,” says Martin Spurr, head of e-Ventures at RBS in London. “It provides an efficient and cost-effective means of handling the expensive aspects like processing and settling trades by eliminating instances of human error.”

The idea of commingling prices is also attractive, because it provides a way for banks to share risk. The use of multi-contributor portals is widely expected to push volumes up dramatically. “Commingled pricing will lead to more business getting done, because it gives people a better level of confidence that they will be getting the best market price, which reduces the potential for slippage for those that are trading for profit,” adds Albert Maasland, global head of marketing at Cognotec in London.

State Street already shows evidence of such suggestions, reporting 100% year-on-year volume growth over FX Connect for the first six months of this year.

With the decline of spread income, banks can no longer rely on pricing as a means of differentiating themselves, adds Merrill’s Key. Relationships are therefore becoming more important than ever. “The value is not in the execution, it’s in reducing clearing and settlement costs ‘ these are real advantages for clients,” says Key.

Hugh Stewart, managing director at banking consultancy and e-services company Calleo, adds that portals will enable banks to learn about their clients via their behaviour. “With EBS and Reuters, you can’t observe behaviour. But with portals, if you can profile your clients better than your competitors, you will have the ability to build products and services against those needs. The race then becomes how quickly you can build these,” says Stewart.

Additionally, he notes that as pricing and execution are marginalised, banks must be able to differentiate themselves in terms of support services.

Meanwhile, the models that were news six months ago, may no longer hold the same weight today. In a recent report on e-commerce in FX, banking consultancy Greenwich Associates found that of those clients currently trading online, the vast majority of accounts (84%) would prefer a multi-bank system over a single-bank system. Although, two in five smaller accounts that are currently trading online indicate that they would prefer single-bank systems (see sidebar).

“I’m negative about single dealer systems, because they don’t tend to link to front office systems,” says Key. “Why would a client take a single dealer, execution only system? These won’t last for long; however, they will have a role to play for smaller banks and affiliates, internal transactions, or for very limited credit-related transactions.”

FXall’s Weisberg agrees that single dealer platforms do have a role to play within certain client segments, and even amongst the biggest institutions for which FX may not be a core business, but beyond this, their expansion will be limited by the multi-contributor sites being formed.

If you can’t beat ‘em, join ‘em

So how do banks justify bringing their clients to a platform that links with their competitors? “None of this is about banks protecting their customers,” adds Spurr. “The best way to service clients is by giving them access to the best prices and services. Not participating means you risk losing your clients to multi-contributor platforms that provide a single point of access. Most corporates manage a number of different relationships anyway, so there’s no point in holding back the tide of change. You must help clients through this change and support them. In the end, helping your clients in this way ultimately translates into a better relationship with them.”

“Basically, you cannot afford not to be involved in some way, because if you don’t offer this new brand of service to your clients, you will lose them to a model that does,” says Simon Virgo, business manager for Dresdner Kleinwort Benson’s Online Markets division.

“There is a whole class of clients that are already clients of the market,” adds Weisberg. “Those are the clients that will benefit from platforms such as FXall ‘ and I genuinely believe that clients will drive this initiative. Once our platform is built, it will be one of the most compelling offerings in the marketplace, where clients will have access to real liquidity.”

“There is one rule in e-commerce and it’s all about distribution ‘ finding the most efficient means of connecting into the different approaches ‘ whether it’s a multi-contributor portal or a single bank system. The reality is that banks have a broad array of end users who will look for different ways of accessing the banks,” adds Maasland. “Those that provide this access will succeed in strengthening their client relationships.”

Where to Turn

With the multitude of offerings, how do clients, let alone banks, determine which portals will succeed and which will not?

There are a number of considerations banks must make before getting involved in any of these initiatives, says DrKB’s Virgo. “When you are considering which investments to make, you must look at the way in which you will derive income ‘ both as a bank and as an owner of another company ‘ because it’s about making a strategic connection, providing liquidity and pricing ‘ but you also have to make a living. You have to ask if it protects your own business? Is it an offensive or defensive move? How do you migrate your clients from a proprietary network onto a multi-bank platform? Will the business model allow you to serve your clients effectively? You will find that you end up with a completely different competitive structure in this space.”

IT consultant Nigel Webb says that most banks do not have much to lose by participating in several FX trading portals. “Margins have already been squeezed by the EBS and Reuters matching services,” he says. “So by moving trading online, banks are capitalising on one of the only ways left of making money in the forex market ‘ reducing operating costs.”

Webb believes that of the seven or so portals currently available or under development, only a few are expected to survive. Those that do will be determined by size, liquidity, client type and product range.

“The market for online trading in plain-vanilla financial products is being chased by an untenably large number of firms. Inevitably, the market will be characterised by mergers and company failures, leaving a small number of bigger players in the near future,” says Webb.

Virgo agrees. “I would expect significant consolidation amongst the large number of consortia we are seeing emerge,” he says.

David Woods, managing director and head of e-commerce at ABN Amro in London, adds that when his bank first signed up to take part in CFOWeb, it presented “pretty low risk and low cost” to join. But ABN has not limited itself to the one venture, the bank is also involved in other ventures, including both State Street and Currenex.

The Future

Woods adds that in future, large corporate clients may actually employ “crawl agents” to search out the best prices on Web-based trading platforms, and commingle them onto a proprietary, browser-based front end.

Merrill’s Key holds an even more radical view of the future. “Eventually, FX is going to go to an exchange,” he says.

Indeed, there is one development taking shape that would act as an ECN (electronic communications network) for the FX market. Hotspot FX is the planned B2Bexchange (with a B2C aspect as well) that will allow clients to anonymously trade with clients, much like EBS and Reuters work in the interbank market.

But what about credit? David Ogg, CEO and founder of the venture, says the system will be margin based, so clients must maintain a certain level of collateral to trade on the system.

Ogg admittedly says it will take a “leap of faith” by the banks if they are to give up their spread income to provide liquidity to the system. But some say this direction is inevitable no matter what model prevails.

“At the moment, FX is a principle business ‘ you make a price and take what you can. In the end, FX margins are falling ‘ so why not open the market out onto an exchange and allow clients directly onto the system? If FX goes to a commission-based business, it won’t matter who you transact with, because you get the commission,” says Key.

Under this assumption, Key believes the banks that would stand the most to lose are the first-tier institutions with large global client franchises. “These banks make their money in emerging economies where they can quote wide margins. But in the future, we’re going to get margin compression like we’ve never seen before. If any of these consortia becomes the industry standard for processing transactions (so you can write just one link from the system to the client’s back office), that model will prevail above the others. But this path will prove incredibly erosive to the core businesses of these top-tier FX institutions, because of the very high operating infrastructures these institutions will be left with if the revenue model really changes.”

Most likely, two or three pools will eventually dominate the horizon, capitalising on particular niche areas of strength. But which these will be seems skewed towards the bank-operated sites. “History dictates that two liquidity pools can’t be supported. Look at Reuters versus EBS as an example,” says Key. “Reuters should have easily won the battle for spot matching, because they already had systems on every desk, while the bank-owned EBS requires a single, standalone terminal. This proves that banks want to control their own liquidity. When you have liquidity and technology, then you win.”

However, others point out that the market has made room for both systems, although each has settled into its own niche, EBS for the major currencies and Reuters primarily for the minor currencies and emerging markets.

“As we’ve seen in the past, if the banks don’t take the initiative themselves, a third party will come in and determine how their market develops,” adds Bronia Jenkins, chief marketing officer at “Banks’ core asset is the ability to create and understand liquidity, so they should own the distribution medium.”

“The landscape will be very different in two years’ time,” adds Key, “2000 is the year to set up all these initiatives, but in 2001, we’ll see them begin to merge.”

Looking beyond 2001, one source foresees an even greater pooling of resources. “Over time, if these alliances and consortia do deliver on what they say they will ‘ a flexible architecture, built and developed on industry standard protocols that met client requirements, there is no reason that in future, these portals cannot be ultimately linked together,” the source says.


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