The internet, and particularly the web, has accelerated the move of markets to online operations. While electronic trading was well established in the foreign exchange and some securities markets before the 1990s, the emergence of the web made international communications accessible on an unprecedented scale. Some traditional markets, such as European derivatives, have since migrated en masse to electronic networks, while many entirely new markets have appeared, for example in fixed income, that exploit the new global connectivity.
Online trading is a fast moving area, with a rash of new platforms appearing during the dotcom boom. In October 2000, ABN Amro estimated that there were 150 multi-bank platform initiatives alone under way, 20 of which it was participating in. Although several more have appeared since then, the bursting of the dotcom bubble and the downturn in the US and global economies has led to a large number of casualties.
There is no single business model for online trading. Organisations creating the new platforms have in some cases simply tried to replicate traditional market conventions, although automating many of the processes for greater efficiency. Others have dreamed up new models, for example using technology to disintermediate the traditional broker, or have attempted to find market niches that simply were not feasible before the internet. Meanwhile, the suppliers of trading and investment management systems are evolving their software to enable their customers to take advantage of the new environment.
Foreign exchange has long tended to lead the way in adapting to modern technology, and there are now a range of online markets, from individual bank platforms, such as State Street’s FX Connect, to those set up by bank consortia, such as Atriax and FXall, to independents such as Currenex and Hotspot FX (IPE March 2002, page 50). With a head start on the others, FX Connect has so far dominated trading volumes, with Currenex in second place some way behind, according to Boston-based market research organisation TowerGroup. (The platforms do not as yet publish their volumes.)
Two recently announced but not yet launched platforms – US financial software giant SunGard’s STN Treasury and European bank consortium-backed Centradia – both plan to kick off with foreign exchange before extending into other asset classes such as fixed income and derivatives. They argue that ultimately what investors want is a single venue where they can find the best prices and execution for all the asset classes in their portfolios. They may well be right, but when they launch they will have to engage in an energetic battle for liquidity with the established and already fiercely competitive foreign exchange platforms, and repeat this for each asset class where there are already specialised services.
Fixed income is a case in point. This sector saw the biggest raft of platform launches and planned launches over the past couple of years. However, 2001 was the year of the Grim Reaper as far as online bond trading was concerned, with over a dozen platforms closing down and the plug being quietly pulled on projects still in their early stages. The most high-profile casualty was BondBook. Although backed by big names, such as CSFB and Deutsche Bank, it failed to generate liquidity and shut down in October. Industry commentators blame the fact that it tried to introduce a new model of anonymous trading to the buy-side, while being simultaneously hit by the general economic slowdown. So far, the most successful platforms have been those that largely automate the traditional trading process – Market Axess and TradeWeb in the US, and BrokerTek Europe, EuroMTS and Instinet Fixed Income Markets (IFIM) in Europe.
BrokerTek Europe is an electronic inter-dealer broker of fixed income securities owned by banks and brokers. In January, it said it would be introducing a number of new products for the UK government bond market. It is also active in the euro repo markets. EuroMTS is a European government bond trading platform owned by Italy’s MTS, a bank consortium operation that also runs a number of national platforms such as MTS Italy (which dominates its local market), MTS Spain and MTS Belgium. Last year, it formed a partnership with online international credit trading platform Coredeal to create Coredeal MTS to trade international corporate bonds in Europe. IFIM is a part of Instinet, the hybrid voice and electronic agency securities broker owned by Reuters. Last year, it introduced Eurobond products to its service in addition to its existing government bond and Pfandbriefe (German mortgage bond) offerings.
Online equities trading also saw its share of casualties last year. In the US, the Arizona Stock Exchange disappeared after 10 years of struggling to establish itself, while Wofex, a new multi-trading approach platform did not get off the ground. In Europe, where equities trading has been online for many years, developments have focused on the power struggle between the London and German stock exchanges and on the moves to create new venues for the cross-border trading of European equities.
On the retail side, Morgan Stanley and Scandinavian exchange technology supplier OM Group launched Jiway to offer the trading and settlement of European and US stocks. But after a shaky start, Morgan Stanley pulled out of the venture last September, leaving OM to go it alone. On the institutional investor side, the London-based consortium Tradepoint and the SWX Swiss Exchange last year merged to launch Virt-x, an online trading platform for cross border European equities trading with a built-in central counterparty. According to its financial statement for the six months up to 31 September last year, the platform had an average daily volume of 30,000 trades worth around e2.5m.
Virt-x faces competition from the European arm of US technology stock market specialist Nasdaq. Launched last June, Nasdaq Europe offers similar functionality to its US parent, with a single rule book, single membership approach for firms wanting to trade stocks across the EU. More recently, it has formed an alliance with the Berlin Stock Exchange to bring German retail investors on to the platform.
In the derivatives area, Europe has led the way in converting its old open outcry pits to electronic trading. The German-based exchange Eurex proved the effectiveness of the new approach when it wrested the market in Bund contracts from the London International Financial Futures and Options Exchange (Liffe) in a bitter struggle over several years. Liffe has since gone electronic too, leaving only Chicago among big derivatives exchange centres still operating pits.
In addition to these converted exchanges, many banks have proprietary online derivatives trading sites such as CDC IXIS Capital Markets interest rate derivatives service, a number of specialised platforms have also appeared. London-based CreditTrade was set up in conjunction with voice broker Prebon Yamane for the online trading of credit derivatives and is backed by several big trading banks. Volbroker is an inter-dealer platform for foreign exchange options. SwapsWire seeks to bring online the private negotiations of over-the-counter derivatives trading, with an initial focus on euro and sterling interest rate swaps.
But the derivatives area has proved no easier than any other asset class for those wanting to build a brave new world of online trading. In October last year, Cygnifi, a platform spun out of JP Morgan and offering electronic trading plus additional services, was forced to file for the US Chapter 11 bankruptcy process.
Clearly, online trading is an evolving business. Some traditional exchanges that have gone electronic have been enormously successful. For example, Eurex is now the world’s biggest derivatives exchange, trading 675m contracts last year. The internet has brought the possibility of new business models – most notably the multi-bank platforms, such as Atriax and FXall. These provide an efficient way for investment firms and others to meet their fiduciary duties of finding the best price, as well as providing greater efficiency in the processing of transactions. Other successful models may appear in the future, but a further shakeout is likely as the industry discovers which models work best and liquidity settles on the most successful platforms.

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