Although electronic platforms for foreign exchange trading have been proliferating over the past year, 95% of actual deals are still conducted over the telephone. But this could be about to change as the components begin to fall into place that will make trading currencies online worthwhile.
Online trading of foreign exchange has been around since at least the 1980s, with banks offering the option of executing deals by computer. However, industry estimates suggest only 5% of deals are currently done electronically. Over the past year or so, a number of new platforms have appeared, some operated by individual banks, others by multiple banks and some independent. Although take up of these facilities has been comparatively slow, momentum is likely to pick up as buy-side firms make the technology connections that will bring the benefits that this new generation of platforms promise.
State Street was one of the first to launch a single bank site in the mid-1990s. Last year, it opened FX Connect to other banks and now has 23 signed up, most recently Bank of America. Two big multi-bank sites went live this year, FXall in May and Atriax in June. The independent Currenex platform has been in operation since last year, as has Volbroker which specialises in foreign exchange options. More recently, Pennsylvania-based SunGard, one of the world’s largest financial systems suppliers with a range of products for the buy and sell sides, announced a quote- driven internet trading platform for foreign exchange, money markets and over-the-counter derivatives called STN Treasury.
But what is different about these platforms compared with the online trading that banks have made available for ages? There is the internet for a start, which makes connection easier and cheaper. And whereas the early trading services were execution only, the new platforms are offering a range of functionality to support sophisticated trading strategies. Furthermore, the platforms are marketplaces, with price competition among the sellers who also bring pools of liquidity.
But perhaps most important of all is the fact that they provide direct links between their execution engines and the users’ portfolio management and back office systems. This enables increased automation in handling deals, known as straight-through processing, with resulting efficiencies and cost reductions.
Edinburgh-based Standard Life Investments made it clear that these are the key benefits it expects when it announced that it had conducted the first deal on the newly launched Atriax in June.
“The benefits that Atriax will bring in offering straight-through processing of deals and introducing transparency of best execution to the market will be of huge value to our company and indeed the entire foreign exchange market,” said Keith Skeoch, chief investment officer at Standard.
Several of the platforms offer consultancy and support to users planing to hook into their operations in order to achieve straight-through processing. In addition, they are forming alliances with financial software companies to build connectivity to the platforms into their trading and back office systems. FXall, for example, has alliances with FNX and Wall Street Systems, based in the US, and with Trema based in Stockholm, among others. Atriax has 14 technology partners, including Wall Street Systems and Copenhagen-based SimCorp.
The new platforms are bullish about their prospects. FXall already has over 100 buy-side users doing deals that average $5m (E5.6m)and with the biggest deal so far over $100m. Mark Warms, FXall’s general manager for Europe, says that the platform includes a lot of special functionality for pension funds and asset managers that it got from its member banks. For example, it can net and gross allocations and transacat them simultaneously.
Atriax, which counts Ontario Teachers Pension Plan Board as a member of its advisory board, says that its launch was really just the first stage of its development and that it plans to add extensive functionality aimed at the buy side over the coming months. So far, its users have been experimenting with the system, some trying out very big trades while others test its capabilities with a series of small trades, says a spokesman.
Where Atriax, FXall and Volbroker are the products of bank consortia, Currenex has approached from the other side. Its philosophy is “bring the customers together and liquidity will follow,” says Karen Steele, Currenex’s vice president of marketing. Currenex says that its independence and neutrality are important factors in its success so far.
STN Treasury takes advantage of the SunGard Transaction Network (STN), a series of links that SunGard has been making between its products and a global communication network to facilitate the direct interaction between its buy and sell side customers.
At the moment STN Treasury is still in pilot, but the company expects to announce the first users in the near future, says Ben Auld, director of marketing for the platform. Although it is late with its platform, SunGard believes that the market is still wide open. “Mass migration to online trading will only occur when there is real-time, end-to-end technology,” says Auld. The STN is all about this kind of connectivity, he says. SunGard has over 700 banks, 180 brokers and 1,000 money managers on its customer list. Although non-SunGard product users can also join STN Treasury, its chief advantage appears to be the natural community the company’s customers form and their commonality of technology which makes linking to the platform possibly easier and cheaper than to other platforms.
The platforms are also widening their reach. In July, Currenex and Atriax gained regulatory approval to operate in the UK and thereby a ‘passport’ to conduct services in the other 17 countries of the European Economic Area.
It is impossible to say just how quickly business is moving to the new platforms because they generally do not publish their volumes. But even though it is early days, Atriax says that firms should be assessing what the various platforms offer in terms of their requirements. Hooking up to any of the platforms will take time and resources so it is best for firms to plan ahead, says an Atriax spokesman.

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