Currency trading is undergoing a transformation. A growing number of online platforms offer investors a range of options in terms of who they trade with, how they connect, the size of deals they will accept and so on. Some have been set up by the sell side to create a single environment where a number of banks compete for business, while others are independently operated and target specific sectors of the market.
The new platforms offer a number of benefits, such as 24-hour global trading, internet access and pricing transparency. However, markets are ultimately about liquidity and the online venues have yet to capture substantial liquidity from traditional telephone-based trading. One platform, CFOweb, has already gone out of business and many of the newest ventures have yet to prove their business models. Nevertheless, market commentators suggest that the momentum is in the favour of the electronic platforms and that they could account for two-thirds of the foreign exchange market by next year.
Individual banks have offered online trading for some time. Boston-based State Street was one of the first and began trading on its FX Connect system in 1996. Operating as part of its Global Link electronic, multi-asset information and trading portal, FX Connect now has 25 banks participating on its platform, including ABN Amro and Deutsche Bank. With a head start on most of its competitors, the platform achieved estimated daily trading volumes of nearly $6bn (e6.9bn) last year, according to Boston-based TowerGroup. (The platforms are generally not publishing trading figures for the moment.) FX Connect is focused exclusively on the institutional investment sector.
Out to challenge FX Connect’s dominance are two multi-bank platforms set up by consortia of banks, including some of those already participating in State Street’s platform. Atriax and FXall both went live last year, seeking to exploit the potential efficiencies offered by the internet and other modern technologies. In particular, these platforms offer direct connections to firms’ trading and investment management systems for the straight-through processing of transactions, which is quick, cuts costs and reduces errors.
In contrast to Atriax and FXall, Currenex is not owned by banks and this independence has helped it gain a strong foothold in the corporate market. TowerGroup estimates that it was trading around $1.35bn a day last year, giving it the second largest share of the online forex market.
FX Trade, Hotspot FX and Gain Capital are also independent, and focus on different areas of the market. FX Trade is operated by Oanda (Olsen & Associates), best known for its sophisticated forex forecasting analytics and currency converter popular across the web. It will handle transactions as small as $1, with small spreads and continuous interest rate payment. Hotspot FX is an electronic matching system rather than a trading platform and has established a niche in speculative trading and has a number of hedge funds as customers. Gain Capital targets small- to mid-sized speculative traders, including money managers and hedge funds, and among the attractions it claims are fast execution and no commissions or transaction costs on trades.
Coming into the market this year will be STN Treasury, a platform under development by Pennsylvania-based financial software supplier SunGard. It plans to exploit the size and diversity of its customer base. It has sold systems to over 700 banks, 180 brokers and 1,000 money managers. STN (SunGard Transaction Network) is the company’s proprietary network that it is using to link customers across market sectors, creating internal markets such as its forex project. It plans to offer automatic, built-in connectivity to STN Treasury to all its relevant customers.
Another new entrant is Centradia, the creation of a European bank consortium including Santander Central Hispano, Commerzbank, The Royal Bank of Scotland, Sanpaolo and Société Générale. Although the first products it will trade will be forex, it claims its major attraction will be its plan to offer a range of assets, including fixed income and derivatives, as well as other services such as market research. However, others such as Atriax and Currenex says they also intend to expand into other asset classes.

The next six months will be crucial for the electronic forex market place, says Robert Iati, researcher at TowerGroup. Users will test the platforms and establish the viability of their business models and the various market segments will align themselves with the platforms they deem to best serve their requirements.
“The maturing market could result in more than one third of all forex trading being executed electronically by the end of 2002, growing to a majority of trades by 2003,” says Iati.
The platforms mostly do not require any specific technology to trade and most firms will want to connect up their existing trading or investment management system if they have them, or will want to invest in such a system. The platforms such as Atriax, Currenex and FXall are very active in creating interfaces with the most popular systems because they want to make it as easy as possible for customers to hook up and begin trading. Currenex also recently helped launch an initiative called Treasury Workstation Integration Standards Team (Twist) to create technology standards for connecting to the platforms.
There are a number of specialised forex trading systems, although most are targeted at bank and broker dealing desks or corporates. Dublin-based Cognotec, for example, supplies a real-time trading service called AutoDeal Lite that banks can install and then provide their customers trading access through their browsers over the internet. The system also has built in links to the major forex platforms.
Copenhagen-based SimCorp’s TMS2000 investment management system supports the trading of forex, along with bonds, equities, commodities and derivatives. The system has an order management module for placing and tracking orders. A ‘blotter’ lets the user follow the development of orders, combine internal requirements into single orders and so on. A number of tools are available for analysing positions and portfolios, for monitoring market and credit risk and so on. TMS2000 includes cash management and back office functions and supports straight-through processing. Users of the system include the asset management division of Deutsche Bank and the Nordic financial group Nordea.
Like SimCorp, Stockholm-based Trema is a member of the Twist initiative developing interconnectivity standards for forex trading platforms. Among recent customers for its Finance Kit treasury and investment management systems is Finnish mutual insurance company Pension Fennia, which is using the system for trading and managing fixed income and equities and forex to cover foreign investments. Key aims in installing the system were to achieve straight-through processing of deals, as well the management of credit risk and asset allocation limits, and these benefits are already being realised, says Anne Nurminen, project manager at the firm.
Other suppliers of investment management systems that support the trading of forex include Advent Software, SS&C Technologies and SunGard Investment Management Systems. SunGard’s Invest One, Portfolio One and Global Portfolio II are among the products in its suite of software that will have built in connections to its STN Treasury trading platform when it goes live. What the company is doing in this regard – creating straight-through processing from the forex platform through to the end user system – is similar to the cross-industry Twist initiative. Both have the aim of simplifying market connectivity to encourage the growth of liquidity.
This year will be crucial for the new forex trading platforms with the players themselves acknowledging that not all of them will survive. Those that do are likely to be the ones that focus on a market segment and serve it well. But all platforms will want to make it as easy as possible for firms to link in their computer systems to execute and manage their trades.

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