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Cross-assetclass trading- automation a viable possibility

Dynamic LiquidityManagement- towards a next generation solution

Regional eFX perspective- spotlight on France

FOCUS on eFX and Latency- the growing importance of speed

Cross-assetclass trading- automation a viable possibility

Dynamic LiquidityManagement- towards a next generation solution

Regional eFX perspective- spotlight on France

FOCUS on eFX and Latency- the growing importance of speed

october 2005

transforming global foreign exchange markets

It’s all about speed in this edition. We are concentrating on the

reasons for latency and why it’s becoming such a critical issue

for both the sell side and buy side, particularly the active dealer

community. It’s clear that if banks wish to win and retain client

business they must focus on reducing latency between price

publication and execution. A key question is whether the problem

of faster data delivery can be solved merely by throwing new and

improved technology at it or whether other parts of the trading

cycle also need to be modernised to ensure they don’t continue to

slow down deal execution. In our next edition, we plan to examine

some of the specific risk management issues facing banks which

are linked to the topic of latency.

One new feature we’ve introduced in this edition which we hope

will become a regular fixture, is the Regional eFX Perspective

article. In this edition we concentrate on France and Andy Webb

has canvassed various French banks, French technology

companies and French buy-side players to get an overall view of

how eFX is developing in the country. Our next regional

perspective article will focus on Scandanavia. If you would like to

contribute to this feature, let us know and we will get in touch. We

expect to do follow up articles on all the regions we cover to see

how eFX deployment has evolved over the course of time, so if you

miss the opportunity to contribute to one article you should get

another chance in the future.

As usual we hope you enjoy this edition of the magazine.

Charles Jago

Editor

e-Forex

Autumn 2005

welcome to

Susan [email protected] Editor

Charles [email protected] (FX & Derivatives)

Charles [email protected] Manager

Helen [email protected] Manager

Alan [email protected] Manager

Louis [email protected] Manager

Anthony [email protected] Manager

Helen MurrayPhotography

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Design and Origination:Phill Zillwood Design [email protected] in the UK by Broglia Press

e-Forex (ISSN 1472-3875)is published quarterly in January, April, July and Octoberwww.e-forex.net

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Although every effort has been made to ensure theaccuracy of the information contained in this publicationthe publishers can accept no liabilities for inaccuraciesthat may appear. The views expressed in this publicationare not necessarily those of the publisher.

The entire contents of e-Forex are protected by copyrightand all rights are reserved.

Companies and organisations in this issue:

Godfried De Vidts Terrorist threats

Damon KovelskyCross-asset class trading

Peter C. RandallDeveloping a common

industry standard

Adam HawleyTrading Latency

2 october 2005 e-FOREX

Xavier AlexandreTransaction Cost Analysis

Harry Gozlan Taking e-FX platforms

forward

John AshworthDynamic Liquidity

Management

Björn Lundvall The e-Forex Interview

A

ABN AMRO page 9ACI page 125ACM page 119ACT Forex page 103Aite Group page 104AMD page 81

B

Bank of England page 26Banque de France page 45Barclays Capital page 10Baxter Solutions page 25BIS page 26BitPass page 8Bloomberg page 91BNP Paribas page 43Brown Brothers Harriman page 16

C

Cameron Systems page 10Caplin page 88Celent Communications page 44Chicago Mercantile Exchange page 15Citigroup page 64ClientKnowledge page 26CMC Inside

Back CoverCognotec page 76Communicating Ltd page 100Currenex page 41C-View page 99

D

Deutsche Bank page 63DynexCorp page 99

E

EBS p4 & 5eSignal page 121eSpeed Inside

Front Cover

F

Federal Reserve Bank page 26Financial Insights page 22FIX Protocol Limited page 50FlexTrade page 107Forex Capital Markets page 75FXall page 19FX Concepts page 98

G

GAIN Capital page 111Global Forex Trading page 117Goldman Sachs page 63Greenwich Associates page 86

H

Handelsbanken page 39Hewlett Packard page 81HotspotFX page 13HSBC page 14

I

ICY Software page 46IFX Markets page 17Integral Development Corp page 11Intel page 81ISDA page 50

J

JP Morgan Chase page 70

L

LavaFX page 64

M

Man Financial page 99Mellon Financial page 10Microsoft page 86Misys page 14Morgan Stanley page 64

N

Nordea page 53

O

Opus Capita page 8Overlay Asset Management page 58

P

Portware page 106

R

Rabobank page 37RBS Financial Markets page 8Refco Capital Markets page 109Reuters page 42Riskcare page 38RWE AG page 54

S

SAP page 55Savvysoft page 92Saxo Bank p20 & 21SEB Merchant Bank page 70SmartTrade page 57Societe Generale page 7Standard Chartered Bank page 79State Street Corporation page 61Stentra page 62SWIFT page 10

T

360T page 54Tradertools page 85Traiana page 10Trema page 55TWIST page 50

U

UBS OutsideBack Cover

W

Wachovia page 33Westpac page 6WM-data page 8

X

XRT page 45 Sang Lee Algorithmic Trading

Andy WebbRegional perspective on

France

Foreword18. Are terrorist attacks a threat to our markets?

Godfried De Vidts looks at the risks posed to the FXmarket by attacks such as the recent Londonbombings.

Features22. Leader – Cross-asset class trading: automation

becoming a viable possibility

Damon Kovelsky outlines how automating cross-assetclass trading has now become a viable possibility andlooks at what demand there’s likely to be for it.

26. Look Back

Justyn Trenner provides our regular overview of thekey milestones in the growth and development of eFXover the past year.

30. Transaction costs – quantifying the value of

electronic marketplaces

Xavier Alexandre assesses how the benefits ofTransaction Cost Analysis might be extended to FXmarket participants.

34. Taking e-FX platforms forward

Harry Gozlan discusses the shortcomings of existinge-FX platforms and how they may develop and offernew capabilities.

38. Dynamic Liquidity Management – towards a next

generation solution

John Ashworth explains how banks and other sell-sideinstitutions are exposing their FX liquidity to an everincreasing range of FX market counterparties and therisks involved with doing this.

44. Regional e-FX perspective - France

In the first of our new regional perspective features,Andy Webb reports on e-FX in France.

50. A collaborative approach towards a common

industry protocol for the FX markets

Peter Randall takes a look at the principal rationalebehind the decision of FIX Protocol, ISDA and TWISTto collaborate in developing a common industrystandard.

54. Case Study: Real end-to-end STP at RWE AG

We ask André Scipio, Manager Front Office, andChristoph Waldvogel, Manager Treasury Operations,about real end-to-end STP at RWE AG.

58. eFX – adding value to all aspects of the currency

overlay process

Henrik Pedersen & Xavier Lefevre from Overlay AssetManagement in Paris talk to e-Forex about the valueadded from e-FX on their business.

62. Technology Challenges: the next phase of FX

Prime Brokerage evolution

James Kemp looks at what’s likely to shape the futureevolution of FX Prime Brokerage.

66. VIEWPOINT: The Three Pillars of Superior

Execution

Chip Lowry talks about Price, Process and STP.

68. SURGERY: Ian Stannard answers questions aboutOnline FX Research & Analytics

104. Algorithmic trading in FX – charting the voyage

of discovery

Sang Lee explains the importance of Algorithmictrading in the fight for market share in Electronic FX.

108. Assessing a fundamental shift in the way the FX

marketplace trades

Lee Ratner outlines why the next level of trading in FXmarkets is likely to be more Algorithmic in nature.

112. FORUM: Charting the continuing evolution of

Retail eFX Platforms

5 major online FX trading providers discuss the issues.

122. Real-Time Position Management

Daniel Darst illustrates how serious trading demandsefficient, real-time integration of risk, margin andaccount information.

The e-Forex Roundtable70. e-FX : catering for the needs of a new generation

of clients

6 leading FX providers tackle questions on this key topic

FOCUS – e-FX and Latency76. Data Latency – Why Speed is of the Essence

Sean O’Donnell looks at how the increased move bythe FX markets to a real-time trading environmentmeans that there is a new urgency to address the risksassociated with data latency amongst the bankparticipants.

80. Case Study: Sean Gilman, CTO at Currenex,

outlines how they are tackling the latency issue.

82. Is it time to raise your game?

Andy Webb writes about the advent of high qualityminimal latency data feeds.

86. Case Study: We ask Mike Mistretta, Senior

Director, Infrastructure at FXall, to tell us about theirLatency Monitoring System.

88. Trading Latency – an e-problem seeking atechnology solution Adam Hawley looks at the technology issuessurrounding the use of the Internet as a connectivitychannel for services such as low-latency messaging.

92. Traders WORKSHOP

Andy Webb outlines one way of addressing thelatency issue for one of the most ubiquitousapplications in financial markets - Microsoft Excel.

96. Trading Latency – feeling the squeeze

Heather McLean interviews a variety of marketparticipants to assess the impact of latency on their FXbusiness activities.

100. Case Study: Millisecond Arbitrage

We talk with Vladan Jovanovic about how histechnology and trading firm arbitrages the latency andmatching algorithms of futures exchanges.

The e-Forex interview127. With Björn Lundvall, Vice President, Head of e-commerce markets at Handelsbanken Capital Markets.

Cross-asset class trading

Dynamic Liquidity Management

A collaborative approach

Real-time position management

contentsOctober 2005

october 2005 e-FOREX 3

news Banks enhance service toasset managers with FXall FXall has launched Treasury Center 2.0, the latest release of its clientrelationship tool for banks. The new functionality delivers greaterproductivity and enhanced risk management, and enables banks toprovide a faster and more effective service to their customers. New features include: • Enhanced ability to handle complex asset manager workflow,

making it simple to price an entire portfolio of trades acrossmultiple allocations, currencies and forward dates. It also addssupport for new instrument types including NDFs and fixed spotswaps.

• More flexible liquidity options, offering banks the opportunity toaccess supplementary liquidity on a flexible, deal-by-deal basis.

More than 1,150 traders at 55 banks around the world have alreadyimplemented Treasury Center, which delivers a complete solutionfor making prices to clients. Treasury Center works seamlessly withboth proprietary and vendor rate engines, enabling dealers toprovide faster and more customized prices to their clients.

eSpeed enhances FX Trading PlatformeSpeed has further enhanced its anonymous, multiple buyer,multiple seller, central counterparty FX trading platform, making iteven more flexible and versatile than before. Stemming from clientfeedback, eSpeed’s FX platform, which is targeted towards the highfrequency trading community, now has the ability to commingle onto the same screen, eCommerce liquidity from participating marketmakers to clients on mutually agreed terms.

The result: tight spreads and maximum liquidity located in oneplace, on one screen. With eSpeed FX, traders have the ability tocustomize the application in terms of view, desktop real estate, andspeed. Managing Director, Nigel Renton said, “Our proven builtand paid for technology provides us with the flexibility, scale anddistribution to develop solutions that meet our customers’ needs.”


Westpac launches newgeneration eFX PlatformWestpac Institutional Bank recently unveiled its latest eFX offering,Mareeba. The new look platform incorporates a number ofinnovative features, designed to add value at every stage of thedeal life-cycle. Notes Westpac’s Global Head of eFX Distributionand Services, Jim Nuzum, “It’s no longer sufficient to focus just ondiscovery and execution. Buy side expectations continue to evolveand the message from our customers is the need for flexibility”.

“While certain customer segments are content with robust bids andoffers, others require customisable windows focusing on otherelements of the deal life-cycle such as pre trade analysis,settlement, STP and communications”. “This is where Mareebareally shines” continues Nuzum. “Our customers can now slice,dice and customise to suit a myriad of individual circumstances”.Further enhancements, including a sophisticated OMS andlanguage support are planned for later in the year and earlycalendar 2006.

EBS®TM facilitatesautomated program tradingEBS®TM has introduced automated program (API) trading to theworld’s largest spot FX trading community. EBS®TM Spot Ai willprovide customers with a unique tool to enhance their businessopportunities in the global spot FX market. Automated tradingsolution EBS Spot Ai provides direct electronic access between thefinancial customer’s trading systems and the global FX communitytrading on the EBS®TM Spot system using automated programminginterface (API) technology. The EBS Spot Ai API supports a range ofFX functions including risk management and facilitating algorithm-based trading such as momentum trading, moving average andarbitrage models.

Jack Jeffery, Chief Executive Officer,EBS, said: “While trading modelsare commonly used in other assetclasses, it has not been a significantfactor in FX trading. EBS Spot Aimarks a pivotal development for theFX market, as it provides anadditional way for institutions totrade FX by linking their tradingprograms directly into EBS Spot.” Jack Jeffery

news Nordea integrates toWM-data TWIN TMSFollowing the recent STP integration between Nordea e-Marketsand the Opus Capita treasury management system, Nordea hasnow also launched STP to the TWIN treasury management systemfrom WM-data.

The TWIN system is widely used among both Swedish and Finnishcompanies, and the STP functionality will improve the tradingprocesses for a wide range of current and future customers ofNordea. “We are excited about the possibility to offer true real-timeSTP to mutual customers of Nordea and WM-data. Thefunctionality will simplify the FX trading process for our existingcustomer base and will prove to be a valuable feature in attractingnew customers and business to Nordea”, says KennethSteengaard, Head of e-Markets at Nordea.


RBS and BitPass team up onFX for digital content salesBitPass, Inc., a leading platform for monetizing digital content andservices, announced an agreement with The Royal Bank ofScotland plc (RBS) to enable automated foreign exchangemanagement online. BitPass will use the RBS FXmicropay serviceto aggregate, execute and settle transactions in more than 30currencies, allowing international online content brands andportals that leverage the BitPass platform to conduct cross-bordercontent sales at a high volume, while RBS manages the FX risk.

The BitPass Network consists of an increasingly diverse communityof more than 2,500 merchants in over 30 countries. Buyers frommore than 100 countries can use BitPass to purchase and accesstheir favorite content. The agreement will enable BitPass to offermulti-currency pricing, while all inherent FX risk for cross-bordertransactions is proactively, intelligently and automatically managedby the FXmicropay service.

Smart Trade Technologiesand QuickFIX partner toprovide QuickFIX/JSmart Trade Technologies and QuickFIX, the open source FIXengine, have announced their partnership to provide QuickFIX/J, apure Java implementation of the QuickFIX engine. This newinitiative allows a native integration of the QuickFIX engine withJava enterprise technologies. Smart Trade Technologies can nowprovide inside its smartTrade Trading Platform (STTP) an out-of-the-box enterprise class FIX connectivity extension. Thispartnership is part of the Smart Trade’s strategy to embrace theopen source community and push for the next generation oftrading technologies.

“QuickFIX/J is a great opportunityfor the FIX community,” saidDavid VINCENT, CTO of SmartTrade Technologies. “We want tohelp building technologies aroundFIX and pushing for its adoptionvia the Open Source community”.The QuickFIX/J engine is currentlyunder beta phase. Tests are beingcarried out with a major globalinvestment bank. David Vincent

Rabobank provides insighton Collateral posted for clientson RaboTreasuryWebBy using Derivatives, Dutch Pension Funds are more activelymanaging their interest rate risk. Often, these trades are executedon a collaterised basis: Collateral will be adopted when the MarketValue of outstanding trades exceeds pre-agreed threshold values.Through RaboTreasuryWeb, clients can already access the currentMarket Value of their outstanding Derivatives.

From October 2005 clients will also be able to monitor the MarketValue of any Collateral posted. On the basis of the Market Value ofthe outstanding Trades, the Market Value of the Collateral and thespecifics of the Contract between both parties, the client is offereda full insight whether additional action is needed. This feature isdesigned to facilitate the operational process for all Rabobankclients. Originally aimed at Pension Funds, this feature is nowavailable for all Corporate and Institutional clients as well.

From plain vanilla to highly complex FX solutions, we have what it takes to deliver. A global network with local insight, dealing in 150 currencies through 24-hour sales and trading centres. Our online FX and money markets services can streamline your trade executionthrough a choice of world-leading platforms. Whatever your tradingarea or online needs, together we'll create the right fit.

www.wholesale.abnamro.com

YOU WANTA TAILOREDFX SOLUTION.WE HAVE THEPERFECT FIT.

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news


Mellon introduces IDealForex enhancementsMellon Foreign Exchange has unveiled the latest enhancements toits IDeal Forex online trading platform. IDeal Forex can now processan unlimited volume of international transactions. It acceptsdesktop, Web file upload and file transfer deal entry, and enablesusers to remit payments by SWIFT, check and EFT; often referred toas international ACH.

The improvements are intended tobroaden a corporation’s electronic FXcapabilities and may be used forvendor payables, claims payments, payroll/pension obligations andbeneficiary remittances. Extensive reporting features includepayment tracking, access to more than 120 standard reports andcustom reporting upon request, at no extra cost. In addition, userscan benefit from bulk pricing and bulk payment features.“These enhancements are designed to save customers time andmoney, and significantly increase efficiency,” said Frank Cook,Electronic Sales manager with Mellon FX. Our goal is to continuallyenhance our clients’ electronic trading experience by giving them thebest service and technology.”

Barclays Capital offerselectronic multi-asset classtrading through BARX With increasing client demand for direct access to pricing and toolsacross multiple asset classes, Barclays Capital continues to add newmarkets and features to its BARX Ecommerce solution. It recentlyadded precious metals to its BARX for FX Trading platform, whichprovides clients with a single GUI (Graphic User Interface) for FX,money market, precious and base metal execution.

BARX precious metal execution offers a combined market makingand dynamic order book, allowing customers the ability to placebids / offers and directly influence the market shown on the BARXapplication. Forwards and rolls can also be traded on a RFQ(Request for Quote) basis, with post trade tools providing averaged"end of day" contracts and multiple account allocation. BARX alsoprovides market making and direct market access order routing forbase metals.

Traiana introduces Tri-Party Credit solutionTri-Party Credit is Traiana’s credit calculation and limit monitoringsolution, which brings greater visibility to executing banks engagedin foreign exchange tri-party trading. TPC monitors tradingrestrictions around hedge funds, prime brokers and executing banks.

TPC enables executing banks to inquire whether a trade will beaccepted by a prime broker before executing the trade, reducing therisk of having the trade rejected, and to monitor intraday tri-partytrading positions. As a result, executing banks limit their risk and holdconfidence that the prime broker will accept their trades. Traiana’smiddle office and network connectivity technologies address theautomation needs of investment banks, executing banks and primebrokers, enabling them to capture and service the dramatic growth inhedge funds and alternative investment trading firms.

FXall extends FIX offeringwith CameronFIX PlatformCameron Systems has announced that FXall is extending its FIXconnectivity services using the CameronFIX Platform.TheCameronFIX Platform has been deployed with FXall’s market leadingQuickFill and QuickTrade products.

Cameron Systems President andCo-chair of the FIX ProtocolAmericas Committee, MartinKoopman adds: “We congratulateFXall for supporting and pushingFIX for FX trading. CameronSystems continues to demonstrateleadership in supporting the use ofFIX across all asset classes asdemonstrated by our work withFXall.We are excited about thepotential for FIX in FX,particularly following FPL’s recent announcement for a Statement ofUnderstanding between FPL,Twist and ISDA to push FX standardsforward.”

Martin Koopman

D U B L I N • L O N D O N • M O U N T A I N V I E W • N E W Y O R K • S I N G A P O R E • T O K Y O • T O R O N T O

w o r l d w i d e

s t a t e - o f - t h e - a r t

u . s . p a t e n t e d t e c h n o l o g y

i n t e r n e t

s o f t w a r e & s e r v i c e s

i n n o v a t i o n i n c a p i t a l m a r k e t s

e - b u s i n e s s s o l u t i o n s

e n t e r p r i s e j a v a

Welcome to next generation eFX.

To upgrade your eFX solution, contact [email protected] or visit http://www.integral.com/eFX.

i n t e g r a l d e v e l o p m e n t c o r p .

news

RBS offers Prime Brokeragethrough CurrenexCurrenex has announced that The Royal Bank of Scotland (RBS), isoffering their prime brokerage services on the Currenex global onlineforeign exchange platform.

Currenex seamless integration into RBS’s prime brokerage servicesoffer an efficient and cost-effective way for banks to strengthen FXtrading relationships with their customers, combining traditionalprime broker capabilities - trading on a prime broker bank's credit -with full service FX execution capability. RBS prime brokerage clientscan now effortlessly connect to andtrade through Currenex.Meanwhile, the mutually beneficialrelationship allows Currenex clientsthat want to utilize RBS primebrokerage to do so with ease.

Clifford M. Lewis, CEO andChairman of Currenex, said,”We’re delighted to be broadeningour relationship with RBS and nowoffer their Prime Brokerage clientsaccess to the world’s best FXliquidity”.


Clifford Lewis

Leading Japanese FCM becomesEBS®™ Prime customerJapanese FCM giant Nihon Unicom Corporation is to take a moreactive role in global FX trading by becoming an EBS®™ Primecustomer. Nihon Unicom is one of Japan’s leading FCMorganisations and will use the EBS Prime service to access andtrade in the global spot FX market through the pre-screened creditof an EBS Prime bank, to gain access to liquidity and optimumpricing in the major currencies including yen, euro and US dollarpairs. It will participate in the EBS Spot market through EBS SpotAi, an automatic programming interface (API), which enables highfrequency, model trading for FX trading on the EBS Spot system.

The EBS Prime model is specifically designed to maintain thisrelationship between the banks and their customers, to keep the FXmarket orderly. Nihon Unicom will therefore only gain access toEBS Spot through its EBS Prime credit relationship with its EBSPrime bank.

CMC Markets introducesInstitutional ServiceHigh volume customers at CMCMarkets are now receivingenhanced services with theintroduction of a dedicatedinstitutional desk.

“We are formalizing the personalservice and highly competitiverates that CMC markets are knownfor,” explains the Head of NewYork Operation, Enis Mehmet. “Ifyou are a client trading highvolumes, you want to berecognized. Providing access toour senior dealers, market flow information and a raft of technicallevel information reflects our understanding that our clients requirereal value added service as well as great rates.”

Enis Mehmet

Handelsbanken CapitalMarkets joins RTFXHandelsbanken Capital Markets has joined Reuters’ new serviceReuters Trading for Foreign Exchange (RTFX). The service allowscorporate clients with Reuters 3000 Xtra and Reuters Dealing 3000 terminals to trade directly from their desktop with theconnected banks.

“Through RTFX we will be able to provide our customers withHandelsbanken Capital Markets’ e-FX-capabilities over a well-established platform. Reuters experience and client-base in foreignexchange market will make RTFX a valuable addition to our existinge-offerings,” says Björn Lundvall, Head of e-commerce markets atHandelsbanken Capital Markets.

newsIFX delivers full controlto Money Managers,Allocators and IBsIFX Markets has made a major enhancement to its FX tradingplatform. Steve Pryor, Head of Sales and Trading at IFX, said:“Money Managers who trade more than one account can now useour “Bulk Trading” facility, allowing them to trade an almostunlimited amount of accounts in one click. One manager iscurrently trading 256 individual accounts in this way. Each accountis assigned its pre-determined amount automatically in real time.”These allocations are made easyby the simple import of an excelspreadsheet into the tradingplatform.

Said Pryor: “In addition, MoneyAllocators, Introducing Brokers orthe account holder can nowassign more than one manager totheir portfolio. One of ourallocators has assigned fivemanagers to his client portfolio,giving true diversification.”


More tradable FX currenciesnow available on HSBCnetHSBC recently added to the number of tradable FX currenciesavailable on HSBCnet (HSBC’s cross-product e-Commerce platformfor clients of the Corporate, Investment Banking and Marketsdivision). A total of 81 currencies, plus their respective crosses, arenow tradable on-line, across majors, minors, emerging markets andNDFs. Currencies added in the past month include BRL, RUB, CNY,KRW and TWD.

“Our approach is to support a trading platform that allows clients todo all of their FX trading in the same place. HSBCnet supports a widerange of currencies and does not impose any minimum or maximumtrading amounts. We acknowledge that a number of clients requirefurther emerging market currencies. With this in mind we plan toexpand the number of supported currencies to over 120 in the nextfew months, by making the current indicative prices executable”,said Alan Clarke, Head of e-FX at HSBC.

Steve Pryor

FXConnect’s daily tradingvolume surpasses $40 BillionState Street Global Markets, the investment research and tradingarm of State Street Corporation, announced recently that itsFXConnect multi-bank electronic trading system has surpassed $40billion in daily trading volume.

“FXConnect’s value proposition for real-money managers isevident,” said Simon Wilson-Taylor, managing director andworldwide head of Global Link for State Street. “Our customerstruly understand and value our unique business model, and thishigh-volume mark is a testament to their continued support.”Launched in 1996, FXConnect became the first multi-bank tradingplatform for foreign exchange in March 2000. FXConnect is offeredvia State Street’s Global Link network, which delivers unique fact-based research, decision support tools and trading technology toclients around the world.

Misys and Hotspot FXisign partnership agreementMisys Banking Systems has announced that Misys Global ManagedServices, its front-to-back treasury services arm, has signed astrategic partnership agreement with Hotspot FXi. The partnershipenables the integration of Hotspot FXi’s foreign exchangemarketplace with Misys’ integrated treasury services portal (MisysTreasury) to deliver transaction and application services to over4,000 treasury professionals worldwide. Misys Treasury customerswill be able to access HotspotFXi’s marketplace in which FX market clients buy and sell currencies directly andanonymously with each otherand leading FX banks.

R. Keith Lite, Director of BusinessDevelopment, Hotspot FXi,comments: “We have seentremendous interest from thetreasury groups of multinationalcorporations and asset managersin trading foreign exchange viaHotspot FXi’s transparent electronic marketplace. Integrating ourplatform with the Misys treasury platform creates a robust solutionfor treasury clients seeking FX best execution and comprehensivepost-trade functionality.”

R. Keith Lite

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news

ActForex expands ICTS®

Online Trading PlatformfunctionalityActForex has implemented additional functionality to allow clientsto provide a more robust trading platform for customers who tradefor multiple accounts. This “Money Manager” functionality allowsmultiple segregated accounts to be traded simultaneously, withP&L and margin calculated in real-time, and with trades dividedproportionally between accounts.

Furthermore, the ActForex ICTS® platform now supports “realmoney” trading—traders can execute trades for any amount ofcurrency. This functionality greatly increases convenience fordealers at banks and other non-FCM financial institutions who areused to dealing in currency units as opposed to lots. Additionaldevelopments slated for the next two quarters include mobiletrading, trading from charts and support for algorithmic trading.


BAXTER Solutions Kft.launching new component BAXTER Solutions Kft. is launching a new component to it's suite ofFX Streaming PriceEngine applications: Mark-to-Market Monitor(the "MMM"). The component which can potentially run with anythird party system is build to facilitate the analysis of Customer"Flow quality", and is used to monitor trades coming from eitherone's Single Bank system, ECN's or direct Customer connections.

This development is in response to the growing pains endured bytop Tier Liquidity Provider, to help understand the nature andquality of the business they capture with their various e-FXinitiatives.This tool proves to be essential in production to evaluateMarket Making profitability. It helps identify quickly possiblenegative trading patterns like "arbing", line-ups and "insider"trading. Once a customer profile is identified, the Bank can bettermanage the risks associated with trading against "aggressive"counter parties, or address and rectify the issue directly with thecustomers.

BBH enhances FXOrderView®

Brown Brothers Harriman has enhanced FX OrderView®, its electroniclimit order management system, which is designed to help clientsstreamline the order process and improve risk management. Thelatest enhancements have been created to increase the ease andefficiency with which BBH’s clients can manage their limit ordersthrough FX OrderView.

Clients now have the ability to view executed orders by executionrate, date and time. Once a limit order has been executed, clients canreceive an email notification containing the details of the completedtrade. In addition to these new capabilities, BBH has also created newuser default options and shortcuts within the order entry screenenabling clients to re-institute expired and deactivated orders as wellas replicate an order from an existing entry screen.

Gain Capital hires newCFO and expands operationsGAIN Capital Group has hired Alexander Bobinski as its chieffinancial officer. Bobinski was previously CFO for futures tradingand clearing firm Refco LLC. Other recent appointments includethe promotion of Chris Calhoun to chief operations officer, and thehiring of Andrew Haines as vice president, application developmentand Kenneth O'Brien as vice president of product management.

The company also announcedplans to open a New York Citysales office in 2005. The NewYork office will be GAIN's secondfield office; the firm established arepresentative office in Shanghai,China in February 2004 toprovide local support for itsrapidly expanding Asian clientbase, including white labelpartners in the region.

Alexander Bobinski

tested FX trading solutionIFX Direct – a tried and

IFX Direct is a reliable, fast and accurate trading platform for all a client’s foreign exchangedecisions. It is unique in putting EFP trading side-by-side with spot forex on one single screen.

In normal market conditions there is no dealer intervention; the system provides transparent liquidity combined with asophisticated order-management system which can cope withcomplex orders such as contingents, OCOs, stop-loss andGTCs, which can be filled, settled and reported back instantly.

This tried and tested forex trading platform from IFX Marketscan be delivered to clients in three different ways, to provide whatever trading environment the client requires.

The basic method allows clients to trade through the platformdirect with IFX’s dealers, with straight through processing (STP)which can be delivered in a variety of formats from emails,through to file transfer protocol (FTP).

The second method is as a White Label, which is aimed at IBs,FCMs and other client-facing institutions. It is branded with thelogo of the institution. The institution itself is able to dictate itsown spread and commissions with the end-user.

Thirdly, the Application Programming Interface (API) enables athird-party software system to be “plugged-in” at the front-endof the trading platform. Positions can be auto-offset, or theinstitution can use the IFX price engine, just as a feed.

The API can be used in a variety of ways. At its most basic it isa price feed; but it can also be linked to third-party tradingplatforms, multi-bank portals, or automated trading systems(black-box) to name just a few.

IFX can tailor these solutions to each institution, and cansimultaneously offer more than one of them to a single entity.

For further information please contact:IFX Markets Ltd

One America Square, 17 CrosswallLondon EC3N 2LB United Kingdom

Telephone: +44 20 7892 0909 Fax: +44 20 7488 9326

Authorised and regulated by the Financial Services Authority

october 2005 e-FOREX 17Sponsored Statement

Are terrorist attacks a threat to our markets?Are terrorist attacks

a threat to our markets?


Foreword

Nobody will deny that we are living in a

dangerous world. The London bombings

reminded the financial markets that since

the tragedy of September 11 we have to

be vigilant. In an internal communication

to our members I issued the following

release: “ACI – The Financial Markets

Association extended its condolences to

the families and friends of all those killed

or injured in the horrific terrorist acts that

occurred yesterday in London. In

particular its thoughts are with the

families of any of its members who may

have been victims of this atrocity. ACI

hopes that the financial markets will try

and cope with this disaster in as calm and

sensible manner as is possible.” ACI UK

reported that it has received many

messages of support and condolence

from other ACI National Associations.

The next Monday I spent a business day

in London. Speaking to many colleagues

in the market the calm and composed

attitude of all was remarkable. The UK

authorities including the Bank of England

and the FSA have prepared for

emergency situations. LCHClearnet, the

Central Counterparty used by many in

Europe, had to evacuate their building.

But within a short time, all clients had

been notified of the transfer to their

recovery site so that netting and

settlement could occur in good time.

On the surface, all looks well. But are we

really ready, does everybody understand

the risks posed by such events to our

industry? Since 2001 many committees

around the world have discussed

resilience against terrorist attacks. Off-

sites have been built and emergency

situations have been simulated to make

sure systems are robust. The risk is of

course that with time we focus on other

more urgent business matters and the

finalising of all plans, that look beautiful

on paper, are pushed backwards and the

necessary funding is not forthcoming or

insufficient.

ACI’s Committee for Professionalism(CFP) met at the Stockholm Congress inMay with a group of industryprofessionals to discuss the use andgrowing impact of electronic platforms inthe foreign exchange markets. Thestatement of the CFP reads as follows : “The CFP held a productive and interestingpanel comprised of banks, vendors,central banks and other interested partieson electronic foreign exchange trading. Itbecame very clear from our discussionsthat the proper allocation of the burden ofdue diligence, including the credit-worthiness checks, KYC (Know YourCustomer), enforceability analysis,regulatory compliance etc. is key. With theautonomy of some e-trading systems,KYC becomes even more important, notjust to know your direct client, but alsowhom this client acts for as anintermediary. Vigilance of this kind ifparamount to protect the integrity of theFX and other financial markets”.

The unsolvable problem in emergencycases like the London bombing is thehuman being. Nobody can afford to putfull qualified staff in these recovery sitesas a perfect match of the prime site. So isthe emergence of electronic tradingsystems in our markets a bonus? The e-trading systems to conclude transactionsin foreign exchange, money market andderivatives are connected with settlementengines, either through a “kind of centralcounterparty like CLS” or a real CCP likeLCH Clearnet in Europe, or FICC in theStates. With real-time straight throughprocessing the burden of instructing yourcash or collateral paying agent has beenpartially outsourced.

Although the use of ATS system hasmoved the human impact of disasteraway from each individual bank, theoriginators of trades are of course a riskthat is impossible to take away. Bankshave transferred the administration riskpartially to the ATS systems, in particularthrough the “CCP” functionalities.

Here there is an extremely important rolefor the regulatory authorities and centralbanks. Competition in our markets mightforce people to cut corners in the buildingof systems, as time to market is crucial.

There are various models in the marketthat “look like a central counterparty”. Therecommendations of CPSS/IOSCO haveto be put in practise. I welcome theannouncement of a Conference re “Issuesrelated to Central Counterparty Clearing”by the European Central Bank and theFederal Reserve Bank of Chicagoscheduled for April 3rd and 4th 2006, to behosted by the ECB in Frankfurt. Theconference is intended to provide a forum for a multidisciplinary “law andeconomics” discussion of key public andresearch oriented issues relating to centralcounterparty clearing. A delegation ofACI- the Financial Markets Association willpay attention to the conference andprovide feedback to the organisers aimingto make sure the financial markets remainwell organised, robust and efficient in light of, in particular, the outside threats toour markets.

Godfried De Vidts

President, ACI

www.fxall.com

Efficiency, control,

compliance – with FXall we get them all.”

“Reconciling our forex positions

used to take a day. It now takes

an hour. FXall delivered a solution

that gives us better control of

exposure and risk. We have fully

automated trading with account

allocation at the touch of a button.

With QuickConnect™, it talks

seamlessly with Oracle Treasury,

making compliance much easier.

Using FXall with Oracle applications

has given us a significant boost

in efficiency.”

Geri Westphal Vice President – Assistant Treasurer Oracle Corporation

“

FXall, QuickConnect and all associated logos, are the trademarks of FX Alliance LLC. FX Alliance Limited, regulated by FSA.


The standard approach to cross-border trading is decoupling the

equities and FX trades. For many firms, this involves aggregating

their FX exposures at the end of day and sending it to their bank

or prime broker. This alleviates equities traders from working FX

trade, but exposes firms to the bank's traders, which may not be

getting the best price or most efficient execution for the firm. It

also exposes the portfolio to currency risk from the time the equity

position was established or sold.

Damon Kovelsky is a Senior

Analyst at Financial Insights

The growth of cross-border equities trading during the past decade (see

Figure 1) below, along with the automation of securities trading among many

asset classes, has made automating cross-asset class trading a viable

possibility. Automated cross asset class trading would allow, for example, an

equity trader to automatically hedge their FX exposure of a cross border

trade (we will call this FX-equity trading). Thereby locking-in currency prices

at the time of equity execution. This may provide traders with a less

expensive alternative to their banks. Technologically, we are almost there.

However, is demand sufficient enough for the majority of participants to

dedicate resources and time to support automated

cross-asset class trading?

Cross-asset class trading:automation becoming a viable possibility

L E A D E R

Figure 1. Growth of Cross Border Trading

Source: SIA, 2004


>>>“In order to gain greater control of this process,some buy-side firms, with assistance from theirsell-side and bank counterparts, began linking

the execution of equities and FX”

Banks aggregate and net their clients FX trades, which are then

offered in the interbank market. Trading revenues come mainly

from spreads, which in FX spot are usually a small percentage of

a basis point. This behooves banks to make trades large, allowing

them to get as large a nominal dollar spread as possible. In order

to gain greater control of this process, some buy-side firms,

with assistance from their sell-side and bank counterparts,

began linking the execution of equities and FX. This allows

firms to automatically trade the FX leg when the equity leg is

executed, with none to minimal bank involvement.

The required technology has been developing for several

years, though usually without automated cross asset class

trading in mind. All of the three major required technologies:

• A common communication protocol, such as FIX

• Liquid ATSs with actionable prices, and

• Front end trading tools that can support multiple asset

classes,have been overlapping, like three convoys heading

towards the same port, since they were introduced.

Each of these three provide a different component to automate

FX-equities trading. In isolation, none are able to support it.

Only when they are properly co-joined can they support this

type of trading. In fact, much of the necessary technology to

support FX-equities trading already exists and is being used,

just not explicitly for this purpose; or it has not been fully

embraced by the market.

FIX

A significant problem in any cross asset class trading is

communicating the prices of both asset classes in such a way

they are immediately actionable. This requires an underlying

communication protocol that can support both asset classes, in

this case FX and equities.

FIX began supporting FX, albeit minimally and only spot, in the

early part of this decade. Those few firms that did use FIX for FX

trading at this time, had to make use of the user defined tags.

Since then, more firms have experimented with FIX for FX, and

more tags have become standardized. This has aided in making

more firms and vendors comfortable in using FIX for FX.

“A significant problem in any cross assetclass trading is communicating the prices of

both asset classes in such a way they areimmediately actionable.”

Cross-asset class trading: automation becoming a viable possibility


ATSs

Concurrently with a common protocol, electronic

execution venues with enough liquidity to provide

immediate actionable prices are required. These

venues, also known as alternative trading systems

(ATSs), have demonstrated their ultimate value in

equities, and have started to make strong inroads into

FX, especially the spot market.

To date, most of the electronic trading of FX has

focused on single bank or multi--bank portals. This

allows banks clients to trade directly with the bank,

which can then aggregate clients trades and trade

them on the inter-bank market.

These portals require clients have relationship with

the bank and they tend to use propriety protocols.

Recently, ATSs, such as Hotspot, have started to offer

FX trading to institutional traders. Though they don't

currently use FIX and have yet to reach critical mass

(though they are approaching it), Hotspot would be a

good example of an ATS that could be the destination

of the FX leg of FX-equity trade.

Front-end applications

A third link in the automated FX-equities trading chain

is the front-end applications that sit on the traders

desks'. The majority of in-house and vendor

applications tend to be asset-class specific, but that is

changing. Vendors are showing an interest in cross

asset class trading and the infrastructure to support it

is developing, several equity trading vendors starting

to support FX. This includes Lava, Portware, and CRD

amongst others. Right now only CRD automatically

links equities and FX trades, but supporting FX on an

equity platform, is the first step to auto-hedging and

auto-arbitrage tools.

There are currently two major stumbling blocks to

increasing this market. One is the lack of real liquidity

in the 1 day FX forward market. To properly lock in FX

rates for equity settlement, trader must choose the 1

day FX forward, with its 2 day settlement to match the

equities 3 day settlement.

The other stumbling block, which must be overcome

to grow this market, is the number of potential end-

users. The technology is already there for niche users

and is just about there for the market in general. The

vast majority of traders who use these products have

been hedge funds. In fact, the major provider of these

services does it for their hedge fund clients. This is

also why there has been limited movement towards

automating cross-asset class trading—there has been

a limited market, despite the growth of cross border

trading. Currently it is only those traders whose

performance is measured against FX trading that will

be truly interested in these tools. Although the

portfolio managers might disagree, buy-side traders

whose performance is measured by the performance

of equities portfolio, would rather not be distracted

with FX.

Conclusion

The current state of affairs is changing. Not just hedge

funds, but asset managers are starting to add a

greater variety of asset classes to their portfolios. Not

just as hedging vehicles, but also as value adding

strategies in their own right. FX and equities are just a

first step since all cross border traders already have a

comfort level, no matter how small, with FX. As more

portfolios add more asset classes, we expect that

automatic cross asset class trading to become more

common. Though we expect interest to increase in

these tools, Financial Insights thinks that it will be only

those traders that require immediate hedging or

desire arbitraging tools who will be consistent users.

Therefore, this group will be the primary revenue

generators for automated cross-asset trading tools in

the near term.

To organise a demo please contact Gabor KORMOS or Franck MIKULECZ.

BAXTER-Solutions Kft.1075 Károly krt. 1.Budapest, Hungary

phone: +36 (1) 235 06 87e-Mail: [email protected]

BAXTER-Solutions LLC2116 3rd StreetSanta Monica, CA 90405USA

phone: +1 (310) 399 00 93

BAXTER Financial Services Ltd.Dublin Exchange FacilityIFSC, Dublin 1Ireland

phone: +353 (1) 670 04 55

The TrackWheel®:An efficient visual interface for

traders to quickly and intuitivelyadapt their pricing in real time.

"Skew" commands are sent to theserver side, allowing to integrate

the Dealer's knowledge in the PriceStream.

Trade Blotter:Real-time market activity is

reported at lightning speeds,even over remote networks.

Trades can be marked-to-marketfor instant evaluation of

counter-party profitability.

Admin Tool:Fine-grained but practical administration

provides control to management at various levels of the firm. Market

makers can access the parameters thataffect their trading profitability.

Alternatively please call a member of our professional technical sales teams in the following offices:


Last year, in these pages, ClientKnowledge

noted that the market had shifted, over

the last ten years, from a broadly,

simple single-dimensional market (from

interdealer brokers to sell-side to buy-side)

to a more complex multi-dimensional

space, where those definitions were much

harder to apply. 2005 has seen two parallel

evolutions along similar lines, both

materially fuelled by technology. The first

is the changing roles and types of trading,

rendering the old neat segmentation into

providers and clients inadequate.

The second is the growth of aggressive, or

alpha-seeking, activity (and outsourcing of

liquidity) which tend to oblige market

participants to be more disciplined

about why and how they trade and,

not insignificantly, how they process

their trades.

The background to all of this is a growing

and healthy market-place. Three lots of

data recently issued paint a congruent

picture: sell-side surveys by the Federal

Reserve Bank FX Committee and the Bank

of England Foreign Exchange Joint

Standing Committee, covering dealers’

activities in their respective centres and

ClientKnowledge’s annual study into buy-

side activity, speaking to more than 2,000

corporations, real and leveraged money-

managers, client banks and other

intermediaries. Together, these paint a

revealing picture of the significance of

these different participants and how the

market’s structure is evolving.

The Bank for International Settlements’

most recent triennial surveys of the

foreign exchange market have revealed a

sharp drop in overall volumes between

1998 (US$1.5trn) and 2001 (US$1.2trn),

followed by an even more marked rise as

at 2004 (US$1.9trn).

LOOK-BACK 2005

Justyn Trenner is CEO & Principal, ClientKnowledge.

[email protected]

LOOK-BACK 2005


>>>

The Fed’s FX Committee and the Bank of England’s JSCsurveys suggest a continuing growth in activity – in the rangeof 17-20% between the second half of 2004 and first half of2005. They are both consistent with the growth measured byClientKnowledge. However, whereas the central banks trackthe overall volume, we at ClientKnowledge focus upon thewholesale client space – corporations, client banks, real andleveraged money. It is the change in the balance of activitybetween different types of participant that, we believe, revealsthe most interesting story.

Loosely speaking, between 1998 and 2001, the overall volumeof wholesale clients was little changed – the roughly 20%reduction in volumes was principally a nearly 30% drop inbanks’ dealing volumes, implying a reduction in risk appetiteand proprietary and market-making activities. Conversely, thegrowth since that point – marked by last year’s BIS data and thecombine analysis of different sources this year – has beenconsistent as between buy-side and sell-side.

In some ways, that is a surprise. We might have expected thereducing numbers of market-making sell-sides to have led to ashift in the balance from the sell- to the buy-side.

The willingness of second-tier foreign exchange banks tooutsource market-risk by passing through client flows toprincipal liquidity providers led to a marked reduction in

volumes by these firms as measured by ClientKnowledge inthe period 2003 to 2004. As more banks exited the market-making game (depending on the currency pair, around 10-20%of banks active in that pair between 2003 and 2004, with afurther 5-10% again from 2004 to 2005) and reduced tradinghead-count, we expected volumes with second tier banks to goon falling. However, they have not – they have stabilised.

There are two reasons for the change. On the one hand, thosemaking markets (typically in their domestic, minor currencies)are seeing increased activity there, while on the other hand,those banks are seeking to replace market-making withproprietary trading. In reality, this is a smarter businessproposition – trust traders for their ability to unearth purecurrency alpha and lock in spread with mainly corporate andcaptive clients. In effect, therefore, we would suggest that thebalance of second-tier bank volume has tilted a little moretowards the quest for pure currency excess returns, increasingnot only the size of the so-called alpha space but also thenumbers and types of player.

Similarly, the traditional money managers have shown asharply increased appetite for the pursuit of leveragedstrategies (and fees). In early 2004, ClientKnowledge recordedabout one third of leading managers allocating at least somemoney to alternative strategies, a number that had increased toabout two-thirds by 2005 – and have rapidly increasing assetsallocated accordingly.

“It is the change in the balance ofactivity between different types of

participant that, we believe, revealsthe most interesting story”

So along with an increasing number of pure-play hedge funds

and CTAs attacking the currency markets, there are more

traditional names with both dedicated funds and more

aggressive overlay approaches. This sector – the leveraged and

highly actives money managers – has increased in dealing

volume by a remarkable 80% between 2004 and 2005.

Taken together, then, it is clear that any reduction in sell-side

market-making appetite is offset by sell-side proprietary risk

appetite, while the overall growth in volumes is truly driven by

the increased variety of currency alpha-seekers.

The search for alpha, in turn, is supporting, as noted above,

healthy opportunities for niche banks – those with a particular

currency specialisation, while the ability to pass through non-

specialist currencies is ensure the viability of client servicing

where the bank is willing to shoulder the credit risk of market

access (either, typically, for corporate clients or for prime

brokered parties). This is facilitating a healthy medium-term

outlook for the foreign exchange businesses at a wide variety

of banks.

We believe that this has one simple and important implication

- there is little prospect of market dysfunction caused by

excessive consolidation. There remains and is likely to remain

an adequate supply of market participants of different varieties

to ensure plenty of liquidity. Indeed, whereas in the past one

could readily divide the market into buy-side (clients, price-

takers) and sell-side (providers, price-makers), those simple

appellations have intermingled. We now have a multi-

dimensional market, with a single institution, even from a

single desk, playing the role of both client and provider, price-

taker and price-market.

The growth of types of leveraged player has been facilitated to

a material degree by the impact of technology. By way of

example, look at the range of prime brokerage offerings.

Routes to market: diversity breeds diversity

These developments have both tended to facilitate and been

facilitated by the increase in the possible routes to access

the market.

There has been a good deal of speculation over how quickly e-

dealing would replace the phone, whether multi-provider

platforms would render single-dealer sites obsolete, whether

an exchange might ultimately displace the dealer-

intermediated market-place model altogether.

The reality, thus far, has demonstrated that plurality tends to

win out. On the first point, the phone is still used for more

client volume than the keyboard. While the trend is clearly to

increase take-up, it will be a long time – and much longer than

many of us thought five years ago – before the phone bows

out, particularly for larger trades and trades where managers

wish to discuss the execution with someone closer to

the market.

In terms of dealing portals, the most important feature of the

last twelve months has been the increase in connections from

buy- to sell-side using application program interfaces (APIs).

These are the balls of code (or plug-in applications) that permit

a bank’s trading system to be routed directly into a client-

selected interface such as an order management system or

even an algorithmic trading program (on which more below).

The multi-provider platforms enjoyed rapid growth since their

inception through to earlier this year while some banks,

mistakenly in our view, made development of their own

offering secondary to their participation in these. However, our

analysis suggests a marked slowing in that growth while much

of the increase in take-up goes to banks’ own systems, whether

by way of their web portal, a white-label proposition or an API.

In parallel, we have seen material take-up of the independent

exchange-style Hotspot FXi, where users can see depth of book

and make anonymous matches and similarly EBS Prime Pro

has attracted some meaningful flow. The Chicago Mercantile

Exchange has also been carrying a daily volume that would

LOOK-BACK 2005


compare favourably to any of the multi-provider systems

online (US$46bn daily for June) – much of it was non-

traditional fx users, such as arcades and previously non-fx

oriented CTAs.

Yet each of these (including the wholesale client user

component of the flow on EBS) would struggle to measure a

few single-digit percentage points of overall daily FX volume.

The CME’s volume, a significant amount in its own right, of

course, equates to about 2% of the daily OTC market.

The reason for the proliferation of venues at which to transact and

routes to those venues is precisely the increased depth and level of

trading in the entire foreign exchange market-place. The reduction

of friction facilitated by the use of computers in generating prices

and buy/sell orders, in undertaking trades and in settling trades

(along with the relatively falling cost of commissioning and

running those computers) all contribute to ensuring that many

similar and different propositions can find their niche. Many

corporations and smaller investors are likely to wish to trade over

single-dealer systems and the phone. At the other end of the scale,

consolidators and algorithmic traders may be the first to adopt

APIs but others will follow as their order management systems

allow them to determine their own preferred digital desktop setup.

This is not say that all of the systems available today will be

around and in the same form in the not-too-distant future. Just

as the previously bank-owned TradeWeb is now part of the

Thomson family, so we should look for some consolidation and

changes in ownership. We might also wonder whether those

offering a new mechanism or kind of market-place (such as the

exchanges and exchange-style offerings) might gain loyal

followings while those who are simply routing consolidators

might be displaced by improved direct connectivity (surely bank

API-to-order management system is more efficient than bank

feed-to-multiprovider platform-to-order management system).

Facilitating a more efficient market

Most of the above has focused on what is driving dealing and

how and where the trade is effected. However, as we noted

earlier, two important areas where IT has made life

dramatically easier are in enabling certain types of client to

access the market, through prime brokerage, and in lowering

the risk and costs of completing the trade.

Prime brokerage previously suffered from two constrictions: a

limited supply of worthwhile clients meant that banks’

operations struggle to achieve viable scale; and the manual

approach to booking and processing trades led to a constant

struggle for the bank to remain ahead of its clients’ limits.

Clearly, that has changed, with technology killing two birds

with one sophisticated, but affordable, stone. From the client’s

perspective, this increases ease of access to counterparties of

all kinds, both banks other than their prime broker in bilateral

trades and other anonymous counterparties over a system

such as EBS or Hotspot; and ready application of the

leveraging of the margin similarly increases the volume that

can be traded.

In the meantime the costs and reliability of settlement have

both improved through straight-through processing

implementation and the advent of CLS third party.

In combination, these factors are tending to reduce the friction

in trading (tickets are easier to write and cost less), which in

turn means that trading profit per volume (whether on the buy-

or sell-side) may be squeezed but the point of viability of a

trade also falls. Consequently, more trades are being done and

new ways are being found to exploit the opportunities (such as

so-called high velocity trading).



Definition of transaction costs

Let us first define transaction costs., Transaction costs can be

defined as the difference between the theoretically attainable

best rate (see graph below) and the effective, or actual,

execution rate of the client.

The theoretically attainable best rate is the best bid or offer

across markets for the amount under consideration. Naturally,

transacting at that rate is exceptional, but this rate is a useful

benchmark..The effective execution rate varies as a function of

the amount to be dealt, the time it is dealt, the market structure

at the time of dealing, the creditworthiness of the client, where

or with whom the trade is executed, or the perception the

market has of the amount and direction about to be dealt.

As far as liquidity venues go, we should distinguish between

electronic FX marketplaces, and more traditional ones, which

include not only dealer environments but also the enhanced

dealer ones as well, where a user can ask several market

makers simultaneously for a price.

The effective execution rate (“effective electronic rate”) in an

electronic market can be compared with the effective execution

rate in a traditional one (“effective traditional rate”).

The effective traditional rate will add to the theoretical one four

factors: a possible credit spread, the effect of dealing with a

lesser number of participants (the liquidity spread), the

impossibility to bid or offer for the client (the market spread),

and possible reading by the quoting bank (the reading spread).

Xavier Alexandre is Head of

Hotspot FX Europe and Asia

This article will look at how to adaptto FX markets an essential conceptfrom equities: transaction costanalysis. Transaction Cost Analysis(TCA) in equities has benefited thebuy-side enormously and we shall tryto extend these benefits to FX marketparticipants.

Transaction Costs -Quantifying the value ofElectronic marketplaces


>>>The effective electronic rate will add to the theoretical one

three factors: the liquidity spread (although by design the

number of participants is higher than when dealing

traditionally), the brokerage (brokerages are typically a small

fraction of a pip ), and a partial market spread (see below).

Note: prime brokers effectively solve the credit spread issue, in

addition to providing anonymity.

The liquidity spread in a traditional market may be greater or

smaller than the liquidity spread in an electronic marketplace.

Answering the question of the value of an electronic FX

marketplace then can be described as measuring the difference

between the “effective electronic rate” obtainable in this

marketplace, and the “effective traditional rate” (see Fig 1).

Fig 1. Difference between electronic and

traditional marketplaces

These two rates will of course vary from client to client, and not

everybody will derive the same benefits from using an

electronic FX marketplace. For a given user, the best practical

way to measure the above effective rates is to use statistics

derived from available market data feeds as well as dealt rates

in various cases.

In how many live cases would the conclusion of such a study

be in favor of a traditional model? The answer to this question

will govern the future of electronic FX marketplaces. So far,

volume trends highlight a growing interest in the latter.

Investigating the theoretical best rate

We shall propose several ways to investigate this theoretical

best rate, from less to more sophisticated:

Liquidity spread: assuming streaming prices from one or more

electronic platforms are available, the theoretical best rate for a

given amount could first be computed on a continuous basis,

using the order book (available in electronic marketplaces only)

to determine what part of the amount is executed at what price.

This method is used by some marketplaces to compute an

“equivalent spread”, which is obtained by calculating the

effective bid and ask rates for a given amount. Assuming an

amount A to execute, the equivalent spread can be calculated as:

( AiOi - AjBj) / A, with Ai = A and Aj = A, where Bj

are the bids sorted from best to worse, and Oi the offers

sorted likewise.

However, this assumes that the entire order is executed in a

single trade. This assumption is unrealistic for large amounts.

Credit spread: this can be measured by comparing an average

spread for a standard amount quoted traditionally against a

tradable quote available electronically. Indeed, anonymity

offered by an electronic marketplace eliminates credit

spreads. If credit plays a role, this will now be reflected in

the brokerage.

Market spread: when a client deals traditionally, he or she

deals on a bid/offer spread provided by a market maker. In an

electronic marketplace, a client may also deal on rates entered

by other clients as well as market makers.

But more importantly, in an electronic marketplace, a customer

is able to bid or offer himself and has a chance to buy or sell

without incurring the market spread. Assuming p is the

probability for one’s rate getting dealt on, a crude first

approximation would be:

Priceeff = p.Bid + (1-p) . Offer = Bid + Spread . (1-p)

A more refined solution would be to look at the consequences

of the price being hit or not for the rest of the offer, but the

immediate conclusion, before these further refinements, is that

the net effect of a “p” probability to be hit improves the

theoretical best rate by a (1-p) factor. Therefore the concept of

a partial market spread.

Reading spread: in theory, this factor could be determined by

measuring the difference between all the other factors and the

effective, or actual, dealing rate. A simple solution is to bundle

it with the credit spread, although using this approach, the sum

can be known, but not the constituents.

For a long time, equity markets have had execution algorithms

in place for large orders. These are natural complements to an

electronic, centralized marketplace. They use the above data to

determine the best way to execute a large order in a given

security. The experience equity markets have of executing

orders in small markets will be useful to apply these algorithms

to the FX marketplaces of tomorrow.

What electronic marketplaces bring to the party

All electronic marketplaces contribute to making markets more

transparent than traditional structures. Some marketplaces,

however, are more transparent than others. To visualize the

difference in clear detail, one might look at the two

diagrams below.

Transaction Costs - Quantifying the value of Electronic marketplaces


In essence, we can say that the net effect of an electronic

marketplace is to concentrate the trading in a centralized

venue, in contrast to the traditional dealer model, where

trading takes place in a multitude of “micro-marketplaces”,

each corresponding to a phone or other bilateral connection

where a buyer meets a seller. Although these micro-

marketplaces are correlated by arbitrage, they are inferior in

concept to a place where all transactions happen in the

same place and are visible by all.

Figure 2 shows a traditional model: dealers can use phone or

dealing systems or systems asking multiple prices simultaneously.

These models are still in use by slightly over half of FX clients around

the world. Note that clients here do not deal with clients.

Only banks supply liquidity.

Figure 3 shows an electronic marketplace model:

Clients connect directly to the market, which now composed of banks

as well as buy-side clients.

An electronic marketplace, where all participants can deal

anonymously with all participants, is neutral. It is this

essential feature which in turn warrants the quality and the

neutrality of its quotes.

They open the door to an

order execution era where

users have full control of when,

at what price and how, their orders

are carried out.

Best Execution and how to measure it

Best execution, or execution at a rate better

than through any other avenue or method, or

execution where transaction costs is minimal, is

devilishly complex to prove, especially in a dealer

environment. Indeed, definitions of best execution in FX can

still vary widely. E.g., is calling five banks at the same time

for 20% of an order to execute actually best execution? Or

ten banks? Answers to these simple questions remain rare.

We shall look at best execution in 3 subsets: within an

electronic marketplace, across different electronic

marketplaces, and across electronic marketplaces and

traditional environments.

Within an electronic marketplace with a transparent order

book and the same prices available to all, best execution is

effectively system enforced. Indeed, it is not possible for

their users to execute at a rate other than the best one

available.

Across different marketplaces, demonstrated best execution

will only be achieved using facilities whereby a “super order

book” can be built, using data from these various liquidity

avenues. Ex-post analysis can be used to demonstrate

where best execution takes place most often.

Across electronic marketplaces and traditional dealer

environments, only an ex-post analysis can show that

best execution did or did not take place (see TCA

discussion above).

Best execution can also be a topic for large orders which

have to be executed at multiple rates. More and more in this

case, best execution is ensured by having the possibility to

use algorithmic execution, as is seen in equity markets. The

best electronic marketplaces can be accessed via either API

or FIX gateways, and eclectic toolboxes are available to help

users implement their own execution routines. These

algorithmic executions can be compared with the traditional

dealer techniques of asking different market makers, or only

one in a full amount.

Conclusion

TCA is still an embryonic concept in FX. However, it is

bound to play a major role as electronic marketplaces

develop, as has been seen in equity markets. If equity

market style best execution becomes a regulatory mandate,

as some recently developed regulatory requirements

suggest, (e.g. MiFID), all market participants will know a lot

more about TCA in a few years than they do now.


As FX is the most universal “trading language” on the

planet, thanks to the simplicity of the instruments involved

(except for advanced options), it constantly attracts new

players to the market, whether corporates or investors

wishing to hedge their currency exposures, traders taking

advantage of the constant volatility and liquidity of the

markets, or arbitrageurs. And in a similar way to the

explosion of the mobile phone market, newcomers in the FX

market are immediately demanding for the latest technology,

asking always for more modernity.

The challenges faced by banks

This revolution puts banks in front of multiple challenges.

They must:

• Maintain the restructuring efforts for the wholesale

business, with the automation of transaction processes,

the adoption of messaging standards like FIX, the

completion of real STP across the entire group (not only

between the main modern centres and branches), the

construction of prime brokerage offerings, and the

standardization of the clients’ access to the bank’s liquidity.

• Integrate more asset classes in their global supply chain,

leading to multi-asset basket trading.

• Expand services to clients, with the addition of

news/research/data, simulation tools, remote access to

front/back-office positions, and proper APIs.

• Consolidate the global bank’s liquidity to leverage the risk-

taking power

• Control IT costs, keeping a fine line between buy and build,

while preserving the bank’s intellectual property.

• Work with, or fight against new competitors able to offer

transaction services online out of non-banking structures,

purely based on e-trading services, out of multiple

emerging locations.

“If banks today can still afford to runparallel systems and business logic in

each market segment, this will becomeunsustainable as volumes and speed of

flows continue to grow.”

Undoubtedly, one of the key success factors to facilitate

these goals is linked to technology. More precisely, it

consists in building the right business logic on top of the

adequately designed technology. If banks today can still

afford to run parallel systems and business logic in each

market segment, this will become unsustainable as volumes

and speed of flows continue to grow. They will have to

reverse the entire routing and trading processes

transversally across all asset classes, around a central global

order book and a trade routing/ matching engine.

In other words, they would have to operate as a complex

ECN, equipped with a multi-asset class internal exchange to

address these issues.

The Traders’ new roles

In this changing context, FX Spot traders are the recipients of

deals coming from multiple interbank ECNs, clients portals

and banks directly connected to the in-house system. They

are responsible for continuously monitoring the prices sent

to the various distribution platforms. They have to reply

manually to specific requests for quotes in some cases,

usually the risky ones.

They must control their overall exposure in real time. This

means that the interaction with this heterogeneous

environment must be simplified at the extreme, and certainly

cannot support the old model where one keyboard was

dedicated to one platform.

Harry Gozlan is CEO andFounder of SmartTrade

Technologies.

The Foreign Exchange market has probably completed its first technologicaland business revolution. With a higher concentration of volumes in thehands of fewer players, electronic trading becoming widely adopted as thenatural way to conduct transactions, the success of the CLS initiative, and arelatively stable and recognized number of specialized FX ECNs andExchanges, the trading environment is drastically different from what it wasa few years ago. Like many other industries, the post Internet-bubbleexpectations have been (partially) delivered, without the bubble anymore.

Taking e-FX Platforms Forward


>>>

“…the role of traders at the bank is tobe at the center of a mini-exchange that they need to

“pilot” and not just a nodein the quote chain only”

Spot traders are at the cornerstone of liquidity

management, between external market sources of

liquidity and the various clients’ and sales contribution zones.

The only way to help them is to aggregate all incoming and

outgoing prices into a single global order book, and give them all

levers to control the flows individually to/from a selected source, or

globally. This implies that the role of traders at the bank is to be at

the center of a mini-exchange that they need to “pilot” and not just

a node in the quote chain only.

Forward markets follow the same pattern to a lesser extent, as

a large part of the market is based on specific bilateral RFQs.

Whether those are dealt manually or automatically, the

principles described for the spot market prevail as well: traders

must keep a centralized view of all that transits or can transit

through their books, i.e. their central order books.

For FX Options markets, challenges for traders consist more

precisely to adjust the limit between automatic and manual

quoting. The difficulty lies in the integration needed to plug-in

the options pricing engine with the e-Options trading platform,

and also to the spot/fwds trading system to enable delta hedges.

The shortcomings of existing e-FX platforms

Very few banking institutions think of themselves as complex

multi-asset class ECNs. Except ECNs and Exchanges

themselves which are usually mono-asset class and interact

with homogeneous communities of actors. Consequently,

current e-FX systems today are usually not able to maintain a

central order book with an aggregated and filtered market

depth. They are not adapted to multiple changing asset-classes,

and have great difficulty integrating and connecting to external

and internal pricing engines, trading engines or legacy systems.

If built internally, the existing systems can necessitate a very

deep re-engineering to change the business logic. In fact, the re-

engineering must take into consideration all asset classes and

business units, which multiplies by many factors the

complexity of the re-engineering exercise. Typical vendors’

platforms are often ASP-based that take the approach of

transactions services providers rather than technology

providers, or mono asset-class, with no real rules-based order

matching system nor central order book.

Taking e-FX Platforms Forward


A different approach: Considering banks as a complex

multi-asset ECN

So, how could the transformation be operated simply?

One first task consists of keeping the development

efforts isolated in specific compartments:

• connectivity to liquidity sources

• standardization of message protocols (including

FIX, SWIFT, integration of proprietary protocols

through adequate frameworks)

• move towards SOA architectures

• unification of data transfer technologies between

services, on top of a standard message service bus,

or Enterprise Service Bus

• distribution channels to clients and traders: design

or integrate business specific order-entry

applications for each category of player if necessary,

under various technology (rich executable format,

web, mobile devices, …)

• unification of the instruments’ and users’ reference

data

However, if the above-mentioned list of components

represents the chorus of “musicians”, the “orchestra

conductor” is missing.

This is where the trickiest part lies. Services cannot

simply be connected one to the other (like for example

a quote engine directly to a GUI via a FIX API) without

being orchestrated by a core trading process engine or

a suite of distributed engines built on the same

technology. The result would lack most of the

expected business benefits (centralization of the

liquidity across all assets into a unified market-depth

(even if distributed on several centers), decoupling of

the price producers from the distribution layers,

elaboration of common order types for all markets,

centralization of the STP chain, replicable trading

environment using a same methodology to reduce

time to market etc.)

e-Trading architecture must be founded on a core

platform, and should follow a pattern whereby

interaction with liquidity pools is decoupled from

distribution channels to clients, while a central process

maintains the integrity with the internal legacy

systems, and creates the central order book and

banks’ own liquidity in a unified manner, across all

asset classes. This architecture can be implemented

today without modifying the existing bank’s IT

environment and spending years of IT development

from scratch, as new generation ISVs offer all or part

of the components that are needed to build it.

Then what’s next?

In terms of platform development and addition

of new capabilities, it becomes relatively

straightforward to achieve large gains

of productivity once such a pattern is

in place:

• Distribution channels to clients can

be added/modified simply on

the fly, on new instruments, new

technologies, or new clients.

• Deal flows can be optimized according to internal

business rules (plugging of a rules engine on top or

inside the platform).

• Networking of the trading platforms becomes

feasible, saving huge network capacity utilization,

and simplifying the business decisions.

• White labeling can become “real” white labeling:

offering to the white-labeled clients not a simple

repainted web-browser to help them trade with their

clients, but a real local system that is connected to

the “mother bank’s” liquidity and integrated into the

local legacy systems, controllable if needed by the

local teams, and above all, private and personal. A

little bit like a telephone switchboard inside the

white-labeled client.

Such a technology being available today, in a fairly

cheap way, means that it can also be used by new

business structures wishing to offer e-trading services

to new categories of clients. In a cheaper, more

efficient, lighter way than what large banks can do

today, with a higher reactivity, and a more focused

approach. Several such companies exist today that

reach sometimes dizzying market valuations, posing a

potential threat to investment banks by capturing a

large part of new private clients eager to trade online,

at the expense of classical banking customer

management networks. By building prime brokerage

services to these new structures, banks can only

reduce this new market gap, not eliminate it.

Conclusion

e-FX systems have a long way to go to offer smoother

and better integrated trading services managed really

like industrial deal flows by financial institutions. For

the forseeable future the success of the outcome will

lie very much in technology choices and strategy, and

in the right mix of IT and business combined efforts.

Our customers know that we devote our time and energy to offer them

the best service. They are aware that Rabobank is the only Aaa/AAA

privately owned co-operative bank in the world. Especially in the integrated

financial markets arena Rabobank International Global Financial Markets

stays deeply commited to local communities. Serving the local market by

leveraging our global strengths makes us a popular choice for our clients.

www.rabobank.com

Strength in Connections.


Everyone is talking about Dynamic

Liquidity Management. In this article,

John Ashworth, Chairman of RiskCare,

discusses:

• How banks and other sell-side

institutions are exposing their FX

liquidity to an ever increasing range of

FX market counterparties and the risks

involved with doing this

• Why many institutions no longer wish to

allocate static limits to control exposure

• How the latest technology and software

solutions can assist in optimising

capital allocation by dynamically

managing liquidity.

In the good old days, the FX market was a

neat pyramid. A small number of well

endowed investment banks made markets

at the top and the great unwashed like you

and me would be changing our holiday

money at the bottom. In the middle of the

pyramid, there was a whole selection of

global banks, regional banks, asset

managers and corporations.

A participant’s position in the pyramid

governed not only with whom they could

trade (typically the counterparty was a

peer or at most one position above or

below in the pyramid so that credit and

relationship issues could be dealt with

more easily), but also the terms on which

the trade was executed. Deals at the top

were typically large, and executed

between credit-worthy and trusted

counterparties, so enjoying narrow

spreads.

At the other end, you and I had our arms

ripped off as we turned pounds into

francs or dollars, giving up tens of

thousands of basis points, a commission,

and the possibility of a further fee or

premium to ‘fix the rate’ just in case we

came back from the Dordogne or Florida

with any cash left over.

Dynamic Liquidity Management –towards a nextgeneration solution

John [email protected]

>>>


“Indeed, the conventional distinction between market maker and market taker is

increasingly blurred”

The good old days are over. Market forces within world trade and

science are driving liquidity and technology ever onwards. The

FX market welcomes newer participants who can connect more

directly to a wider range of counterparties. Your position in the

pyramid – assuming you can satisfy the counterpart that your

credit is good – is less

relevant in determining the

width of the spread. Market

takers can choose from a

multiplicity of platforms or

single bank portals.

Indeed, the conventional

distinction between market

maker and market taker is

increasingly blurred. You no

longer need a marquee name

to make markets in FX,

just a computer and a

balance sheet. Oh, and some

technology and technologists.

There are three major forces

concerning today’s FX market

makers:

Screen/Voice Ratio. The

proportion of business

transacted electronically is

increasing. This is being driven by

both early adopters increasing the

proportion of business that they execute

electronically and by new users of electronic

channels. The biggest growth in volumes is coming from Hedge

Funds and CTAs using systematic trading models. Some of these

new entrants are specifically arbitraging the electronic trading

‘technology curve’, that is, they are arbitraging the relative

strength of counterparty technology.

Those liquidity providers with technology that is not at the

cutting edge risk being systematically picked off.

Correspondingly, in a buyers’ market, the pressure exerted by

sales heads to provide liquidity to all clients (either directly or

indirectly) can cause loss making relationships to persist much

longer than is necessary, and at the expense of traders’ P&L.

Market makers need smart price distribution systems, and in the

spirit of ‘attack is the best form of defence’, a clear strategy to

embrace algorithmic trading.

Regulatory scrutiny. Regulatory scrutiny of electronic trading

capability is increasing to reflect the proportion of risk that is

derived from electronic channels. Regulators need to be assured

that market risk systems and in particular credit risk systems are

keeping up with the pace of change in electronic trading

technology. If clients are trading through both traditional and

electronic trading channels, it is questionable whether the liquidity

providers’ credit systems capture

risk by all these channels.

With the introduction of

electronic trading channels a

liquidity provider can no longer

rely on a salesperson to be

aware of all trades that are

being dealt with a particular

counterparty. If one user at a

client is trading an outright

forward at the same time that

another user is selling an option

to the liquidity provider over the

phone, can the credit checking

for each of these products

capture the incremental

exposure in ‘real time’?

This raises many further

questions as to what real time

really means. If all these channels

are not integrated with respect to

credit there is a significant risk of

credit lines being inadvertently broken.

The reality of STP. The increased volumes being driven

by systematic electronic trading channels is placing strain

on downstream processes and systems. Electronic trading

should deliver significant cost savings as less human involvement

is required at the trading end. However, if electronic trading

systems do not extend throughout the value chain then costs

could be increased. Enabling clients to perform trade verification

and trade confirmation electronically is the only way to ensure

that the savings promised by electronic trading are captured.

“The proliferation of trading channelsexposes liquidity providers to the risk of

getting hit on their prices on multiplechannels simultaneously.”

Dynamic Liquidity Management – towards a next generation solution >>>

For more information about ESP™ contact Currenex at [email protected] phone +44 (0) 207 400 6200 or +1 212 685 5950

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Executable Streaming Prices from Currenex. Instant execution, filled limit orders,automated prime broker give-up, full STP.

YOU DON’T NEED SIXTH SENSE FOR ESP™.JUST COMMON SENSE.

Currenex UK Limited is authorised and regulated by The Financial Services Authority


Dynamic Liquidity Management – towards a next generation solution

The proliferation of trading channels (increasingly tailored to

specific target client segments) exposes liquidity providers to the

risk of getting hit on their prices on multiple channels

simultaneously. This is a risk that is not present in the traditional

dealing channels. If a spot trader is asked by several clients

simultaneously on the phone, then the trader will typically quote

them sequentially.

This natural latency allows the spot trader to adjust his price

depending on the information he receives as each sequential

quote is hit or passed. This process mitigates risk by enabling the

trader to quote each sequential price based on the best available

information at the time, including the effect that each trade has

on his overall position.

In the electronic trading

channels, several prices could

be in flight at the same time

and it is not possible on the

Request For Quote (RFQ)

systems to easily pull or

adjust these prices as

in flight quotes are accepted

by clients.

Also, the total amount of

liquidity that is being made

available to clients through

electronic channels which are

both streaming and RFQ could

exceed sensible limits. The

amount of liquidity being

made available to clients

needs to be managed

systematically, intelligently

and dynamically. The systems to handle

this are defined by the liquidity providers’

particular blend of products and target

segments, and almost always require bespoke

development or at least complex integration.

Credit checking technology has been put under constant strain by

the evolution of electronic channels. Whilst interbank trading of

FX has been electronic through EBS and Reuters for many years,

this does not provide a good model for the current market.

Simply allocating ‘carve out’ limits has many drawbacks. These

drawbacks are increased as the pressure to provide competitive

credit lines competes with the need to manage credit risk across

different FX products and across different asset classes.

“Dynamic allocation of liquidity limitsto specific currencies or currency pairsis the only way to ensure that multiplein-flight RFQs do not expose a liquidity

provider to excessive risk.”

This is complicated further when the relationship of the liquidity

provider to the clients is that of a Prime Broker. As the Holy Grail

of prime brokerage, cross asset class margin and collateral

management is demanded by hedge fund and CTA clients,

liquidity providers have no choice but to invest in technology

solutions that maintain competitiveness.

Similarly, market and liquidity

risk issues are being

complicated by serving multiple

electronic channels. Dynamic

allocation of liquidity limits to

specific currencies or currency

pairs is the only way to ensure

that multiple in-flight RFQs do

not expose a liquidity provider to

excessive risk.

Intelligent liquidity limits that

reflect the underlying liquidity

available to a trader ensure that

tradable rates (derived from

interbank platforms such as

EBS) reflect the liquidity

available on the same systems.

The systematic capture of

information from all channels,

and the subsequent processing of that

information to dynamically change prices, adjust

liquidity limits and make trading decisions ensures that

the amount of value captured from all flows is maximised.

There was never a more exciting time to be involved with

technology! Opportunities abound within financial institutions

and the vendor community alike to embrace these challenges.

Here at RiskCare, we’ve been working on FX systems addressing

sales, pricing, liquidity, trading and risk systems for a variety of

institutions. Customers want a combination of technology and

business expertise but above all the ability to plumb vendor

technologies into their own internal systems.

Global Solutions, Locally Applied

By combining global reach and localunderstanding BNP Paribas delivers a tailor-made

service for our clients in foreign exchange.

The bank for a changing world

BNP Paribas London Branch is authorised by CECEI and AMF and is regulated by the Financial Services Authorityfor the conduct of its investment business in the United Kingdom.


For any commentator accustomed to FX

markets in the US or UK, France

represents something of a conundrum.

While the domestic sellside includes

some of the world’s most active FX banks,

the concept of the “buyside” as it exists

elsewhere is, if not entirely absent, at

least unfamiliar.

Perhaps the most obvious sign of this is

the ownership of the non-bank financial

institution (FI) buyside.

“If you look at the list of the largest asset

managers in France, you’ll find that

something like six out of the top seven are

banks,” says Octavio Marenzi, CEO of

Celent Communications. “Therefore the

clear buyside/sellside dichotomy you see

elsewhere doesn’t really exist.”

This distinction affects the French FX

market in a number of ways. While these

bank-owned managers have the same

duty of best execution as any

independent asset manager, they are

under no similar obligations as regards

the technology they use.

Most will have their own sophisticated

trading function equipped with

technology that may or may not come

from their parent, but will certainly make

them less inclined towards using external

functionality - such as that provided by a

single or multibank portal.

The French market is also far less

commoditised than many elsewhere, and

this is particularly apparent in the

emphasis placed upon relationships. The

norm, particularly among asset

managers, is for very long term bank

relationships that competitors will find

either impossible to acquire or requiring

an extremely protracted sales cycle.

While financial markets have been among the first to feel the effects of

globalisation, some local nuances remain. In the case of France even FX

- the most global market of them all - has retained a local flavour.

Octavio Marenzi

The Frenchexception(or “Vive la difference”)

“If you look at the list of the largestasset managers in France, you’ll findthat something like six out of the top

seven are banks”

In the first of our new regional

perpectives, Andy Webb reports

on eFX in France.

REGIONAL eFX PERSPECT IVE

Andy Webb

Coupling this with a relatively small

domestic hedge fund industry leaves the

French buyside heavily weighted towards

corporates – especially as regards

electronic trading.

“As a rough estimate, perhaps two thirds

of the buyside’s global electronic FX

trading can be attributed to non-bank FIs,

with corporates accounting for the

remainder,” says Christian Baudoin,

Global head of e-Forex at BNP Paribas. “In

France I think those proportions are

probably reversed.”

Large French corporates are also generally

regarded as extremely demanding in

terms of FX pricing. However, the breadth

and longevity of many French

bank/corporate relationships means that

banks finding themselves struggling to

achieve par on FX trades with their

corporate clients can at least console

themselves with revenue opportunities

elsewhere in the relationship.

The French corporate buyside is similarly

demanding in terms of product. Any bank

wishing to capture flows from larger

corporates has to be able to price the

most complex and cutting edge FX

derivatives. Although regulation such as

IAS 39 has somewhat curbed this appetite

for the exotic, some French corporates are

still managing to keep the quants at even

the largest banks on their toes.

Buyside online appetite

With its emphasis on relationships and a

consequent attachment to the telephone,

the French buyside was not necessarily

seen in the vanguard when electronic FX

trading reached Europe. However, this

appears to be changing rapidly.

"The strength of French banking

relationships mean that buyside customers

are often introduced to online trading by

their liquidity provider. In France, banks are

a major source of referrals for us. Over the

last two years, the rate of adoption has

been picking up pace and we have seen

very strong growth in volumes on our

multibank platform."

Some see this online participation,

especially among corporates, as segmented

by size.

“I don’t believe the largest corporates are

using multibank portals such as Currenex

and FXall, as they have their own dealing

rooms in the same way that a bank does,”

says Jean Beaufort, general manager

(France) at XRT. “However, our treasury

solution for corporates includes interfaces

that allow connection to these portals and

the automated update of treasury forecasts

when trades are executed and confirmed.

We have seen a very noticeable increase in

the use of this facility over the past eighteen

months or so.”

Nevertheless French buyside online

activity still has some way to go. (Baudoin

at BNP Paribas estimates that although

the average online buyside trade is

increasing, it is probably still only half the

size of that seen by the bank in some

other countries.) Some members of the

French buyside may well feel that if they

have a long-standing and proven

relationship with their sellside

counterpart then whether or not an FX

deal is executed online is not critical.

The original security concerns that

deterred many buyside participants in the

early days of online FX appear to have

abated in France as elsewhere. However,

apart from the “relationship” issue

mentioned above, two other common

reasons for eschewing online trading are

technical hurdles and unclear cost benefit

advantages.

“The former reason is more commonly

associated with the increasingly

sophisticated requirements of large

corporate clients,” says Reine Dossou,

head of e-business at SocGen. “The latter

is more common with SMEs, who remain

reluctant to trade relatively few and small

tickets online, where the time and cost

savings are not that apparent to them.”

How much?

While some members of the buyside may

still have reservations about online FX

trading, this doesn’t appear to extend to their

overall FX activity. Table 1 overleaf, shows

the Banque de France’s figures for average

daily traded volume in the Paris market.


Christian Baudoin

“the primary concern for smallerbanks is finding alternative sourcesof liquidity that they can distribute

to their clients”

Mark Warms

"In France, strong bankingrelationships mean that banks are a

major source of referrals for us."

Reine Dossou

“...SMEs, who remain reluctant totrade relatively few and small

tickets online”

>>>


The anecdotal evidence supports these

buoyant figures.

“There is absolutely no question that we

are seeing increasing activity across FX

spot and forwards in all market

segments,” says Nicolas de Breteuil,

sales manager of ICY Software. XRT’s

Beaufort agrees. “We have supported

foreign exchange in our treasury products

for nearly fifteen years and we noticed

that with the introduction of the Euro

there was a reduction in the use of our

foreign exchange module,” he says.

“Now, with the growth in e-business, this

is being reversed so that even midrange

companies are exporting outside the euro

zone and are therefore increasingly using

this module to support their FX activity.”

This growth is also extending to

increased use of FX derivatives, and not

just among large buyside players. “We

have one relatively small corporate client

who is looking to conduct more foreign

exchange activity using options rather

than spot or forwards because it gives

them more flexibility and a higher return

opportunity,” says de Breteuil.

Strong trends and volatility in major pairs

such as EURUSD have obviously fostered

this increased use of FX derivatives.

Rather than becoming locked into aforward rate, many corporates haveopted for the flexibility of optionstrategies and have rolled the strikes oftheir positions up or down to takeadvantage of market moves.

Online-specific volume in France is alsorising. BNP Paribas estimates thatapproximately 10% of its online FXbusiness is attributable to Frenchcorporate activity, and according toBaudoin this activity is “rising quickly”.Mark Warms at FXall recounts similarexperience; "Our total volume last yearwas up more than 100%, and activity inFrance reflected this."

Where?

The relative ranking of single bank andmultibank portals in France appears todepend upon whom you ask. One schoolof thought has it that in a marketdominated by direct relationshipsbetween buyside clients and banks, singlebank portals will predominate,particularly where the FX transactions aretied into other business such as crossborder payments. “I think French bankshave historically offered finer FX pricingto domestic corporate clients than banksin some other countries,” says Celent’sMarenzi. “Therefore French corporates,even smaller ones, have had lessincentive to use multibank sites.”

BNP Paribas reports a rather differentexperience, with some two thirds of itsdomestic volume coming from multibankplatforms. However it notes that thisbalance is shifting steadily in favour of itsown FX Dealer platform. The bank alsoobserves that while its ticket volume ishigher on trades via the multibankchannels, the ticket size on FX Dealer isgenerally larger.

SocGen’s Dossou sees client choicebetween single or multibank portal as asimple matter of objective. “The pricecomparison among liquidity providers onmultibank trading platforms obviouslyappeals more to price sensitivecounterparties, such as hedge funds andlarge corporates,” she says. “The singlebank platforms have more to offer tothose concerned with time and costefficiency.”

Nevertheless multibank portals are quickto claim similar efficiencies forthemselves as regards the top slice of thecorporate buyside.

Jean Beaufort

“I don’t believe the largest corporatesare using multibank portals such asCurrenex and FXall, as they have

their own dealing rooms in the sameway that a bank does”

Table 1

“The majority of larger French corporates

have relationships with two or perhaps

even all three of the top three French

banks and all of these provide liquidity to

FXall,” says Warms. “Each of them have

their own online FX platform but if you

are dealing with all three then that means

multiple order entry systems on the

desktop and it also makes STP harder to

accomplish. For corporates, the benefit of

electronic trading doesn’t just come from

trading electronically. To them the real

advantage lies in the ability to do such

things as upload trade requirements

automatically, combine deals, and

execute trades so that they flow straight

through to their treasury system.

Corporates are also increasingly focused

on tightening internal controls and

achieving compliance with accounting

standards like IAS 39."

What, no options?

Whichever type of online platform they

are using, there is no question that online

buyside spot and forward volumes are

rising swiftly in France. While it appears

that the telephone remains the preferred

route for larger deals, smaller

spot/forward trades are now executed via

single/multibank portals as a matter of

course.

The same cannot be said of FX options

where online activity remains small. ICY

Software’s clients include some of

France’s largest corporations, many of

which are also highly active and

sophisticated users of FX derivatives. “As

far as I am aware, none of these

customers are trading FX option products

via any online channel,” says de Breteuil.

“They have no conceptual problem with

the principle of dealing options online,

but at present there is no multibank

channel available that would foster price

competition. I think they have taken the

view that they will get a better price if they

use the phone rather than a single bank

portal, and in some cases their bank has

even advised them that this would be

the case.”

That attitude is perhaps understandable

given that banks have little incentive to

see FX options become as commoditised

a market as spot and their spreads

consequently eroded.

Providing streaming dealable option

prices (particularly for exotics) on a

multibank portal also raises such

concerns for banks as model risk and the

possibility of being picked off by more

sophisticated members of the buyside.

Having said that, vanilla FX options pose

much less of a threat in this respect as the

pricing is largely standardised.

Furthermore, although some members of

the buyside still have a taste for the

exotic, the strictures of IAS 39 have rather

damped this. “I would say that probably

70 to 80% of our corporate clients’ option

activity is in vanilla products,” says de

Breteuil. “The ease of pricing not only

makes them viable for online trading, it

also reduces the chances of mark-to-

market discrepancies.” De Breteuil recalls

one customer who had executed identical

exotic options with two different banks,

but when the banks’ quarterly mark-to-

market reports arrived, the option

valuations were slightly different.

Explaining that to an auditor in a post-

Enron world is not easy.

Machine to machine

In view of French corporates’ long-

standing use of electronic trading/

treasury systems, some see the

single/multibank question as only part of

the picture. “The question of a portal’s

functionality may be irrelevant, as the

client may not be visiting a Web site, but

will instead have a machine to machine

interface between its treasury system and

the bank’s, with all FX transactions

automated,” says Celent’s Marenzi.


Nicolas de Breteuil

“absolutely no question that we are seeing increasing activity across

FX spot and forwards in all market segments,”

>>>The French exception (or “Vive la difference”)



FXall has noted this trend, with somebanks using its platform as a price feedfor their day-to-day cross borderpayments businesses. Historically, bankFX desks have avoided commercialpayments business, as the typically smalltrade size did not justify the costs ofexecuting it. As a result, commercialpayments often ended up being executedat near retail rather than institutionalrates. "By using our price stream as anautomated feed, the lower transactioncost makes this business viable, as well as allowing customers to takeadvantages of institutional pricing forsmaller transactions". says Warms.

White labelling

Unlike some other countries, the FXsellside in France does not gradually taperin size. Outside the handful of globalFrench banks, there is a sharp step down inFX transaction volume. This hasunderstandably supported the assumptionthat the French FX market is well suited tothe concept of white labelling.

“The online FX environment is extremelydynamic, which makes it difficult for downstream sell-side institutions to keep pacewith market trends,” says SocGen’sDossou. “White labelling offers them anefficient way of addressing this challengeand providing the functionality demandedby their buyside counterparties.” Thiscertainly fits with the experience of Fxall,which has noted a growing trend amongmid-sized banks of using its technology inorder to cater for mid-sized corporate clientsthat don't have relationships with thelargest sellside banks.

Others are less convinced. “Rather thanwhite labelling, I think the primary concernfor smaller banks is finding alternativesources of liquidity that they can distributeto their clients,” says Baudoin. “Acting asa primary FX market maker is expensive interms of investment and capital allocation.As a result, many of these banks areeffectively looking to join the buyside andderive their margins from efficientdistribution rather than risk taking.”

Harry Gozlan, CEO of Smart TradeTechnologies agrees. “I think whitelabelling is more discussed thanpractised,” he says.“To start with thereare obvious political/strategic concernswhere the system being white labelled isprovided by another bank.

Though this wouldn’t be such a concernwith something provided by a multibankportal, it still leaves you with a lack offlexibility as regards the sources andinstruments fed through the product.”

Instead, Gozlan sees these smaller banksbeing more interested in technology thatisn’t hardwired. “For example, somethingthey will be able to configure themselvesso they can draw emerging marketcurrencies from one liquidity source, themajors from another and FX options fromanother. This will allow them to act asdistributors, rather than originators, of FXpricing and to respond quickly to clientdemands as they arise.”

Evolution of single bank functionality

This desire for flexibility is also mirroredin the activities of larger banks. Frenchbanks in general appear to be taking aslightly different approach from theircounterparts in the UK and US. Severalare currently revamping their systemsand replacing their first-generationplatforms, many of which were boughtfrom vendors such as Cognotec orReuters. Unlike the second and third tierbanks, the larger banks’ emphasis onenhanced flexibility is not related toaccepting and consolidating externalfeeds. Instead, the aim is to providegreater openness that will allow clientconnections via APIs, and also to allowthe aggregation of price feeds from withinthe bank for other asset classes. Ingeneral, the focus across all sizes ofFrench bank appears at this stage to bemore on distribution and getting clientson board rather than risk managementfunctionality etc.

As elsewhere, streaming dealable priceshave inevitably become something of abenchmark for French banks’ FX tradingplatforms. This is believed to have beensomething of a turning point for somesmaller banks, which have decided that thereturns from making those streamingdealable prices themselves do not justify theassociated risks and costs. As a result, theyare now seriously considering the“distribution only” model mentioned earlier.

In view of the high percentage of theironline FX volume that major Frenchbanks transact with clients outsideFrance, there is a suspicion thatfunctionality is not necessarily beingdriven by the domestic buyside.

Harry Gozlan

“I think white labelling is morediscussed than practised”


Particularly among asset managers and

mid-sized corporates, online FX trading is

not necessarily seen as an imperative –

especially where the counterparty is of

long standing and provides competitive

pricing. This is not to imply that such

clients are unsophisticated – far from it –

but they are seen as less likely to switch

banks because of a lack of online

functionality, than buyside players in

more commoditised FX markets.

Derivatives, breadth, analytics, research

Despite this, the major banks see the

French buyside’s predilection for FX

options as a strong incentive to integrate

increasing option functionality into their FX

platforms. This interest in options isn’t just

the preserve of large French multinationals

– mid-market corporations are now also

looking for exotic option functionality.

“They have become used to having this

sort of demand supported over the phone

- even the regional branch of a French bank

will be able to provide a quote on virtually

any type of instrument related to FX,” says

Gozlan. “Once they have an online system

in front of them they will still expect the

same degree of functionality. They won't

reduce their requirements simply because

the tool is now online.”

Some French banks have already responded

to this challenge. BNP Paribas has formed a

dedicated e-Forex Services team to address

these regional nuances, as well as to

enhance the overall implementation of the

bank’s e-Forex strategy. The BNP Paribas FX

platform, FX Dealer, already incorporates

derivatives functionality in the form of

research, historical volatility, and strategies.

Online order execution for FX options is

currently under development and is

expected to go live in 2006.

Apart from derivatives-specific items,

BNP Paribas has also been extending the

functionality for spot and forward

markets, including quantitative trading

models and technical analysis, research,

and strategy analysis. It has also been

increasing the number of currencies

covered, particularly in emerging

markets. “Our general objective is to try

and anticipate clients’ requirements and

have the basic functionality in place in

advance, so it can be switched on

relatively quickly when specifically

requested,” says Baudoin.

Prime brokerage

A natural extension to electronic FXdealing is FX prime brokerage, but somecommentators see French domestic primebrokerage as a rather restricted market.“In view of the preponderance of banksamong leading asset managers I wouldsay most domestic FX prime brokerage isfocused on hedge funds,” says Celent’sMarenzi. “However, the domestic hedgefund market is relatively small (certainlymuch smaller than London or New York)and even Parisian hedge funds will oftenhave their prime brokerage relationshipsin other countries.”

This doesn’t seem to be deterring thelarger banks, which are in any casecatering for a global as well as domesticmarket. BNP Paribas has had a presencein FX prime brokerage for more than twoyears and Baudoin sees it as a long-termgrowth market both domestically andinternationally. “We have seen a steadyincrease in interest from both corporatesand financial institutions looking forcompetitively priced liquidity andanonymity,” he says.

SocGen has also been active, launchingits own FX prime brokerage offering, SGPrime, earlier this year. This covers theusual range of FX prime brokerageservices (including client access to ECNs)and is particularly targeted on highvolume clients who have multiple tradersor who are using algorithmic models.

Over the horizon

While the relatively modest domestichedge fund industry may not be a majorspur to e-innovation, French banks

certainly anticipate further demand from

the corporate sector. This seems to be

borne out by one interesting trend

observed by BNP Paribas – the average

ticket size for its corporate clients’ FX

trades has been growing steadily to the

extent that it has almost reached parity

with that of its FI clients’.

As XRT’s Beaufort observed, the post-Euro

dip in French FX activity is over and the

range of export markets reached by

French corporates’ e-commerce activity

continues to grow. As a result, exotic

currencies are becoming a matter of day-

to-day necessity. However, most deal sizes

required are unlikely to be large enough to

warrant negotiating prices on the phone,

so this will only further increase demand

for online/automated execution.

Online option trade execution is already

starting to appear on the back of buyside

demand. With pricing models for vanilla

FX options already well standardised, this

trend is only likely to accelerate – further

supported by online tools such as

volatility surfaces. The picture is slightly

less clear as regards more complex

structures. The more sophisticated

members of the French buyside would

welcome the addition of “pick and mix”

simulation and trading functionality for

such structures. However, while the

largest global banks may have already

started to consider the addition of

these capabilities to their platforms,

some French banks may decide that

the associated risks and costs cannot

be justified.

The French exception (or “Vive la difference”)



In July of this year, FIX Protocol Ltd. (FPL), the

International Swaps and Derivatives

Association, Inc. (ISDA) and TWIST Process

Innovations Ltd., signed a Statement of

Understanding outlining a collaborative

approach in developing and using a common

industry protocol for the Foreign Exchange

markets. In this joint effort, FPL, ISDA and

TWIST will work together and provide

resources to undertake a product coverage and

business process gap analysis with regard to

the FX coverage in their respective standards ˆ

FIX, FpML and TWIST. This gap analysis will

serve as the basis for future developments in

the FX area. The three organizations believe

that agreeing on the universal business

meaning of information and message scenarios

covering the financial trading processing chain

and utilizing common messaging standards,

will enable and encourage the end-to-end

straight through processing of foreign

exchange messages between industry

counterparties, without regard to the network(s)

used, the platforms employed or the operating

systems utilized. In this article Peter Randall

outlines the rationale behind this collaboration

and the first practical steps that have now been

taken by these organizations.

A collaborative approachtowards a common industryprotocol for the FX markets

Peter C. RandallExecutive Director,

FIX Protocol Limited

>>>


It is often observed that a very good proxy for the value of a

standard within the financial services industry is the breadth,

depth and speed that the standard is adopted. The complexity

of many financial products these days and the sheer variety of

the circumstances that different participants find themselves in

have increasingly favored collaboration as the most effective

means to develop new standards, new operating protocols and

new business models.

The level of connectivity between different industry participants

and the need for improved risk control and exposure

management tools have exacerbated the need for open,

platform independent and vendor neutral standards that can

allow the benefits of connectivity such as reduced errors and

improved risk management to guide the development of better

and more complex products whether within the FX market or

amongst the users of products traded in the FX markets.

FIX Protocol, ISDA and TWIST

It is true to say that the de facto standard of the asset trading

community is the 10 year old FIX Protocol which offers a very

wide protocol covering equities, fixed income products,

derivatives, and FX and ranges from pretrade activity all the

way through to allocations and is currently in the process of

being extended to cover important aspects of the market data

process as well.

The FIX Protocol which enjoys very wide adoption is in itself a

collaborative effort and includes contributions from all areas of

the asset trading industry. In a similar way ISDA enjoys almost

universal adoption of its documentation and processes in the

world of complex OTC derivatives. Like FIX Protocol, ISDA and

its standard FpML, is essentially a collaborative effort between

industry participants.

TWIST is the most recently founded one of partners and seeks

to promote the adoption of standards between corporates and

their customers as well as between corporates and their

banking partners. Likewise TWIST is a collaborative venture.

Rationale behind collaboration

The principal rationale behind the decision of FIX Protocol,

ISDA and TWIST to collaborate in developing a common

industry standard was the observation that between them the

three organizations had highly complementary areas of

expertise which mutually supported each other and because of

the open and collaborative way in which the three groups

approached their work product and arranged their affairs it

meant that co-operation between them was relatively easy to

arrange and orchestrate.

Each organization also recognized the need to provide

implementable standards in as timely a fashion as possible. The

need for speed is a powerful focus and in this case meant that

each organization was convinced that it could rely on the

expertise and experience of its partners in delivering

appropriate answers and hence avoiding unnecessary

duplication. It is important to note that the principal driver of

collaboration was the need to produce implementable

standards for the industry and not to try and build

any monolithic edifice encompassing all aspects of the

business model.

Practical steps

The first practical step that the collaborators have taken is to

commence a gap analysis between the existing offerings in the

space and the various pieces of work that the member

organizations have already undertaken. This work is already

well advanced and when the definitive shape of the ‘gaps’ are

known it is the intention of the parties to develop scripts,

processes and work flow solutions that will allow participants

and implementers to start to garner the benefits of increased

automation, improved control and better product development

opportunities within the fast moving FX markets.

However all three partners agree that the gap analysis on its

own will not produce the necessary answers and to this end

have established a small working group consisting of

representatives of each of the parties. The principal function of

this group is to drive the process forward and to ensure that the

final offering is adoptable, efficient and contributes towards

reducing risks and improving business flows.

A collaborative approach towards a common industry protocol for the FX markets

Collaboration is the organizing principle on which all the work

undertaken by the team is based. This is because the experience

of each of the founding partners has been that collaborative

efforts most frequently lead to adoption and that in turn as

noted above is the measure of a successful exercise.

There is no intention for the three organizations to extend their

activities beyond this narrow focus at this time. Each of the

groups believes that it is preferable to work on a well defined

project to begin with and to see what benefits may accrue to the

industry and to the broad FX community before extending work

into any other area.

However there are some signs that a

successful collaboration may lead

to other ‘expert bodies’ and

industry groups coming

together to answer

similar questions and

to deliver similar

benefits for the

broader financial

services industry.

However all this is

some time in the

future and the first

test will be the level of

adoption that the initial

offering enjoys.

Benefits

Perhaps the biggest benefit that the FX

markets will enjoy in the short term is the ability to

extend the ‘FX trade’ deeper into the asset trading industry and

more efficiently into the corporate market. In the event that the

equities market is any guide where the benefits of

standardization and connectivity are most obvious, the most

visible benefit will be a marked increase in the number of

bargains.

This may be coupled with a decrease in bargain values which

will tend to favor those industry participants that are more

efficient. As these changes become ingrained in the future it is

likely that a variety of new products will be needed to service

customer requirements.

At the same time, it is certain that increased automation will

lead to improved risk control, better risk pricing and hence an

improvement in industry profitability.

As the finance industry continues to rationalize its operations

the true integration offered by electronic connectivity to both

external counterparties and internal systems will likely lead to

increasingly exotic combinations of products and services and

more effective ways of meeting customer requirements and

expectations.

Conclusion

One existing solution to the issues raised by

standards in the financial services sector

has been to favor a single monolithic

approach; another has been to

create standards out of a

network of lots of

specialist industry groups.

The small group as

an instrument of

community is powerful

and successful with its

focus on discussion and

interaction not on one

person teaching and the

others listening.

The small group is an

extraordinarily strong vehicle, it is

cheap to run, flexible and every industry

participant is able to find a group to which

they can contribute. Of course the measure of success is

how much any work produced by the collaborators is adopted

by the industry but with the strengths of the three partners it is

difficult to imagine that implementation is anything more than

a matter of time.

A further powerful driver of industry driven standards is the

increasingly complex requirements of regulators both

domestically and internationally and at both the banking and

the security level. Industry adopted standards, developed by

open, collaborative processes and shared between groups that

represent ’best practice’ in their individual areas of expertise are

the perfect antidote to the fever of over-regulation.


Gentlemen, can you tell us a little about your

company structure and treasury operations?

A.S.: RWE AG is a leading international multi-utility

group with 7 operating companies and € 37bn of

external revenues in 2004. Several hundred

subsidiaries with business activities in the UK, the

USA, central and east Europe and of course mainly

Germany require a very diverse risk and liquidity

management controlled by the Group Center. Our

central group treasury located in Germany provides

in-house banking services to our domestic and global

subsidiaries. This includes centralized FX execution,

cash pooling supervisory, internal and external group

financing, as well as liquidity planning.

C.W.: At RWE AG we are continuously reviewing all

treasury processes in order to find the optimal set

up in terms of process efficiency, cost and risk

minimization. Streamlining of trade captures,

confirmations and corresponding settlements

based on straight-through processing have been

some of our major focuses recently. We trade

electronically with our banks and with our

subsidiaries via 360T’s TEX and I-TEX. The resulting

tickets are uploaded into our Treasury Management

System, Trema Finance Kit, and further on into our

SAP legacy system.

Confirmation matching is automated via MISYS

CMS. Our settlement payments are effected

through an electronic multibank communication

system. All modules are fully integrated to a

seamless electronic workflow.

How important has e-trading become at your

treasury department?

A.S.: Very important indeed. Our centralized

treasury operation requires the management of a

much increased number of transaction processes,

internally and externally. Demand from subsidiaries

will need to be handled at very high levels of

standardization and, where possible, even

automation. In the last 6 months we have traded

electronically somewhere around 1.800 Deals. This

means an increase of 50% compared to the same

period of 2004 and we expect another increase of

25% for 2006. We are now trading about 70 % of our

total volume electronically and expect this number

to further increase.

Real end-to-end STP at RWE AGC

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e-Forex talks with André Scipio, Manager Group Treasury, andChristoph Waldvogel, Project Manager TREMA Suite, at RWE AGabout electronic in-house banking and real end-to-end STP.


Christoph Waldvogel (standing)

André Scipio (sitting)


C.W.: Online e-trading significantly reduces the error margin of

executed deals. There are no misunderstandings about the

requests, nor about the resulting quotations. The same

headcount in Front Office can cope with a lot more transactions

dealing electronically with both external liquidity providers and

subsidiaries internally.

What prompted you to adopt e-trading and when did you

commence adopting it?

C.W.: From a workflow perspective at RWE AG we were looking

to realize a true end-to-end STP, meaning that we wanted to

reduce the number of manual deal captures across various

components of our IT infrastructure to just a single entry. Our

goal was to negotiate and execute electronically with our more

than 20 external counterparties via just one trading platform,

creating electronic deal documentations which could

automatically be processed into our Trema Finance Kit and to

further downstream modules of our system environment with

no one having to manually re-capture them. To complete the

picture, we were also looking to standardize and automate the

internal trading workflow with our subsidiaries.

A.S.: We evaluated a number of e-trading platforms and

decided for 360T’s Multibank Portal TEX in early 2004. When

our centralized group-wide FX trading commenced in 2004, we

knew it would increase the number of trading processes

significantly. We decided to also implement 360T’s intra-group

trading system I-TEX, which connects us to most of our

subsidiaries with significant FX exposures. Since early 2005

both external and internal trading module work fully integrated

with our Trema Finance Kit.

How is e-trading assisting you to improve efficiencies in your

day-to-day operations?

A.S.: Regarding our external trading, we value the facilitated

price transparency across multiple banks and instruments, as

well as the fast execution workflow. For internal trading, we

have achieved a standardized communication with our

subsidiaries, formerly conducted via various channels such as

email, fax and phone. To satisfy our role as a service provider

to internal clients, we need to provide our subsidiaries with 24h

competitive pricing in multiple currencies, which we are able to

deliver via 360T’s I-TEX. More generally, across all internal an

external e-trading activities we value the electronic

documentation and auditability of our trading history, as well

as time, risk and cost reductions through high process

efficiency and STP.

C.W.: I-TEX, 360T’s intra-group trading tool, provides a high

level of convenience and workflow mapping. From an inhouse

bank perspective, we can configure by individual entity,

currency, notional and other parameters whether a requests is

to be quoted manually, by a built-in autodealer, or routed to a

pre-defined basket of banks on 360T’s Multibank Portal for

automated back-to-back execution of ‘best offer’. For all

internal and external transactions the deal confirmations run

into the TREMA Suite without re-keying. If the request was an

automated back-to-back trade with a bank the system

generates two trades, one internal between subsidiary and

Group Center, and one external between Group Center and the

bank. The variety and ease of optional settings in the

configuration of I-TEX met most of our expectations to an

automated trading tool, even including individual trader limits.

>>>

Can you give us a brief workflow description of a

typical end-to-end STP?

C.W.: As you can follow in the workflow diagram, a

trade captured and executed via 360T is uploaded in

real time to our Trema Finance Kit position keeping

module. In case of an internal trade, Finance Kit

automatically sends individual back office

confirmations to our subsidiaries via e-mail or fax.

Where applicable, electronic matching of external

deal confirmations with our banks is done fully

automated via Misys CMS. After netting has been

completed in Finance Kit, settlement payments are

generated and subsequently forwarded to the banks

through a multibank communication system.

What parts of your treasury activity do you think are

benefiting most from e-trading and subsequent STP?

C.W.: Although we firmly believe that e-trading and

STP have brought us improvements across all

aspects of the trade life cycle, from trade request all

the way through to settlement and final booking, I

would like to especially highlight the following.

Manual telephone dealing and trade capture have

been largely replaced by automated trading and file

upload. Former multiple and error-sensitive manual

entries in systems along the workflow chain have

been replaced by a single pre-trade entry. Automated

confirmation matching via Misys CMS has reduced

the number of formerly hundreds of manually

matched confirmations to just a few remaining.

Measurability and auditability of our banks’

performances has literally become a matter of

pressing a few buttons.

What instruments are you commonly trading online or

planning to in the future?

A.S.: Externally, as well as internally, we frequently

trade FX spot, outrights and swaps. We also do a lot

of so called MFTs (multiple forward trades). This

unique function of 360T allows us to trade whole

schedules of multiple forward tenures based on best

net offer and on a predefined spot level. Furthermore,

we trade short term loans, deposits via the platform,

internally and externally.

We may try trading FX Options and Interest Rate

Swaps online in the future, since 360T provides

functionality and liquidity for both.

Do you still have any reservations about online FX

trading?

A.S.: Although we are generally trying to maximise

our transaction volume and numbers via the platform

to scale the beneficial effects of electronic

processing, there are certainly products which are

too complex, too illiquid, or require some sort of bank

advisory, such as unusually high notionals, long

tenures, exotic currencies, Cross Currency Interest

Swaps and more sophisticated strategy options.

Furthermore, we are still missing some liquidity

providers, either entirely on the platform, or

technically, because they simply fail to provide

pricing equally fast and efficient as others. However,

we can feel this improving continuously as online FX

is becoming ever more of a standard.Case S

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e-Forex C

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In many banks and financial institutions, e-trading systems inplace today are very static, linear and lack a lot of the flexibilityand interoperability initially desired. Particularly, it is difficult fora bank to aggregate its entire tradable liquidity into one singlevirtual market and for traders to have a unique view of theaggregated market depth they can trade on, while controlling thequotes they broadcast to their clients and managing, in return,the auto-crossing conditions of the clients’ orders and interests.

The key is to create a single internal market that can let ordersbe matched against an aggregated liquidity pool, according tocustomizable rules, and that can show a unified market depth forall markets (internal and external). Such a virtual market mustbring a common access layer for all the types of liquidity, beadaptive to the constant changing cartography of liquiditysources, distribution channels, trading modes, messages types,instrument classes, client-facing and order-entry applications,while maintaining a unique and harmonized silo where theliquidity is maintained. In parallel, the core structure andarchitecture of the platform must support the changes that areconstantly carried out on the delivery channels and on thepricing sources.

As a solution to this equation, Smart Trade Technologies hasdeveloped a private order-routing and order-matching platformthat banks and financial institutions can deploy as a softwarewithin their infrastructure.

The Smart Trade platform is composed of one or several inter-connected platforms, able to communicate with various externalliquidity sources, deal with customizable orders types, rules-based routing and execution conditions, message protocols,internal data referentials, client-facing and order-entryapplications, symbology translation issues, externalpermissioning. The Smart Trade platform constitutes eventuallya flexible single sign-on trading network, that the bank controlsfunctionally and technically, integrates within its own IT teamsand that remains stable and evolutionary over time. Itsperformance and throughput are in line with today’s andtomorrow’s requirements emerging from the highly demandingclients and program trading engines.

The design of the Smart Trade platform’s architecture has been

built around a few core concepts:

• extremely robust routing and matching engine

• Gateway Framework to build specific connectors to

external liquidity sources

• exhaustive APIs to support and build multiple types of

client-facing and order entry applications

• independency to the asset class, and the instruments

quoted

• compatibility with any type of order and trading mode

• central order book:

• integration of credit limits:

• integration of customer spread management/ price tiering

• connection to third party data referentials

october 2005 e-FOREX 57Sponsored Statement

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Currency Overlay has grown significantly in popularity since the

first mandates were awarded in the late 1980’s, and in particular

over the past couple of years. The main drivers behind recent

growth business growth can predominantly be attributed to:

1. A basic need for currency hedging/risk management linked to

the increase in global cross-border investments (and trade

exposures)

2. A new need for investments that have the ability to earn

positive returns uncorrelated to the broader markets such as

equities and bonds.

This development has also been supported by the general drive

from institutional investors towards a specialist approach in all

areas of their asset management activities including the cost and

processing benefits of outsourcing FX management in general.

Essentially currency overlay is the process of separating

currency management from the underlying assets (or

exposures) of the client. The general idea is that client benefit

from the relative advantage of being able to focus on their core

competencies (which are rarely FX management). Currency

Management is generally categorised as follows:

Passive Currency Overlay has the objective to remove the

unwanted currency risk from an international asset allocation (or

other currency exposure). This process is essentially

mechanistic and therefore very suitable for outsourcing to

professional currency managers in order to benefit from the cost

reductions available from specialisation and economics of scale.

Active Currency Overlay is essentially a combination of a

passive management process and a profit seeking strategy. In

the latter case clients pay currency managers to provide

incremental returns (or alpha) from FX markets while at the

same time reducing risk in their investment portfolios.

Currency Markets can – despite their huge volume – be shown to

be inherently inefficient and can therefore provide absolute

return opportunities for profit seeking market participants. In

addition currency returns can provide significant diversification

to traditional asset classes as well hedge fund strategies as

illustrated below.

Figure 1 Investment diversification available

from investing in currency markets

eFX – adding value to all aspects of thecurrency overlay processHenrik Pedersen & Xavier Lefevre from Overlay Asset Management inParis talk to e-Forex about the value added from e-FX on their business.

Henrik Pedersen Xavier Lefevre

>>>


Overlay Asset Management and e-FX

Overlay Asset Management (OAM) is a Paris based specialist

currency manager with more than US $ 7 billion in multiple

absolute return strategies and currency overlay mandates. OAM

primarily uses quantitative analysis of historical currency

market prices to identify directional and non-directional

opportunities across all major currency pairs. In 2001 BNP

Paribas Group acquired OAM as part of its alternative

investment strategy. OAM has experienced a significant growth

in assets under management, of more than 50% per year, since

it was founded in 1998.

e-FX is particularly suited to our business model as OAM’s

trading models are at the core of all the active investment

management activity. Our system uses these signals to

calculate and determine the relevant deals that need to be

executed daily, taking into account specific client investment

guidelines and constraints so that the required deals may not be

in breach of guidelines. An outline of our investment process is

shown in Figure 2 below.

Figure 2 illustrates our strong emphasis on a quantitative and

systematic approach to investment management. Human

intervention is limited to optimisation of the execution and

reduction of slippage when executing trades in the market.

This is why e-FX solutions are adding value to all aspects of our

currency management process today. We believe that part of

our success has been our systematic investment approach

combined with our ability to provide customised solutions at

competitive rates. e-FX is therefore not only a natural evolution

in our constant strive to innovate and improve both our order

handling processes and straight through processing capabilities

it is also an essential part of our growth strategy.

Best Execution.

A key element of our offering is the ability to provide best

execution to our clients. Aside from increasing transparency in

the market place, which is fundamentally a good thing for all

users of foreign exchange, e-FX plays an essential role in

enabling us to provide the best possible execution for our

clients. We are currently using two electronic multibank

platforms and a couple of single bank platforms from leading

FX banks as part of our currency trading.

From a pure execution perspective Hotspot FXi, apart from a

very tight spread also provide us with a very good idea of the

market’s liquidity as you get tradable volume on each side of

the bid-offer spread and also a few ticks away. This is extremely

helpful tactical information when having to execute large orders

in the market place. Another feature that we like with Hotspot

FXi is that you can also put your interest in the machine, for

example if GBP/JPY quotes 58/65 you can put a bid at 61 and the

spread will become 61/65 with good chances to get your order

filled. That is very useful especially for more illiquid crosses. By

allowing us to participate proactively in the

market place we are able to “save” the

liquidity premium charged by market makers

at the benefit of our clients.

Another system that we like is FXall. FXall is a

multi-bank portal that enables us to

simultaneously ask a price to several banks,

thereby giving us full price transparency and

access to the best bid and offer prices. After

the trade we can allocate trades across all our

account ensuring equal treatment of all our

accounts. With FXall you can trade spot or

outright compared with traditional trading via

phone, where salespeople provide you with a

spot price and then have to provide you with

the price adjustment to put the position

forward, while you are waiting on the phone.

Last but not least you get the price instantly as

opposed to having to wait for the sales person

to get a price from a trader. This time saved is

of course not significant for those, who only have a few trades

to execute, but when you have the amount of trades to do on a

daily basis as we have, the time saved has a significant impact

on our business. In addition it frees up time for our execution

team to concentrate on adding value to our clients.

Operational improvements

More generally apart from the best execution, most of the e-

trading systems have an internal blotter with all the trades done

for every day with the exact time of execution, split by fund.

This is very helpful for the back/middle office as those daily

reports could be sent automatically to the prime broker and

then reduces drastically the number of errors.

Figure 2. Overview of OAM investment process.

eFX – adding value to all aspects of thecurrency overlay process

You also keep a trace of the trade history and FXALL provides an

"audit trail" that gives you for each request you have done the

details of the quotes from each bank. All this helps improving our

operational interface with our clients and their counterparties.

With most of the e-FX systems today you are also able to enter

take profit orders, OCO, stop losses, which again facilitates our

risk management process all 24hrs of the day.

We are also currently working with leading e-FX banks to

provide a direct link from our trading systems to their (single

bank) e-commerce platform, thereby enabling straight through

processing of system trades under a certain amount. Our

objective aside from providing further operational efficiencies

is to increase speed to market, reduce execution slippage and

to help our execution team and portfolio managers to

concentrate on optimising the execution of large trades

where special considerations have to taken to minimise the

market impact.

From our perspective e-FX platforms is like a salesperson that

works for us 24hrs a day, who never complains, and who never

goes to the bathroom (a little bit like 007). Equally important,

because we are professional and model driven users of foreign

exchange and not reliant on the traditional client service model,

e-FX enables us to cut out the middle-man. This in turn means

a savings made on their commission - a savings which is then

passed on to our clients.

Benefits e-trading technology brings to clients adopting a

currency overlay solution

The operational efficiencies and improved execution available

to us – and described above - is automatically passed on to our

clients as operational efficiencies and improved execution. Not

only does this help reduce the administrative burden that has

previously been a hidden cost of currency overlay management

but it also allows us to provide more customised solutions to

our clients.

Equally important, e-FX has also made it economical to manage

smaller customised mandates that would not have been

economical to handle just 3 years ago. This opens up the

opportunity for outsourcing currency management by end-

users that did previously not have the required “entry level” of

currency risk to reap all the benefits that comes with a

reduction of operational risks and cost savings on

infrastructure. Interestingly, it is frequently in this group of

“smaller clients” where outsourcing makes the most sense

and where the potential to reduce “hidden” execution costs is

the biggest.

It has never been more advantageous for institutional

investors, corporations and other users of foreign exchange

where FX is not a key competency, to outsource their currency

management process to professionals such as OAM.

TO REG ISTER , CALL 1-800-647-7600 or 1-781-939-2438Fax : 781-939-2490 • e -ma i l : i n f o@wor ld rg. com • www.wor ld rg. com/a lgo t rad ing

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INNOVATIVE RESEARCH PORTFOLIO STRATEGIES TRADE OPTIMIZATION GLOBAL CONNECTIVITY

© 2005 State Street Corporation. 05-SGM0180805*Data source: Pensions & Investments May 2004, Money Managers’ Directory.


While FX Prime Brokerage hasbeen in existence for over adecade, the last two to three yearshave witnessed its transformation.What was a “niche product”,offered by banks to a few selectclients, has now become a “musthave”, with banks scrambling togain market share. Notsurprisingly, prime brokerage hasacquired great significance forinvestment banks: according to arecent report by CSFB, in 2004, itaccounted for more than $25billion or 12.5% of total fees.

To date, the efforts of prime brokers have

focussed on enhancing connectivity with

the client base. Future evolution is likely

to involve electronic provision by banks of

a greater range of products (not just cash

foreign exchange) and the use of

automation to remove inefficiencies from

operational processes (notably the “give-

up” process).

The power and increasing diversity of the

buy-side will also provide fresh

technological challenges for prime

brokers - the requirements of the hedge

fund community are likely, for example, to

drive the development of cross product

prime brokerage. At the same time,

electronic platforms e.g. EBS Prime, which

make use of the credit intermediation

model, are likely to prove influential,

creating greater volumes of business for

their prime banks.

The attraction of FXPB

FXPB is aimed primarily at investors whorequire operational and collateralefficiencies. A prime broker acts as acentral counterparty to the client’stransactions, holding any collateralrequired for trading with multiplecounterparties, and acting as a centralback office, providing clearing, settlementand reporting facilities. Thus, a fund cantrade with a wide range of counterparties,without needing to set up credit lines andcollateral with individual trading parties.

The model has already proved hugelyattractive to hedge funds and, with aflourishing buy-side interest in FX as anasset class, new customer segments (e.g.traditional asset managers, fund of funds,multiple programme managers, as well aspension funds, corporations and,interestingly, other smaller banks) arecontinually emerging.

Technology challenges: the next phase of FX Prime Brokerage evolution

James Kemp is Managing Director of Stentra

[email protected]

BAXTER-Solutions Kft.e-Mail: [email protected] | phone: +36 1 235 06 87

Traditionally inefficient and based largely on manual

processes, FXPB has undergone significant change: the

complexity of the relationship between client, prime

broker and executing banks, the consequent potential for

errors, as well as the rising volume of trades, have all

served to make FXPB a natural candidate for automation.

However, as banks have found to their dismay,

automation has hidden perils: fees have plummeted and

banks have been left struggling to differentiate offerings

and offer truly value added services.

The sector is still attracting new entrants, many

leveraging existing infrastructure (e.g. collateral

management systems, electronic FX platforms,

settlement and clearing systems) to provide an FXPB

offering. However, newer entrants find themselves

competing against well-established players (e.g.

Goldman Sachs, Deutsche Bank) with very deep pockets.

These front-runners already provide sophisticated client-

facing systems (offering trade capture, real-time status

evaluation, portfolio analytics and credit analysis etc),

often through a web-based platform linked directly with

electronic dealing platforms.

Certainly, any player hoping to survive in this very

competitive market will have to be able to offer a

minimum of services e.g. consolidated clearance,

settlement, margining and reporting of FX products, credit

lines to trade with multiple counterparties, real time credit

utilisation reports and automated credit checks,


full netting across instruments andcurrencies as well as facilitation of STP,functionality for split and roll trades, link-in with trade and position data forreporting, plus provision of key data foranalytics through to inventory andportfolio analytics.

“Due the sheer number ofpotential strike pricesavailable across the

currency options range, it isdifficult to determine where

client interest would lie.”

The immediate future

The immediate goal for FX prime brokers

will be the provision of a full range of

product offerings, not simply cash foreign

exchange. Leading prime brokers have

already done so, and are happy to offer

spot and forward foreign exchange, plain

vanilla options, structured options and

swaps. Nevertheless, offering products

such as FX options can be technically

challenging. Due the sheer number of

potential strike prices available across the

currency options range, it is difficult to

determine where client interest would lie.

If it is not possible to ascertain a sub-set

of options and prices then quoting a full-

range is extremely expensive in

application resource terms and

bandwidth to deliver.

Option management must be very closely

monitored, as any options with automatic

events will have a direct impact on credit

or collateral facilities when the event

executes.

Removing operational inefficiencies: trade

give-ups

Prime brokers are also looking to streamline

operational processes such as the “give-up”

of trades: if trades are not settled correctly,

errors can quickly erode margins. Recent

technological innovations (e.g. offerings

from software developers Traiana) are

aimed at creating efficiencies to this area.

However, the give-up process is complex

and its automation challenging: the

transaction for “giving-up” is executed

between the client and any one of their

nominated counterparties, and, while these

counterparties are known by the Prime Bank

(as part of their clients Prime Brokerageagreement) the onus is on the client tonotify the Prime Bank of the transaction(who, until notified, will be unaware that acorresponding transaction has takenplace). Furthermore, trades to be given-upmay have been executed by telephone,trading channels or via the counterparty’sproprietary application. The disparatechannels for execution and multiplecounterparties all add to the complexity ofintegrating these into automatedtransaction give-up channels.

New clients

An increasingly diverse buy-side, whichnow includes multiple programmemanagers and funds of funds, is alsodriving change: each client group hasspecific needs, and, given the increasedpower of the buy-side, prime brokers areobliged to take heed of theserequirements. Multiple programmemanagers or funds of funds might, forexample, require reports or trade detailsfor end investors, risk managers oraccountants: in order to offer deeperreporting capabilities, a prime brokerwould, at the very least, have to ensurethat all transacted business was on onlineand could be fed into a central repository,where it would then generate a P&Lreport.

“..for most FX primebrokers, cross productprime brokerage is still

some way off”

Cross product prime brokerage

Certain banks are already providing crossproduct prime brokerage with portfoliomargining across multiple asset classes(e.g. BarCap). However, for most FX primebrokers, cross product prime brokerage isstill some way off. Nor is this surprising,given the silo-based nature of most banks’operations – indeed, for many banks,simply “on boarding” clients to primebrokerage systems, where clients wish totrade across multiple asset classes, is aprotracted and difficult process. Evenmore difficult is the integration of differenttransactional systems with a singlecollateral management system. Andgetting it right is critical: if data is not fedthrough in a timely fashion, clients mightface a situation where their positions arenot fully covered or capital is over-utilised.

Electronic platforms: credit intermediation

model

The market is being yet further shaped by

the presence of a number of electronic

platforms (e.g. EBS Prime, Lava FX,

Hotspot FX). The platforms, originally

developed by banks, make use of a credit

intermediation model: banks with credit-

related restrictions (e.g. smaller or

regional banks) can trade utilising the

credit of the platform’s own prime banks.

EBS Prime now has support from some

sixteen banks, Lava FX, numbers Barclays

Capital, Citigroup, Deutsche Bank and

RBS amongst its prime banks. Electronic

platforms are already giving prime

brokers access to new customers, while

smaller banks that might have had limited

access to the global FX market, are seeing

their ability to trade, or engage in

more complex strategies, such as

hedging, increase.

Platforms also look set to make life easier

for prime banks by taking some of the

stress out of processing and settling

trades: EBS Prime, for example, claims to

have simplified the notification and give-

process to the point where “there

effectively is no give-up process” (James

Sinclair, Head of Strategy & Liquidity, EBS

Prime). All this is good news for prime

brokers – however, only for those with

sufficiently automated systems to be able

to link up with the platforms, again

favouring those institutions that have

already invested in overhauling technical

infrastructure.

In conclusion

Given the technological challenges and

the expense involved, it is unsurprising

that the sector has come to be dominated

by a handful of banks (Morgan Stanley

and Goldman Sachs alone account for

some 43 percent of market share). For

smaller players however, the situation is

not entirely bleak: nevertheless,

particularly for those considering entry

into the market, caution is necessary –

already low margins are shrinking and the

cost of infrastructure, technology plus

operational and marketing costs must be

very carefully weighed up against

potential revenue.

Technology challenges: the next phase of FX Prime Brokerage evolution

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vie

wpoin

t

In olden days, circa 1985, investment

managers would execute foreign

exchange transactions by separating

trade tickets into different piles of like

currencies, adding up the associated

amounts, and calling banks for a price. A

bank would later receive a fax (if it was

lucky) with the associated breakouts and

duly enter them by hand on their books

and records. This was a very early

example of the three pillars of superior

execution. The process was sorting the

deal tickets; the price was on the phone

from the bank; and straight through

processing (STP) consisted of the fax

machine. Today the three pillars of

superior execution – price, process and

STP – still exist, although perhaps in a

less obvious state.

As the FX business, the business practises

surrounding FX, and the technology we use

become more complex, balancing the pillars

becomes more than just a science. It also becomes

an art form. The science is easy to see from the

abstract: Superior_Execution = f(price, process,

stp). In English, that equation states that superior

execution is a function of price, process, and STP.

The art is balancing those to maximise the

resulting variable, Superior_Execution. Thinking of

superior execution as simply science has its

appeal: “Just do x and you’ll get y.” Reality is not

so kind. The philosophy of superior execution

requires a marriage of art and science. Paying

myopic attention to any one pillar is dangerous.

Price Myopia: The Siren’s Song

It is certainly tempting to succumb to the Siren’s

song of price. After all, price is easy to ‘see’ (it’s

right there in front of you); it’s auditable (you can

make a record of what you did and current market

conditions); and it’s the path of least resistance (the

internal audit folks like it.) It’s equally tempting to

say if one price is good, then two must be better, so

why not ten? Such a fixation on price allows the

less visible costs of information leakage to escape

our notice. Information leakage comes from asking

many market participants for a price on a large

amount of currency. Simply asking several

markets participants for a price can be enough to

shift the price against you even before you have

completed your trade.

As investment management consolidation

continues, the nominal amounts of currency traded

by buyside desks can increase commensurately.

Larger traded amounts mean potentially larger

information leakage costs. As an example,

consider $100MM in currency. Moving the market

by even one point through a competed price would

invisibly cost the manager $10,000.

Chip Lowry is head of Global Link Europe at State Street.

The Three Pillars ofSuperior Execution

Viewpoint is a column in e-Forex where we invite organisations, companies and individuals to comment on eFX

and FX trading issues. Please feel free to write to us with your own views on these contributions as well as suggestions for other topics.v

iew

poin

t


As far as the manager is concerned, however, he got

the best price of two, five, or ten prices requested. A

far more preferable method for such larger orders

would be to work quietly with one bank thus

minimising market impact.

Process Myopia: Form Over Substance

I have a general theory about organisations, which

states that people are very good at learning an

existing process – regardless of the complexity – but

very bad at changing it. This is a form of

organisational amnesia where we forget why we do

something and only remember that we do something.

Ask why a particular process is used and you may get

the response “because we’ve always done it that

way.” If a process works and the job gets done there

may be little impetus to reengineer the process.

Inefficiencies remain invisible. Opportunity costs

remain invisible. The impact however is very real.

Despite advances in trading technology, process

design, and market understanding, many managers

continue to trade using the electronic equivalent of

separating trade tickets into currency piles. They

ignore the advantages of currency and cross-

currency netting. The advantages of netting derive

from having an overview of your trading positions

across currencies before you ask for a price.

Understanding your net and aggregated positions

reduces the amount of currency you need to trade.

Trading less, both in terms of number of trades and

amount of currency traded, reduces your trading

costs. As the FX market innovates, we need to stand

ready to re-examine and re-invent our processes.

STP Myopia: Technologia Gratia Technolgiae

Back in the late 1980s, I was among those predicting

the death of big iron as networked PCs would take

over the world.

So when I hear of the impending death of the

telephone’s role in the FX market, I find it interesting

to note that IBM recently sold its strained PC business

while its mainframe business continues at a robust

pace. Similarly, as I look around at the piles of paper

in my office, I recall the predictions of the paperless

office to come. Godot will arrive first.

Fundamentally, institutional FX is still relationship

driven regardless of the predictions to the contrary.

Slick technology can not replace personal contact

and the advantages of market colour garnered from

conversations between client and bank.

Technology is vitally important to our business. But

when I see people substituting a good business

process for a lesser one so that it can be handled by

existing technology, I wonder if we’re just pursuing

technology for technology’s sake. What we need is

not for technology to trump good business practices,

but rather for technology to expand to handle our

business practices.

The positive news is that there are signs of progress

in this area. The FIX protocol organisation has

recently elevated its FX working group to full

committee status. Also FIX, TWIST, and ISDA have

recently announced that they will cooperate on

common standards to support FX workflow

enhancements.

Escaping these myopias requires a keen eye. When

examining the three pillars of price, process and STP,

it is clear that one size does not fit all. Each

investment manager’s circumstances are different

and continually evolving. The key to superior

execution is not in the three pillars, per se, it is in the

people who know the art and the science of how the

pillars work together.

� There seems to be so much research available it’s

becoming difficult to differentiate between one service

and other. What should we look for in our choice of online

FX research provider?

It is true that there has been a huge expansion in the amount

and type of FX research available online (and by other

electronic media), as the internet opens up the potential to

deliver more research to a broader customer base. However,

the internet also provides the opportunity to target research

more specifically to individual customers needs, and some

research providers are now starting to utilise this potential.

This has certainly been the approach adopted by BNP

Paribas, where the FX Dealer Portal allows the customer to

select and filter the FX Strategy research they require,

ensuring that the research they receive is the research they

need. Also customers can request the format in which they

receive the research.

� How easy is it for us to get a tailored FX research offeringas opposed to being overloaded with lots of “tradeinformation” which we didn’t ask for and don’t really need?

One of the major advantages of web based research is that itopens the opportunity to provide customers with tailor maderesearch. Indeed, the ability to select specific aspects ofresearch from the broad range on offer is a powerful tool andone that is being made increasingly available to customers. Thisis one area where BNP Paribas FX Strategy has put a lot ofemphasis. Indeed, the BNP Paribas FX Strategy product is nowfully web based which enables the customer to tailor make theirown e-mail alerts, which are sent directly from the website. Thisensures that the research the customer receives is relevant andtimely. Customisation of web pages is also becoming widelyavailable and is a major part of the functionality within the BNPParibas Global Markets portal, which provides cross marketresearch capabilities, also covering bond, interest rate andcredit markets in addition to FX.


Thee-Forex SurgeryOnline FX Research & Analytics

With Ian Stannard,Senior CurrencyStrategist at BNP Paribas.


� We are a Fund manager looking for fairly short term, live,research content coupled with very specific tradingstrategies. Do any FX providers offer this degree ofcustomised product?

The internet provides the delivery channel making liveinteractive research and content possible to a broadercustomer base. Services which had previously only beenavailable internally to banks' traders are now becoming morewidely available to individual external customers. Many FXproviders are now providing the ability for customers to carryout their own research with the provider's proprietary toolsrunning live over the internet. BNP Paribas for exampleprovides access to live comments from its strategists 24hours a day, including specific trading strategies andrecommendations. The live daily trading strategies with P/Land full track record is one of the most visited sections of theBNP Paribas FX Dealer Portal. Live technical trading modelsand charting tools are also provided, along with acomprehensive range of quantitative models.

� We would like to get more cross-asset class researchinformation and economic data, particularly correlationanalysis of FX rates against other markets, to help us withour FX investment strategies. Are there any cross-assetclass analytical tools available to help us achieve this?

Cross-market analysis is also far more available now asglobal markets are seen as becoming increasingly integrated.This is particularly true of foreign exchange as activity in fixedincome, equity and commodity markets have a significantimpact on FX. Many research providers offer research fromacross different asset classes. At BNP Paribas not only are fullcross market research capabilities provided by the newGlobal Markets Portal, relevant research and analytical toolsfrom other asset classes are incorporated directly in to the FXPortal. The BNP Paribas Cross Market Overview available onthe FX Dealer Portal is proving a highly popular referencetool. Also customers have direct access to BNP Paribas'comprehensive databases enabling quantitative analysis ofFX, bond, interest rate and equity markets, including crossasset class correlation studies.

� As a hedge fund that treats FX options as an asset class,we have a growing need for sophisticated analyticalrequirements on currency derivatives. What sort offunctionality can online research products offer us for ourOption strategies?

Online option research is one of the most rapidly growingareas, where in addition to live option volatilities, the tools toprice and analyse increasingly sophisticated tradingstrategies are now becoming available. BNP Paribas alsomakes available its database of option market data, includingvolatilities and risk reversals so customers can perform theirown analysis, in addition to option market analysis andtrading ideas from BNP Paribas' strategists. Research onother structured FX products are also provided on BNPParibas' FX Dealer Portal.

� Are there any advantages in looking to one portal orwebsite for a comprehensive suite of FX research offeringssuch as valuation tools, currency forecasting, traderecommendations and strategic advice etc or would it bebetter to seek bespoke offerings from different providers?

Although online research is now becoming more tailored tothe individual user, making it more practical to manageresearch from multiple sources, many customers are still likelyto find there is little incentive to switch between websites. Soproviding comprehensive online FX research is essential, notonly to provide a service for customers using a single source,but also to be able to provide a bespoke research service.Customers are in the driving seat and are likely to becomeincreasingly specific in requesting the research they requireand the way in which they want it delivered.

� We are interested in FX Indices. Are there any bankgenerated Indices available online?

Many banks now produce their own FX Indices, mainly forbenchmarking and analytical purposes, covering a wholerange of different currencies (areas) and other factorsimpacting foreign exchange markets. BNP Paribas GlobalBias Indices, which track relative strength among a group ofselected currencies are extremely popular and the BNPParibas FX Funds Index has also been attracting significantattention recently. This particular index tracks theperformance of systematically based FX hedge funds andCTA's and provides an insight in to market positioningamong this investor group.

� We are keen to develop our own FX trading strategies.What sort of online analytical tools are now available toassist us to do this and do any allow us to test our ideas?

Technical analysis packages are now being made widelyavailable online to help technical traders. While many ofthese are off the shelf packages, BNP Paribas FX Strategyhas designed and built its own comprehensive technicalanalysis tools to meet the needs of its customers. Thisproduct has been designed by technical traders for technicaltraders and allows customers to carry out live technicalanalysis, using all the major technical tools.

� As we work with trading models we rely oncomprehensive and reliable sources of real-time marketinformation to assist us with our high frequency tradingneeds. What types of FX research are now beingdelivered on a real-time basis?

One of the advantages of online research is the ability todeliver live real time research to the customer. As well as liveprices, most FX research providers also make available livecommentary from their FX Strategists, especially afterimportant data releases and events. In addition BNP Paribas'FX Dealer Portal also provides live technical trading modelswith tailor made alerts when new signals are triggered,allowing management of trading positions.

� How easy is it to gain access to the research tools on yourown FX Dealer portal and do you have to trade with BNPto use these services?

Access to the FX Dealer portal is restricted to customers ofBNP Paribas, but is available to customers through out BNPParibas Fixed Income, with access via the broader crossmarket Global Markets portal. Similarly, FX customers alsohave access to BNP Paribas' Credit, Interest Rate and BondPortals, with all customers having direct access to BNPParibas powerful cross-market analytical tools.


During the last year, we’ve consistentlybeen reporting on rising e-volumes. Howmuch would you attribute this tocustomers who are already using the e-channel increasing the proportion of tradesthey execute electronically as opposed tothe arrival of new clients adopting eFX?

Severn: At Standard Chartered we’ve seena combination of both. Our experienceshows that existing customers areincreasing their volumes across a range ofe-channels and this is indicative both of anincrease in the proportion of volume dealtonline as well as rising absolute volumes.However, in addition to this, we have seensignificant growth in the take-up of e-channels among new customers; as well asin new geographies as we have expandedour eBusiness footprint.

Brittan: The growth in eFX is clearly fuelledby existing participants becoming morecomfortable with transacting a largerpercentage of their total businesselectronically and by new entrants to themarketplace. The latter include firms whichhave traditionally transacted FX over thephone who are now trying out electronicplatforms for the first time plus new entrantsto the FX market, particularly hedge fundswho are attracted by the recent focus on FXas an asset class in its own right.

eFX volume is also driven by increases inthe breadth of product supported byplatforms and of course by the tremendousgrowth in the underlying FX market itself.

Best: I would attribute it to both. We’veseen real growth in the adoption ofeTrading from existing customers. Thisincludes retail, corporate and institutionalclients. Improved performance is a bigdriver for retail (CTA, small hedge fund)and institutional customers. Operationalefficiencies and better pricing are some ofthe benefits that corporate customers areaiming for. At the same time, there has been an increase in the amount ofbusiness being done by existing eTradingcustomers. This has been due, in part, tothe natural increase in FX volumes wehave experienced this year.

Warms: New clients continue to flock toonline FX trading as its benefits, from bestexecution to control and compliance,become clear. Our delivery of additionalfunctionality aimed at particular clientsegments - such as tools to streamlinetrading and workflow for the world’slargest asset managers – has also broughtnew clients on board. At the same time, aswe extend our offering, our existing clientsare increasing the proportion of theirbusiness they trade online.

Once a customer has integrated to FXall,they typically trade most or all of theirvolumes online.

Leskinen: The clear trend has been that the new clients require distributionelectronically. The growth in e-FX volumesby both volume and number oftransactions is more based on new clientsentering the FX market than the growth ofthe existing e-clients.

Baseliers: This rise is primarily attributableto business originating from new eFX users.Existing users are already trading arelatively large portion of their businessthrough e-channels. This development isfurther reinforced by the fact that usingelectronic, efficient channels, we are able toremain more than competitive in terms ofpricing. Increasing our e-offering helps usexpand our user community into clientsegments that were previously not covered.

Some argue the eFX market hasn’t yetundergone consolidation because of thearrival of a new community of investors,actively trading FX, each with uniquetrading needs, which is fuelling the growthof eFX by providing more customers forthe platforms to target. Do you go alongwith that and would you expect the ranksof electronic trading service providers tocontinue to expand as a result?

The e-Forex Roundtablee-FX : catering for the needs of a new generation of clientsWith Martin Severn, Global Head of E-Sales, Global Markets at Standard Chartered Bank, Philip Brittan, Global Head of FX atBloomberg, Stephen Best, Managing Director, Head of eCommerce, Global Currency & Commodities Group at J.P. Morgan,Mark Warms, General Manager for Europe at FXall, Seppo Leskinen, Head of Foreign Exchange at SEB Merchant Bank and MarcBaseliers, Senior Sales Advisor, e-Commere, Rabobank International, Global Financial Markets.

Philip Brittan

Martin Severn

Stephen Best


Severn: I think that there is currently

sufficient volume and demand for

eBusiness solutions to sustain a wide

range of providers. As the e-FX markets

begin to mature, providers have realised

that success will not necessarily be

attained by being generalists. The

increased specialisation amongst e-

platforms is evidence that catering to

specific market segments or niches is

viewed as the best way forward. A

combination of this specialisation, as well

as increased volumes from new and

existing investor communities, will ensure

that opportunities for a broad range of

providers will continue to exist. What we

will see over time however is consolidation

between those platforms where there is

significant overlap with competitors and

where liquidity is seen as too fragmented.

Brittan: The eFX market is still in its

infancy. The growth of volume transacted

electronically has been phenomenal and it

will continue to grow for some time. There

is a lot of room in this market. And it is the

growth in the market that has supported,

up until now, the relatively large number of

electronic platforms, even platforms

whose business models will not survive in

the long run. There are several different

types of customers with somewhat

different needs, however in the longer run

some of those differences will disappear as

the market realizes that the value has

vanished from the bid/ask spread and as

banks rein in the liquidity mirage and limit

the range of trading styles they are willing

to support.

Best: Consolidation takes time. The social

issues, in large part, determine if deals get

done (who is in charge? Where is the head

office? Whose technology? Etc.) There has

been a significant amount of new volume

over the past several months, but there are

now fairly steep barriers to entry for new

platforms. The new volume is coming from

fewer participants than one might think. It

is also necessary to have a business model

that keeps the cost of client acquisition in

check, which is not easy.

Warms: It’s true that FX requirements vary

from sector to sector. But there are certain

demands that are common to all

institutional clients – deep markets, tight

prices, speed of execution, comprehensive

currency and instrument coverage, robust

technology and round-the-clock support.

These requirements can only be met by a

global, industrial-strength solution with

the critical mass to invest in technology

and services. Niche providers, who focus

on providing a narrow range of services to

a particular geography or client segment,

have found it difficult to deliver this level of

service for institutional clients.

Leskinen: The consolidation is happening

already and it looks very unlikely that a

totally new ecn would be able to break into

this space with a major volume. The

exsiting providers are busy trying to

accommodate the various client needs.

However some providers seem to focus to

their strengths and become more

specialised providers.

Baseliers: We have a slightly differentvision in that we expect future trends tofavour initiatives that either:

• meet a niche requirement, or• increase efficiency / ease-of-use

With pricing not being a key differentiatoranymore, the client’s focus is shiftingtowards added-value in other areas, likeTreasury Control, Risk Management, andefficiency.

What’s likely to influence clients with moresophisticated trading requirements in theirchoice of online FX provider? Is it mainlygoing to revolve around pure technologycapabilities, pricing mechanisms on offerand speed of execution etc or will theprovision of value-added services such asadvice and consulting start to become animportant factor?

Severn: It is Standard Chartered’s view thatservice will continue to be paramount evenas e-FX technology develops andfunctionality improves. As FX becomes an increasingly commoditised product,sophisticated e-platforms will be taken forgranted and it will be the value addedservice that will differentiate banks, ratherthan their technology.

Brittan: It will continue to be a combinationof factors. Speed of execution and stabilityof the platform will remain importantfactors. As customers grow morecomfortable with transacting electronically,breadth of product coverage, includingoptions and cross-asset-class trading, will become increasingly important.Sophisticated post-trade trade-routing andallocation capabilities will rapidly become“must-have” features.

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Seppo LeskinenMark Warms

Marc Baseliers


Pre-trade analytical support will alsobecome increasingly important. And in thelong run, value-added services will be vital.As pointed out in the next question below,FX is a relationship business and the valueis driven foremost from that relationship.Banks that recognize this and are able tointegrate their Sales desks mostthoroughly and effectively into their e-commerce initiatives will see the biggestgrowth in electronic trading.

Best: It depends largely on the type ofclient. Retail aggregators will be focusedon providing price and research/technicaltools. STP and operational efficiencies, as well as price are important toinstitutional investors and corporates. Newsophisticated clients will want APIconnectivity, system performance data,speed of execution and notification, andalgorithmic trading advice.

Warms: We find that clients across allmarket segments have gone beyondpricing and execution when it comes tochoosing an online FX provider. For hedgefunds and other active traders, deepmarkets, tight prices and speed ofexecution are certainly important. However, equally important is automatingthe full deal lifecycle – by streamliningcumbersome manual processes such assettlement instructions, confirmations andprime brokerage messaging, hedge fundscan reduce operational risk and enhanceproductivity. Active traders are looking formore than just spot trading in a handful ofcurrency pairs – they want the broadestpossible coverage of currency pairs, as wellas built-in control and compliance features.

Leskinen: We offer two types of services:transaction business and advisory. Theyboth have their own requirements andnaturally the transaction service is underconstant demand to improve latency,stability and flexibility to the clients ownindividual requirements. The advisorybusiness with consulting, capitalintroduction is getting more important towin the relationships. Important questionis how banks price this service as e-FX haslead to spread compression.

Baseliers: Some five years ago, RabobankInternational has adopted a so-calledbusiness-cycle approach. This strategyrevolves around the daily recurringactivities performed within our clients’Treasury departments and defines howand where the Bank can assist by providingthe proper tools. This full circle supportmethodology has led us to develop a Portalrather than a sole trading platform.

In this Portal, Market Information (Rates, News, Research) and Reporting/Reconciliation Tools are flanking ourTransaction Services, creating a completespectrum of eServices, much broader thanjust Trading.

FX has traditionally been seen as arelationship service. Is that likely to change in any way with the arrival of some clients who may be looking toexploit inefficiencies rather than seekrelationships?

Severn: I think that liquidity providers to e-FX platforms will increasingly have tomake decisions regarding the type ofbusiness that they wish to transact overthose platforms. Until recently, manybanks have been trying to attract volumeover e-channels without too much concernas to the quality of the business. This hasperhaps been a natural tendency as bankshave made significant investments in e-technology and wish to capture marketshare and generate returns as quickly aspossible. However, as the market matures,banks are beginning to step back and areplacing more emphasis on quality ratherthan quantity. We have also seen certainthird-party platform providers begin totake steps to improve the quality ofbusiness transacted on their systems andto use these measures to reassure liquidityproviders and therefore increase theirperceived value. It is banks with this viewpoint who will place a greater emphasis onpromoting an FX service based aroundrelationships.

Brittan: No, that is not likely to change.Every market has clients who are lookingto exploit inefficiencies.

These arbitrageurs ensure that the marketis as efficient as possible. However, theycannot change the fundamentalrelationship-driven nature of the FXmarket. Banks are becoming increasinglyemboldened to turn away business that isnot strategic to them and will continue todo so. For many banks, FX is a loss-leaderbusiness that they provide primarily as away of adding value for clients for whomthose banks also issue debt or provideprime brokerage or advisory services, forinstance. As the market returns to itsrelationship-driven roots, only thoseelectronic platforms that support thatrelationship will last. Platforms that seek todisintermediate banks from theircustomers will in time be abandoned.There is no value for banks to provide loss-leading liquidity to a platform when theyreceive none of the benefits of the clientrelationship in return.

Best: For us, it will always be aboutrelationship. The definition of exploitation,however, has changed over the last fewyears. What would have been consideredbad form in the past, may be standardpractise today. At the end of the day, if oneis being exploited, then you don’t reallyhave a healthy client relationship and itwould be best to walk away.

Warms: Foreign exchange is and willcontinue to be a relationship-drivenbusiness. Market makers are providing themost liquidity to relationship-basedservices, where they have the widest rangeof customers and benefit from non-correlated flow.

The e-Forex Roundtable

While there is certainly room for bothanonymous and relationship models in themarketplace, it is the relationship-basedtrading venues that get the deepestliquidity and best prices from banks. FXallhas benefited from an upsurge in take-upfrom hedge funds attracted by this deepliquidity and tight prices.

Leskinen: Already with the arrival of onlineforeign exchange the relationship changeddramatically. The relationship service isstill important but different.

Baseliers: Rabobank’s policy is aimed atcreating and sustaining long-termrelationships with clients. However, due tothe increased transparency offered byelectronic distribution combined with theperceived anonymity of electronic trading,some buy side participants might betempted to engage in this type of activities.This will be very hard to judge from a sellside perspective.

Can clients who are now beginning to useeFX, but typically trading lower volumesand relatively infrequently, such ascorporate treasurers, expect to gain anybenefits from the improvements providersare making to their eFX offerings to caterfor the trading requirements of other, moreprofessional, active traders?

Severn: As with many other technologies,development made initially to cater to themore sophisticated end of the market willalmost certainly have benefits to otherparticipants over time.

Increasingly efficient, reliable androbust platforms will benefit all users.Functional improvements which may havebeen too expensive to develop for thecorporate treasurer community will beavailable due to their development for thehigher volume end of the market. E-Platforms which allow an increasingrange of products to be transacted quicklyand efficiently, with great transparency,may, over time, encourage a greaterdegree of sophistication from smallerclients. With regard to Standard Chartered,our focus on emerging markets oftennecessitates specialist functionality that isoften aimed at the corporate treasurerrather than the volume trader.

Brittan: Pricing, platform stability, STP, andanalytical improvements will all benefitcorporate treasurers. There is somediscussion in the industry that platformswhich allow buy-side customers to posttheir own prices, to trade inside the spread,and anonymity will all be of interest tosome corporates, but we believe this willbe extremely limited. Corporate treasurersreceive a high level of service from theirbanks because of the overall relationshipthey have with those banks. Anonymityremoves that, in exchange for dubiousbenefits. And the risks associated withposting a 56 bid on a platform in the hopesof doing better than the 57 offered by thebank and then watching the market runaway to 58, 59, 60… are too high forcorporates and other infrequent users ofFX, for whom FX is a hedging andoperational exercise and not a core part oftheir business. All participants in themarket are looking for ways to streamline,especially for small size trades, whichbanks increasingly want to automate.

Improved platform stability, pricingengines, and STP capabilities allow for thatstreamlining/automation.

Best: Many improvements benefit all typesof clients as well as both buy side and sellside. STP and operational efficienciesdecrease errors and losses for marketparticipants. The ability to provide tightpricing increases volumes, liquidity andthe efficiency of FX markets. Theautomation of low frequency, low volumebusiness, allows banks to provide it to thisclient base in a manner that isn’t cost prohibitive.

Warms: The trading requirements ofdifferent client segments do overlap tosome extent, and we often find thatservices designed for one group can beadapted for others – the diversity of ourclient base means that we offer anunparalleled breadth of services, fromwhich all our clients benefit. That said, itwould be misguided to assume that byfocusing on the needs of one sector youcan build a solution that appeals to clientsacross the market. Corporates, forexample, need specific control andcompliance features that enable them to adhere to the Sarbanes Oxleyrequirements. To be successful, you needto identify the needs of participants fromall market segments and develop servicesto meet them. We are constantly workingwith our clients across the institutionalforeign exchange market to develop newtools and services to meet their evolvingrequirements.

Leskinen: Naturally. The whole business isgetting access to the transparent and morecompetitive pricing.

Baseliers: Yes, we think so. Typically wesee a trend in the client pyramid in whichthe level of knowledge and sophisticationand the resulting need for certain toolsmove downward. This trend acceleratesthe development and roll-out of highprofile eFX solutions to new audiences,enabling these market segments to matureat a more rapid pace. The sell side and thetechnology providers are challenged tosupply these needs in a pro-active manner.

Many FX providers are now customizingtheir business models to serve segmentedmarkets such as hedge funds and retailcustomers. Is there a downside associatedwith this strategy or will eFX platforms thatprovide functionality focusing on oneparticular client segment be assured ofgaining competitive advantages fromdeveloping a speciality?


>>>

Severn: I am sure that the strategy ofserving specific market segments withspecific products is the right one, althoughI don’t think that this strategy in itself willnecessarily ensure success. It may verywell depend on which client segment andhow specialised a system needs to be tocater to the particular needs of thatsegment. Systems aimed at clientsegments which require less in the way ofspecialist technology may not succeed ifthe additional costs of that systemoutweigh the benefits. Generalist platformproviders who can make relatively minorchanges to their systems and cater for 80%of a segments’ needs are likely to have adistinct cost advantage.

Brittan: In these early days of the eFXmarket, platforms can survive based onspecialization. However, in the longer termbreadth of product will becomeincreasingly important and we willinevitably see consolidation in the marketwhich will combine the best practices ofsegment specialists into broader one-stop-shop offerings.

Best: An important reality of financialmarkets in general, and FX in particular, ischange. Whatever functionality is provided,it is in the best interests of providers to have an open, flexible architecture and theability to tweak business models as marketconditions require.

Warms: There are service providers thathave had some success in focusing on aparticular niche. At the same time, beingtoo narrowly focused, or having too smalla base of support, can limit growth. Atleast one high-profile online trading portalhas gone out of business simply because itdid not have the critical mass to continue.Providers are starting to realize thatfocusing exclusively on a single clientsegment – such as the cyclical hedge fundmarket – leaves them vulnerable to marketdownturns or changes in trading activityamong their target client base. What’smore, niche providers often struggle todeliver the robust infrastructure andtwenty-four hour support demanded byinstitutional clients. FXall has developed acomprehensive solution that meets therequirements of clients across theinstitutional foreign exchange markets.The breadth of our offering has notstopped us from establishing a market-leading position across all the segmentswe target - on the contrary, it has given usthe critical mass to continually invest in ourtechnology and services.

Leskinen: The further development andcustomization is good for the industry andwill be important to attract new foreignexchange players from the other assetclasses.

Baseliers: We consider this to be a positivedevelopment: there is a great diversity inclient needs and requirements on the buyside. Banks serving a wide range of clientsneed to adopt their strategies to meetthese needs. They can only be catered forwith tailored solutions.

Can you see the arrival of new clients withincreasingly diverse needs stimulatingplatforms to support a wider range ofproducts and if so what would you expectthese to be?

Severn: Yes, I can see this happening andthe products provided will depend upon theclient base of any particular provider.Development of online trading capabilitiesfor an increasing range of financialinstruments will definitely continue, butbanks will also look at deepening theservice for the products that they alreadyoffer and will increasingly need to focus onintegration at the buy-side as well as the on-going issue of desk-top real-estate as theplethora of available channels increases.

Brittan: Yes, platforms will naturallysupport a wider range of productsincluding derivative instruments andcross-asset-class trading.

Best: Yes. These would include an increasein functionality to support algorithmictrading, richer market data tools, and moretrade types within APIs.

Warms: From the outset, delivering thetools and services to meet diverse clientrequirements has been key to our success.Other e-FX providers are now starting torecognize the value of a diverse offering,and are trying to extend their capabilities.As the foreign exchange markets continueto evolve, and new clients make the switchto online trading, new instrument types arelikely to come to the fore.

Leskinen: The DMA concept of covering allthe asset classes from one “platform” orvia API is a clear example of a this type ofdevelopment.

Baseliers: Yes, we anticipate the next assetclass to be distributed via electronic platformsto be FX Options, followed by Interest RateSwaps. However, these will, certainly at theinitial stages, be limited to plain vanillaoptions and standard IRSes only. We alsoforesee a defensive attitude from the sell sidein this particular area caused by the increasedrisks and tighter risk managementrequirements around these products.

Recent eFX platform development has metthe needs of new clients by theincorporation of streaming execution andprime brokerage requirements, bothessential for most fund managers. Lookingto the near future, where do you expect thenext round of eFX platform innovation tobe focused?

Severn: Standard Chartered will continueto focus on providing specialistfunctionality and services to meet theneeds of customers in regulated markets.Generally, product coverage will continueto expand and some existing functionalitywill become more mainstream; forexample vanilla options and interest rateproducts. Banks are also focusing on theirinternal systems; such as bettermanagement of risk from auto-pricing andthe issue of trader real-estate. In addition,a lot of recent development has centredaround G7 capabilities and we are likely tosee future development which leveragesemerging market expertise.

Brittan: The next round of eFX platforminnovation will include expansion of thebreadth of products supported, cross-asset-class trading, and more sophisticated pre-and post-trade analytics integrated into thetrading environment. We will also seeplatforms become friendlier to bank Salesdesks, which will allow banks to align theinterests of their Sales and E-commercedepartments and gain value and customergrowth through their increased cooperation.

Best: Algorithmic trading, consolidatedliquidity views, more sophisticated modeltrading.

Warms: Innovation in e-FX platforms willremain focused where it has always beenfocused – on equipping clients with thetools and services they need to operateeffectively in the global foreign exchangemarkets. Currently, we’re seeing anincreasing interest from clients inachieving best execution, tighteninginternal controls, and complying withcorporate governance and accountingstandards – areas that have long been afocus for FXall. We will keep listening toour clients and it is their demands that willdrive future developments.

Leskinen: One of the main focuses is on themulti asset online execution based onstreaming execution. This combined togetherwith a real time multi asset prime brokeroffering completes the complete offering.

Baseliers: The focus will shift away frompure trading facilitation to efficiency drivenand more added value generating meansfor both buy and sell side:

• full circle STP with back-office to back-office integration

• unattended execution of small amountsagainst predefined conditions

• ultimate transparancy and control

• benchmarking and revaluation (also inthe light of IAS)

The e-Forex Roundtable



The increased move by the Forex markets to a real-time trading environmentmeans that there is a new urgency to address the risks associated with data latencyamongst the bank participants. Fortunately, new technical solutions exist enablingthe problem to be effectively addressed.

Data latency has become a critical issue for the

banking industry. The evolution of electronic trading

is seeing Executable Streaming Rates increasingly

replace Request For Quote (RFQ) transaction models.

Executable Streaming Rates (ESR) enable clients to

deal with a single click on live rates which are updated

in real-time, rather than requesting to deal on a rate

which was made ‘good’ for a period of time and

may be old.

The shift is from a trading environment in which rate

data reflects an historical position (albeit one which is

just one or two seconds old), to one where rate data

reflects current positions.

For market-making banks serious about remaining at

the forefront in the provision of forex trading services

dealing in an ESR marketplace means it is imperative

that they have the ability to provide true executable

Data Latency –Why Speed is ofthe Essence

e F X & L A T E N C Y

by Sean O’Donnell, RealStreamProduct Director at Cognotec


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streaming prices, i.e. ones designed around a push-pricing

model, rather than using an RFQ designed pricing engine to

simply replicate prices more quickly thereby simulating

streaming prices which on execution may not be dealable.

Reducing latency between price publication and execution

enables the market making bank to reflect an accurate picture

of its trading position. As a result of this the trading desk is able

to publish prices that more accurately reflect its market

position, enabling it to maintain its profit margins. On the buy

side, the client sees quality pricing and is able to deal on the

rate that they see. In this more transparent market, where less

defensive spreads are required to protect the bank against ‘off

market’ prices, clients are more likely to get the best price for

the volumes they want to deal on.

ESR trading

This new environment offers many positive opportunities for

both banks and end-users, however it is extremely fast moving,

and increased price transparency has lead to a narrowing of

spreads as banks find they need to be increasingly competitive

in order to get the deal. In addition, there is now a multiplicity

of trading channels (proprietary online channels, multi-bank

portals, ecn’s and black box API’s etc) through which the client

can access their bank – and prices from competitors.

“clients are more likely to get the best price for the volumes they

want to deal on”

Bank risk management in this environment must be more

responsive to the needs of the trading desk. Latency, and the

speed or slowness with which information is transported and

updated, is key to many of these risks. For instance,

arbitrageurs are more likely to be using algorithmic models

which respond to price anomalies much more quickly than a

human being can intervene to adjust prices.

In addition, narrower spreads increase the cost to the bank of

prices being ‘off market’ – a risk which is exacerbated if the

bank is dependent on an RFQ-based pricing model. Finally,

instantaneous price updates can only aid transparency if they

are accurate – faulty prices can engender a sense of false

security on the trading desk, and the inherent risk of taking a

particular position is increased as a result. Finally, there is the

business risk that, within a multi-bank trading environment,

deals can be lost to banks quoting more competitive prices

more quickly.

The trading cycle

Linked to the above risks there are further outcomes associated

with time lags which affect other areas of the trading cycle. Put

simply, faster data delivery can only positively impact on

shortening transaction times if other areas of the trading cycle

are modernised to allow it.

For instance, credit checks can slow down deal execution if a

check is to be made through to the bank’s back office systems.


Solutions now exist which bring

credit checks closer to the user-level

which in turn speeds acceptance on deals

and avoids post-trade errors. In addition by automatically

reducing the deal volume for a time period post

execution, selectively by currency pair, period, channel

and client, the bank can have a greater level of control.

Real-time notification and ‘hit protection’ help the trading

desk to increase their deal flow in a controlled manner

while maintaining a true picture of its position.

The solution

As stated above, a true ‘push-pricing’ engine in which

prices are refreshed instantaneously rather than as a

result of a client request is the foundation for an effective

technical solution to the problem of data latency. With

push-pricing, the possibility that published prices are

dead and no longer tradable is vastly reduced. For this

reason pricing engines that solely work on an

RFQ basis are no longer adequate in

the current trading environment.

Secondly, to reiterate the

points about the impact

of latency on the trading

cycle made above,

moving transaction

processes such as

credit checking and

notification closer to the

client level and out of the

back office enables overall

transaction times to be reduced

and the whole trading cycle to

become more efficient.

In addition, the number of end-users has effectively

grown exponentially because existing clients may be

accessing the trading desk via more than one trading

channel. Therefore a solution which is easily scalable

and can be quickly pushed out to hundreds or even

thousands of end users is required.

“The forex trading environment ischanging and banks need to invest

in technical tools”

Further, the ability to tailor prices according to individual

clients, groups of clients and how that client is trading

(via proprietary channels or multi-bank portal for

instance) ensures that end-users will receive the most

competitive prices wherever and whenever they want

to trade.

The forex trading environment is changing and banks

need to invest in technical tools which are specifically

designed to meet the demands of near-real-time trading.

In order to build an effective business model around

delivering executable streaming rates – and meet client

demands for prices which display the tightest margins

and are guaranteed to be tradable - banks have to be

able to distribute real-time customisable prices across a

multiplicity of trading channels. More

importantly, in terms of their own

risk management, banks have

to be able to rely on these

prices and their efficient

delivery in order to

retain a true picture of

the bank’s position in

the market and

eradicate the need

for defensive pricing.

These are essential

requirements to the

competitiveness of the

forex trading desk.

Business is already being lost by

some banks to competitors who have made

this investment, and as comparative prices are

increasingly made available via the use of portals and

multiple screens the pace of competition is likely to

increase. However, efficiency of delivery and execution

has to be matched by effective risk-management tools if

banks are to compete profitably in a more transparent

trading environment.

Data Latency – Why Speed is of the Essence

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Introduction

With a continuing investment in developing

enhanced technology, Currenex – a leading

multibank FX trading platform – has focused on what

is one of the most vital aspects of today’s online

trading: SPEED. In migrating to a Linux open source

environment they have established a competitive

advantage in what they believe is a crucial facet of

future success.

Currenex seeks to maintain a technological edge

amongst FX trading platforms, knowing full well that

such a determination could be the difference between

feast and famine in the increasingly competitive FX

arena. Currently, the growing adoption of electronic

trading in FX is following the same course set by

equities, derivatives and fixed income. However, the

fact is much of what passes for “electronic trading” in

FX is relatively unsophisticated and unsustainable.

Other market experiences demonstrate that the

quality of technology becomes the key determinant of

which trading platforms flourish and which collapse

during the period of inevitable consolidation. FX will

be no different. With that in mind, Currenex’s

technology focus has been on reducing latency to an

absolute minimum. An important aspect of

Currenex’s quest for limiting latency has been the

migration to a faster Linux operating system.

The Importance of Speed

To understand the motivation behind the migration isto understand the overall importance of speed as itpertains to the challenges of execution in FX. RFQ(Request For Quote) and RFS (Request for Streams)workflow emulates trading over the phone, and therewas less need to focus on latency when this was thedominant mode of trading FX. With the emergenceof ESP (Executable Streaming Pricing), e-FX hasevolved due to the fact that this mode of trading isdecidedly faster than RFQ. The ESP model isextremely time sensitive.

For streaming rates, the two forces driving FXplatform success are access to liquidity and speed(low latency). A customer will look for thedestination where there is the best chance of gettingexecuted; in other words the ECN with the deepestand tightest order book. However, speed is anequally important decision factor when choosingwhere to route an order. In particular, low latencytechnologies provide market participants with themost efficient executions (i.e. lower cost of execution,less slippage, etc.). In contrast, high latency systemscause poor execution, slippage, and allow for the“picking off” of market makers (i.e. banks). As aresult, market participants – whether they are banksor buy side firms – will migrate to platforms withgood initial liquidity and low latency. Put simply,volume will go to the fastest.

For example, a trader might wish to execute a fill orkill order. Due to latency, in a fast moving market withmultiple ECNs available, the trader doesn’t actuallyknow the exact liquidity available at a given instant ateach destination. In reality, the trader only has anapproximation of the available liquidity based onmarket data. The accuracy of the approximation isinversely proportional to the time it takes to receivethe market data plus the time it takes to submit anorder to the ECN. Therefore the trader needs to makea strategic decision about which ECN should receivethe order first. By reducing the “opportunity cost”(i.e. time) that a trader takes in routing an order, thedestination with the lowest latency has an edge. It isthis competitive advantage that Currenex has created.

Faster Boxes

Currenex:Tackling the Latency Issuee-Forex asks Sean Gilman, Chief Technology Officer at Currenexto tell us how they are tackling the problems of latency.


Sean Gilman


Faster Boxes

In 2003 Currenex entered into a strategic relationship withHewlett Packard to design and develop the optimal systemsenvironment for low latency FX trading. As a result of this jointeffort, Currenex has been able to reduce the execution latencyto levels of less than 10ms, and this effort continues with thegoal of reducing execution time to the microsecond (sub-millisecond) level.

Continuing the partnership with HP, Currenex has migrated itssystem to a Linux environment, running on Intel Xeon andAMD Opteron processors, to achieve greater speed. Beforemaking the decision to move to Linux, Currenex built a testsuite to measure the benefits. “We built tools to measure eachstep of the order execution process and have used thatinformation to locate and streamline processing bottlenecks,”says Currenex chief technology officer Sean Gilman. “Whenwe were done, we saw a 75% reduction in processing latencyand three fold increase in maximum throughput.” Lookingahead, Currenex plans to perpetuate the benefits of thisprocess as it continues to develop. “We chose Linux becauseof the performance/cost curve,” adds Gilman. “We plan torefresh our hardware every six months and stay on the fastestboxes money can buy.

Practical Benefits of Speed

The focus on speed allows Currenex to overcome some of theobstacles inherent to online trading. In the process ofconnecting banks with their customers, the Currenex platformprocesses approximately five thousand spot orders persecond. Additionally, each order can have its own options(partial fills, stop-loss, take profit, etc.) which makes theprocess more complex. Further, the sorting of the order bookneeds to be “atomic”, meaning the work can’t be split betweenmultiple processors or threads because that could createinconsistencies. This is a particularly computation intensivepart of the system that Currenex has focused on acceleratingwith the upgrade to the faster Linux processors (see Figure 1).

The liquidity at a given ECN destination is constantly moving,causing the prices to change. If prices are updating every 50

milliseconds, any latency above 50 milliseconds can result insub-optimal execution. If a trader sends an order to a slow ECN,the market can have already moved before the trader evenknows if the trade has been executed. Even 50 milliseconds oflatency can cost a customer or market maker a couple of pips inexecution. “Our customers have an advantage with us becausethey have faster access to liquidity than their competitors,” saysGilman. “Instant access to these volatile markets makes adifference as to whether a trader makes money or chases themarket, therefore a key component in our superior executionperformance is, and will be, limiting latency.”

Better Trading

Reduced latency also means more effective blackbox modeltrading. With faster execution, black box traders willexperience less slippage in their models. Unlike theircompetitors, Currenex does not throttle customer orders,meaning there is virtually no limit to the amount of orders thatcan be entered per second over the platform. During typicaltraffic the Currenex matching engine handles about 5,000messages per second, and has experienced peaks of 11,000 persecond. The system has been tested in a controlledenvironment at 25,000 messages per second. Because thesystem is so fast, order-throttling techniques employed byother platforms are not necessary on Currenex.

Throttles drive liquidity away for the simple reason thatplatforms employing throttles will not keep up with a volatilemarket. Rejected orders will clearly mean less liquidity and lostopportunity. Furthermore, Currenex provides market updatesin real-time along with displays of market depth. By contrast,the leading interdealer system’s market data is only updatedevery _ second, which is, at best, merely indicative of themarket and not a reflection of prices that can be transacted.

Market makers garner benefits from reduced latency as well, asspeed will also contribute to a more balanced exchange. Aplatform like Currenex can ensure fairness to both sides sincespeed of execution can help banks avoid potentially harmfularbitrage situations.

Legacy of Innovation

Currenex builds, owns, and operates itsown technology and is focused onmaintaining its advantage bycontinuing to invest in technology andforeign exchange expertise. Theirassociation with HP and Linux has beenanother step in this process. Thanks toa technology advantage, Currenex haspositioned itself as the best platform formodel trading and the best for marketmaking, which subsequently results inunbeatable liquidity. Sustainedprofitability in FX – for the buy or sellside – requires a high-performancetrading platform that can capitalize on speed. Currenex has made this idea a reality.

Figure 1


Considering the size and liquidity ofthe market, and the number ofquantitative methods applied to it, itis perhaps ironic that FX has in somerespects been rather imperfectlyserved in terms of raw data.

Just as with any other market, foreign

exchange is populated by individuals and

organisations looking for an edge.

Whether they are trying to predict the

direction of a currency pair, arbitrage its

inefficiencies, or capture business for

their FX e-commerce platform, all these

entities are to some extent dependent

upon market data.

This data appetite has further expanded in

recent years as interest in areas such as

high frequency trading has grown.

Yet, despite this demand, definitive real-

time and historical data sources for FX

have not always been readily available.

For example, whilst very low latency real

time information has obviously been

visible through the trading interfaces of

primary FX markets, until comparatively

recently (with the launch of feeds such as

EBS Live) it has not been readily

accessible in a format that can be used for

other purposes, such as powering e-

commerce engines etc.

Real time speed, real time reward

A very low latency data feed provides a

significant edge in a number of highly

competitive areas, with FX e-commerce an

obvious case in point. In the future, banks

that try to skimp on the speed and

integrity of the feed powering their FX e-

commerce servers will find themselves

exposed. Furthermore, as the use of low

latency feeds and primary market access

spreads beyond the market making

community, these banks may even find

themselves increasingly vulnerable to the

buyside as well as their direct competitors.

A similar situation applies to FX arbitrage.

This has become an increasingly popular

activity among banks over the past few

years, as the risk profile of the arbitrage

business (which typically grinds out

consistent returns) looks particularly

attractive - especially when compared with

conventional proprietary trading activity.

However, FX arbitrage opportunities (even

outside the major pairs) tend to be short

lived, so those automated FX arbitrage

operations that adopt the lowest latency

price feeds will undoubtedly have the edge.

The need for speed also applies to a

trading style that has grown rapidly in

popularity over the past few years – high

frequency automated trading. Rather than

capturing arbitrage opportunities, this

attempts to capitalise on very short-term

directional moves lasting only a few

minutes, or perhaps even seconds.

Several thousand trades a day may be

involved, and in comparison with

traditional longer-term trend following

methods, the average profit per trade is

small. This makes it imperative that the

data feeding the automated trading

model has the minimum possible latency,


Andy Webb is a freelance journalist who regularly contributes to e-Forex.

Is it time to raise your game?

where any delay is measured in

milliseconds rather than seconds. If not,

the trading model will be delayed in

making its calculations and therefore late

in entering its trade orders. As a result, a

small average profit per trade can be

quickly and disproportionately eroded by

slippage of as little as one pip per order.

These considerations have not been lost

on the providers of such real time data,

who have responded by reducing the

latency and improving the granularity of

their feeds the EBS Live feed (which is

sourced from the activity on the EBS Spot

system) exhibits latency of less than 200

milliseconds and is delivered in 500

milliseconds time slices.

However, speed is not the only crucial

data requirement for highly automated FX

systems – when it comes to real time

data, cleanliness is also next to godliness.

While growth in electronic trading has

seen a commensurate improvement in

data quality, it still remains a mission

critical consideration. An undetected data

discrepancy that is fed to an automated

system (be it FX e-commerce, arbitrage

engine, or directional trading model) can

have catastrophic results.

Raising the bar internally

Although the advent of high quality,

minimal latency data feeds, such as EBS

Live, address the vital requirements

outlined above, they may also require

additional effort and investment on the

part of the user. Such feeds certainly have

the potential to confer a competitive edge

– but only if the user’s own internal

networks and systems are up to scratch.

Buying a super fast data feed, but then

plugging it into an internal network

clogged with non-critical traffic, is an

exercise in futility. By the same token, if

the system consuming the data is a sub-

optimal performer the real time data

investment will be wasted.

In some cases, banks and other financial

organisations have already fine-tuned

their automated systems to the nth

degree and have dedicated networks and

data platforms for mission critical data.

However, this isn’t always the case, with

smaller organisations in particular often

accommodating data and generic

business traffic (printing, file sharing etc)

on the same network.

Finally, there is the additional problem of

data creep. Like work, data appears to

follow Parkinson’s Law by expanding to

consume all available capacity. Last year’s

high-speed network can therefore quickly

become this year’s treacle. Preventing this

so that an investment in a minimal

latency feed is not wasted requires

vigilance in prioritising traffic, a

willingness to invest in new networks/

upgraded systems, or both.

Historical and real time dislocation

The explosion in electronic trading and

data capture across financial markets has

drastically reduced the problem of bad

ticks, or corrupt data points. (In an open

outcry environment this was often due to

keystroke error by the hard-pressed clerk

entering traded prices from a booth on the

exchange floor). As a result, there has been

an increasing demand for historical data for

trading model development and testing.

However, unlike many other markets,

foreign exchange hasn’t really seen the

full benefit of this improvement. Part of

the problem has been that high quality

primary market FX historical transaction

data has not been readily available.

>>>


“The need for speed also applies to atrading style that has grown rapidly inpopularity over the past few years –high frequency automated trading.”


As a result, development and testing of

FX trading models has often been

conducted on indicative or composite

historical data. These index FX data

sources are typically created by sampling

a number of bank contributed quotes and

then adjusting them with some form of

algorithm in order to allow for outliers

etc. Apart from the risk of outright errors,

this has often resulted in products that are

disproportionately expensive – especially

when one considers that they do not

represent a true record of actual traded

prices from a primary FX market.

The problem with this approach is that the

trading model often ends up being

developed and tested on a different data

set from the one upon which it will

actually be traded. Depending upon the

time frame and trading frequency, this

disparity can be highly significant.

For a long term trading model that uses

daily data as an input, the impact of this

mismatch may not be hugely significant,

as the number of bars and trades may be

relatively small. However, it can be far

more problematic with shorter time frames

and high trade frequencies, where just one

pip discrepancies on (say) five trade

constant volume bars1 can cause a large

number of spurious entries or non-entries.

In short, the model has been designed

and proven to capture particular (and

numerous) statistical anomalies in the

historical data set that may be very

differently distributed (or perhaps even

non-existent) in the real time data of the

live trading environment.

Market depth

The normal convention when designing

and testing quantitative trading models

with historical price data is to use a record

of prices that actually traded. There is now

significant and growing interest in

developing models that also use historical

market depth data, such as the bids and

offers sitting either side of the market when

a trade took place, in their calculations.

Depending on the amount of market

depth information available, this

effectively allows the market order book

at any moment in time to be recreated.

The depth of the order book either side of

the market can be a vital model input for

determining market sentiment –

especially for short timeframe, high

frequency, trading. Some form of

weighting of this data is advisable (since

bids/offers can be withdrawn), so the

further bids/offers are from the traded

price, the less weight they would typically

be given in a trading model.

Historical depth of market data is also

invaluable in improving the accuracy of

historical simulations when larger order

sizes and/or illiquid markets are involved.

A trading model might flag an order for

(say) $5m at x price, but only part of that

order might have been executable at that

price. Obviously, this can have a dramatic

impact on the accuracy of any historical

simulation. If no allowance is made for

this, the simulated performance of a

trading model can be substantially and

artificially inflated.

By contrast, if historical depth of market

data is available, far more accurate

simulation of order fills becomes

possible. Even if the entire order could

not be filled at the price indicated by the

model, reasonable assumptions about

partial fills at adjacent prices can be

made. This is particularly important when

an automated trading model also

incorporates a mechanism for finessing

orders (algorithmic trading). Armed with

an indication of the depth of the market,

the process of developing the finessing

algorithm becomes a far more

straightforward and precise process.

Inevitably, the possibilities offered by

historical market depth data have not

been lost on the trading community and,

while it has been available for some time

for equity markets, data providers for

other markets are now also beginning to

respond to this interest.

The flow jigsaw

Banks have been providing their clients

with FX flow information for some time.

This typically consists of aggregate data

on currency transactions segmented in

various ways, such as type of participant

(speculative or commercial) or instrument

(futures, forwards etc). While this is

undoubtedly useful in terms of the

macroeconomic picture, the downside is

that no one bank can provide the

complete FX flow picture.

The logical sources for this complete picture

are the primary FX market platforms.

They witness the primary interbank and

professional flows 24-hours-a-day and are

therefore ideally placed to provide a

comprehensive picture.

In addition, while many bank flow sources

can provide only periodic (often daily)

updates, the primary markets might some

day provide this data in real time, thus

allowing traders and trading models to

track flows by region and currency

throughout the day.

Good prospects

It is apparent that although FX market

data have been historically sparse in

some areas, the situation appears to be

improving rapidly. The primary FX

markets have now started to make new

data sets available (both historical and

real time) that address a number of

existing limitations, such as latency.

Furthermore, some of these new data

sets, such as historic market depth,

should open up entirely new possibilities

in quantitative financial modelling.


1Constant volume bars (CVBs) are based upon the number of trades, not the amount of time elapsed. For example,

a five trade CVB will show the first, highest, lowest and last traded prices of the last five trades. By contrast a five-

minute price bar would show the first, highest, lowest and last traded prices of the last five minutes.

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Speed of execution is key to maximizing foreign

exchange performance and productivity. For banks

streaming prices to a multibank portal, speed is

central to winning and retaining client business,

while for model-driven traders, it means that trades

can be executed with minimal slippage.

Research from Greenwich Associates demonstrates

that speed of execution is regarded as the single

most important benefit of online trading. 68% of top-

tier financial institutions – including banks, asset

managers, and hedge funds – cited it as one of the

most important advantages realized by trading

foreign exchange online. Active traders, such as

hedge funds and CTAs, place particular emphasis on

lightning-fast pricing and execution – our clients in

this sector often tell us that speed was a primary

motivation for moving volumes online to FXall.

Accelerating the trading proces

Speed of execution depends on two things –

maximizing speed and minimizing latency. To

increase the speed of trading, we have delivered:

Deep markets for one-click execution – FXall offers deep

liquidity from more providers than any other portal.

Our diverse customer base delivers non-correlated

flow, giving banks an incentive to put up more

liquidity. This depth of liquidity means orders can get

filled in one execution – far more efficient than

managing risk over five or six transactions. What’s

more, our one-click execution capabilities ensure

slippage is kept to a minimum.

Flexible connectivity options – Clients can interface to

FXall seamlessly through FIX, API (including Java*

and Microsoft COM*) or our STP solution

QuickConnect, enhancing efficiency and eliminating

the need for manual re-keying.

Powerful infrastructure – FXall is built for speed. Last

year, we embarked on an ambitious project to

design and deploy a new generation of software for

FX trading.

Our new infrastructure is based around a grid

technique of processing engines, which ensure the

shortest code-path for maximum speed. It is highly

scalable for increased throughput, meaning that as

volumes rise it can be easily extended by adding

individual software engines and hardware servers.

Minimizing latency

In the quest to deliver speed of execution, investing

to make FXall the fastest, most effective trading

platform is only the first step. Equally important is

making sure it stays that way.

By monitoring latency both internally and externally,

and by working with banks and clients to trouble-

shoot issues as soon as they occur, our company-

wide Latency Monitoring System (LMS) ensures that

we consistently achieve the sub-second transaction

time targets we set when we built FXall. 99.99% of

trades are executed in less than one second.

Built for Speede-Forex asks Mike Mistretta, Senior Director, Infrastructure atFXall to tell us about their Latency Monitoring System.


Mike Mistretta

*Java is the registered trademark of Sun Microsystems; COM is a trademark of Microsoft Corp.

www.euromoneyconferences.com/fxusa

for more information and to apply for your free delegate place

Lead Sponsors:

Bank of America, Goldman Sachs, Morgan Stanley,

State Street Global Markets,

The Royal Bank of Scotland

Co –Sponsor: Bloomberg

Exhibitor: FXall, Hotspot

New York

London Shanghai

The 2nd Annual

Forex Forum USA9 November 2005

The Hilton, New York

Topics to be addressed include:

The US dollar, international imbalances and

currency realignment

How to trade FX profitably and risk manage

exposures

Options and emerging markets as a source of

alpha

Using currency programmes as a source of cash

generation

Market movements for 2006 and forecasts of the

major crosses

The evolving/changing structure of risk in FX

markets

Speakers confirmed so far include:

Mark Sobel, Deputy Assistant Secretary for

International Monetary and Financial Policy,

United States, Department of the Treasury

Stephen Jen, Managing Director and Global Head

of Currency Research, Morgan Stanley

Chris Harris, Partner, NorOdin Investment

Management

Jeremy Armitage, Managing Director and Head of

State Street Associates, State Street Corporation

Mark B. Fitzsimmons, Senior Vice President,

Millburn Ridgefield Corporation

Dennis Gartman, Editor, The Gartman Letter

David Simmonds, Global Head of Currency

Research, The Royal Bank of Scotland

Transaction latency can be broken down into three

components:

• Network latency – Latency in data being transmitted from a

client or bank server to FXall over a WAN (wide area

network). This can involve a number of issues, including

latency in the user’s internal infrastructure or the way that

information is being routed over their ISP. The location of

the end user also plays a part – if a trader is based in

London, but his firm’s Internet gateway is in New York, any

latency in transmitting the trade information internally

could add to the time it takes to trade.

• Application latency – Internal processing of the transaction

at FXall’s application layer

• Infrastructure latency – Latency in FXall’s network

and server

LMS continually tracks all these components. FXall’s

application and infrastructure performance are monitored

and reviewed continually. Daily, weekly and monthly reports

summarizing latency at component level are reviewed to

ensure optimal performance is being achieved.

LMS also monitors WAN latency on the bank and client side,

and automatically alerts the customer support team if any

user appears to be affected by higher-than-average latency.

Customer support staff are also provided with tools to review

WAN and application latency on a real-time basis. As soon as

a latency bottleneck is identified, our network staff will work

closely with network staff at the user organization to address

the issue.

As one of the fastest-growing online trading platforms, the

daily volume of transactions FXall handles is rapidly

increasing. Capacity planning is therefore a central part of our

latency reduction strategy. We regularly test our servers and

applications to ensure that they are capable of handling not

just the volumes we are seeing today, but the volumes we

expect to see next week, next month or next year.

For FXall, delivering speed of execution is an ongoing

process. We regularly set ourselves – and better – ever-lower

latency targets to ensure that we are among the very best in

the business. We are continually reviewing not only the

performance of our systems, but also those of our users, and

are engaged in a constant dialogue with banks and clients to

ensure that they are operating at optimal levels. We have also

gone beyond execution to enhance speed and productivity

across the entire trade lifecycle. Only by doing this can we

provide our users with the speed and efficiency they demand.


Perhaps the main factor behind the

emergence of this e-trading problem is

that, despite the new functionality and new

products being provided to the FX trader,

trading margins remain static or are

reducing. This is forcing the aggressive

targeting and capturing of additional and

fragmented order flow to maintain

profitability and growth, with the internet

now seen as crucial to this initiative.

In turn, having developed an internet

connectivity option, the greater ease of

deployment this type of solution offers

often triggers a sharp increase in the

number of permanently connected end-

users. Typically these users may provide

proportionately less order flow per user

than users of traditional systems, but they

still need servicing with real-time

streaming rates. In fact, often these

rates are customised to the trader or

the trader’s organisation based on real-

time trading volumes, which adds

additional load.

A permanent need for speed

In addition to the number of users, user

price streams and trading products,

Precision Pricing requirements and the

increasing number of smaller sized

transactions means there is an upward

trend in both the number and the size of

price distribution and order messages that

a trading infrastructure needs to support.

Message size and volume are two of the

biggest enemies of low latency, and the

cost of being behind the market creates

fear for IT and business managers alike.


Adam Hawley is Director & Chief

Operating Officer of Caplin Systems

Following many years of reluctance from within the industry inusing the internet for low Latency trading applications, there arenow many high-end, web-based FX Trading solutions in production.These services are using the internet for both the ExecutableStreaming Prices (ESPs) and subsequent transaction message flow.However, the current surge in demand for differentiatingfunctionality being placed on all FX trading services, particularly thatof low-latency messaging, means that the technology issuessurrounding using the internet as a connectivity channel requirespecial consideration.

Trading Latency -An e-problem seeking a technology solution

However, this is not the full story; more

recent Request-for-Stream services are

placing additional pressure on systems,

as is the recognition of the importance of

relationship-based trading portals. Both

of these requirements for the fastest (but

not necessarily the best) prices show that

the FX business now has a permanent

need for speed.

In looking for a solution for a low-latency

real-time internet service many have

turned to utilising generic web

technology either by hooking into existing

e-commerce infrastructure or building a

homegrown solution from scratch. This is

often under the belief that this will be the

safe option. Indeed, many are often

confronted with an existing Request-for-

Quote (RFQ) FX trading portal that is seen

as simply needing an upgrade around its

existing architecture.

There are several problems in starting out

with this approach. Firstly, any existing

service is unlikely to have been designed

with much time-criticality in mind, and

from a competitive viewpoint, time now

perhaps tops the list of criteria.

For example, the workflow may include a

security or user-authentication check on

each price request or order submission

made by the trading user. While this

would have seemed a completely

sensible design decision initially, such a

step can introduce unnecessary latency to

the overall time in a real-time trading

scenario and should be moved to a

function of the users’ session rather than

of each transaction.

Secondly, to a large extent, standard

application servers and the web

standards that surround them are

naturally designed with very broad

market usage in mind. It often requires

Herculean efforts and many returns to the

drawing board to produce even the most

rudimentary real-time trading system

from these components and APIs, let

alone a service of a standard needing to

satisfy the low-latency messaging

requirements required now in FX trading.

This is because the primary focus of these

technologies, quite rightly, is in achieving

engineering simplicity, in for example

remote procedure calls, standard

relational database access and memory

management.

However, the generalised nature of these

systems introduces data performance and

session scalability obstacles for really

low-latency services and are often at odds

with best practice architectures for market

data and trade messaging, already

devised but in use in services deployed

on internal or private networks.

This then is often the conundrum for the

lead architect, whether to move to open

web technologies, such as J2EE or to

move a tried and trusted architecture to

the web. This latter approach does have

benefits, at least in the short term. It can

take much less time to get to market over

the internet by simply asking all your

users to take an installation of an existing

desktop application. However, this

approach is not so good in the medium

term when the biggest challenge

becomes convincing customer security

teams to open up firewalls. Additionally, it

is unlikely that the existing trading

application will be efficient enough for

more than a handful of internet based

users, quickly using up the dedicated

bandwidth assigned or at least affecting

the latency of connected users to the

detriment of service quality.


>>>


An alternative solution is to install an

existing desktop application on a server

farm and use a terminal service capability

that extends over the internet. Again, this

can get a system to market quickly and

upgrades are certainly easier to manage.

Nevertheless, the deployment can still be

troublesome and you are at the mercy of

notoriously slow technology as far as

latency is concerned. This is usually

unsatisfactory when the service needs to

scale upwards and results in a high

number of servers being required along

with excessive bandwidth provision.

Some architects look to see the increase

in latency caused by the new use of

generic web technology offset by an

exercise to re-engineer the existing

trading platform to optimise throughput.

For example, by moving from standard

relational database management systems

to in-memory databases and other high-

speed caching technologies. Unfortunately,

this compromise will only go so far.

A successful internet solution

With the industry now seeing the benefits

of having the best pieces for each job and

internet trading volumes showing

genuine growth, it seems the internet is

now coming of age in this sector. There

are a number of attributes necessary for a

successful internet solution. Firstly, it is

imperative in a low-latency environment

that a ‘push’ protocol is used for real-time

messaging rather than a client ‘pull’ or

polling mechanism. This is because the

overhead in repeatedly establishing a

communications channel between client

and server needed in a polling system

produces unmanageably irregular latency

and places an unnecessary obligation on

the real-time application server to

constantly construct and destroy these

user channels.

Secondly, the use of a fit-for purpose

internet messaging technology is

paramount, one that has been designed

to compress, package and route data

packets to achieve optimal latency over

the internet and not necessarily to

conform to a verbose standard message

specification such as XML.

The messaging protocol also needs to

have built-in support for the additional

security and monitoring requirements

that go hand-in-hand with the support

needs of internet services. It needs to

provide this without compromising on the

low latency achieved, whilst providing the

ability to monitor the latency of each user

session such that corrective action can

occur in real-time should message latency

rise above acceptable thresholds.

The use of dedicated internet-facing real-

time application servers with purpose-

built in-memory caches for the collection

and distribution of the real-time

messages, rather than generic application

or web servers, helps prevent possible

interference from other applications in

use on the web server farm but more

importantly, prevents the scalability of the

solution defaulting to the much lower

levels offered by an application server.

Ideally, a new internet service should not

only use an appropriate messaging

capability of this type but also seek to

employ web-friendly client technologies

that can be run in or from an internet

Browser application. Doing this will

further simplify the deployment and

support of the trading application and

several of the most successful FX trading

applications now run directly in browsers

with no requirement for special additional

installations or configuration.

Lastly, it is important a new service can

integrate easily with the existing back-end

trading and market data infrastructure,

which will, in most circumstances,

already have been tuned to provide a low-

latency trading backbone or if not, will

certainly have plans to do so.

Recognising the importance of these

architectural decisions and making

informed decisions will result in the

creation of services that provide the

necessary latency performance along

with all the other benefits of using the

internet for trading. Additionally, future

scalability will be catered for if the

offering turns out to be more popular than

first envisaged, both for end users and

institutions wishing to connect black-box

trading engines via the internet. Using

existing desktop web technologies

alongside a robust internet messaging

protocol that tightly integrates with the

best trading system architectures will

further extend the service reach by

providing an easy-to-deploy service, and

consequently an effective targeting

mechanism for all user segment groups.


In finance, as in so many other areas of human

endeavour, ease of use usually comes with a

compromise price tag attached. In some cases that

compromise is restricted functionality or flexibility -

in others it is speed. Excel is a good example of the

latter case. While it allows those with minimal

programming expertise to achieve productivity, its

performance can be less than ideal for production

use in highly active markets such as FX.

An obvious example of this problem is exotic FX

options, where many traders and quants use Excel

for prototyping and testing pricing models. While

performance issues are no great matter (other than

tedium and productivity) at the prototyping stage, it

is a very different matter when the same

spreadsheet platform is also used in a production

environment. Particularly where a spreadsheet

contains a matrix of option prices, strikes and

expiries that have to recalculate in real time, its

calculation latency can become a matter of

competitive disadvantage. In theory such a

spreadsheet should not of course be used in a

production environment, but there are a number of

reasons why it may in practice:

• Time to market – in many cases the builder of the

original spreadsheet is unlikely to have lower

level (e.g. C++) programming skills. To convert

the spreadsheet business logic to a more efficient

form such as a Dynamic Link Library (DLL) or

Excel C++ add-in (XLL), they will have to

explain the methodology to a programmer.

This can take a considerable time and will

probably be a tediously iterative process.

• Errors – unless the programmer has strong

quantitative understanding there an increased

risk of errors being introduced during the

translation process.

• Resources – a suitably qualified programmer,

who could convert the spreadsheet, is simply not

available.

Automation and process

It was in response to a client confronting exactly

this type of situation that Savvysoft developed

TurboExcel2. The objective was to produce an

application that was capable of automatically

converting a spreadsheet to a more efficient

format, such as a DLL or XLL file. The conversion

process had to be able to handle both the code

worksheet cells and any associated VBA (Visual

Basic for Applications) code.

This represents two entirely separate challenges. In

some respects, translating VBA to C++ is the more

straightforward of the two, as the sequence of

translation can follow the same sequence as the

original VBA with a line-by-line conversion. There

are one or two important nuances – for example


Latency has been an increasingly hot topic in FX of late, with several data vendorsrecently announcing lower latency versions of their feeds. However, any gain in deliveryspeed is all too easily negated by the latency of the applications that process the data.Andy Webb outlines one way of addressing this latency issue for one of the mostubiquitous applications in financial markets - Microsoft Excel1.

TradersWorkshop


C++ syntax can differ dramatically from VBA, which

necessitates a quite intelligent parser. Some additional helper

functions are also necessary in order to catch such errors as

divide by zero. Spreadsheet conversion is a more daunting

task for an application like TurboExcel (as it is for human

programmers given the unenviable task of converting a

spreadsheet to C++), as it needs to figure out the correct order

to write out the C++ code based on the implicit relationships

among the cells.

Another major task is the need to replicate all built-in Excel

worksheet and Analysis ToolPak functions, as well as VBA’s rich

object model. This is necessary because if the original source

code is translated into a C++ DLL that is called from an

application other than Excel then the original native Excel

functions will not be available.

From the user’s perspective, the translation of VBA requires

little more than inputting the names of the subroutines or

functions to be converted and the desired name of the output

DLL or add-in. However, since spreadsheets don’t have nice

function declarations like VBA, the user who wants to convert

spreadsheets to C++ is required to define the range of input

cells that drive the calculation to the final output cell(s), and

their associated data types.

Speed

Compiled C++ code obviously runs far faster than VBA or code

entered directly into worksheet cells. This speed advantage

becomes increasingly apparent as the code complexity

increases. This is particularly significant for FX option traders

who are most likely to be suffering extensive recalculation

times if they are using Excel/VBA in a production environment.

Using a DLL or XLL instead should therefore significantly

enhance their response times and edge.

However, other types of FX traders can also benefit from

compiled VBA/worksheet formulae. Proprietary traders using

complex algorithms for mechanical/automated spot trading at

high trade frequencies in short time frames are very much at

the mercy of execution speed. A few milliseconds can make the

difference between profit and loss. Again, using compiled

versions of trading system logic can recoup those

milliseconds.

The speed improvements

possible from using compiled

Excel/VBA code vary enormously,

but it is not unusual to see

calculation times reduced by a

factor of three hundred or so. In

certain cases the gains can be far

greater. For example, if Excel is

being used as COM server and

receiving calculation calls

from other applications, then

compiling the calculation logic

and calling the resultant DLL

directly will result in speed gains of

several thousand times.

The bigger picture

The immediate speed benefits of automated code translation

and compilation are self-evident, but there is a broader

potential gain in terms of workflow enhancement. Consider the

FX trader who has to interact with multiple systems. The initial

step in their workflow might be to calculate a figure in a

spreadsheet and then re-key that into another application, take

the output from that application and re-key to another

spreadsheet, recalculate that second spreadsheet and take a

trading decision based upon the output.

That entire process may take several minutes to complete. One

alternative might be to run the initial worksheet through an

automated translator/compiler such as TurboExcel to produce

a DLL that also incorporates a call to the external application.

Then translate/compile the second spreadsheet as an XLL or

DLL incorporating a call to the DLL produced by compiling the

first worksheet. This will obviously result in faster code

execution, but also in far faster workflow and reduced

operational risks (no re-keying errors).

Automated spreadsheet translation/compilation can also be

used to enhance the functionality of core FX systems. For

example, an FX option desk’s main trading application may

well not be able to interact directly with proprietary models

running in a spreadsheet. (If it can it will probably be by using

Excel as a COM server – an inherently inefficient and unreliable

approach). On the other hand, such an application is far more

likely to be able to make function calls directly to a DLL.

e F X & L A T E N C Y >>>

1Microsoft Excel is a registered trademark of the Microsoft Corporation in the United States and/or other countries.

2 http://www.turboexcel.com

Traders Workshop

Development environment and

enterprise gains

Automated translation/ compilation

technology effectively turns the

spreadsheet into a user-friendly rapid

application development environment. The

whole notion of structured programming

also becomes immediately available, as

spreadsheet functionality can be broken

out into a series of discrete DLL/XLLs that

can be reused and recombined for multiple

purposes.

FX traders or quants effectively also gain

instant C++ expertise without any effort on

their part. While this enhances their

individual productivity, it also has wider

implications. The fact that the

translation/compilation is done in an

automated and consistent manner means

that an extensible and robust function

library becomes available to the FX

enterprise as a whole. Maintaining and

enhancing that library becomes a relatively

trivial and error-free matter, as the original

builders of models will not have to explain

their changes to a programmer.

Finally, in a market environment with

increasing emphasis upon control and

transparency, automated code

translation/compilation has a number

of advantages. For example, if only

the DLL or XLL is distributed, the risks

of intellectual property theft are greatly

reduced – a DLL is far harder to reverse

engineer than Excel password protection is

to crack. At the same time, an auditor is far

more likely to understand and sign off on a

model where the business logic is readable

from a spreadsheet, yet where the

production deployment (a DLL or XLL) is

inherently secure and the process of

translation is consistent.

An application such as TurboExcel does

just one thing: converts Excel spreadsheets

and VBA to C++ DLLs and add-ins. But the

implications of this, and its myriad uses,

are much more far-reaching in terms of

latency reduction and productivity

enhancement.

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As to what causes latency, the majority

put it down to technology and the

electronic hurdles. The further removed

from the trade price originator the trader

is, in terms of systems in the middle of the

deal process or actual geography, the

more latency is going to be involved.

Nick Barker is executive director of

e-commerce at UBS. He says latency is

and has been an issue for UBS for some

time. “The bar of acceptable latency

keeps getting lower. The key point for us

is minimising the time between when a

client hits a rate and us accepting the

trade,” Barker states. “That’s where we

want to squeeze out latency”. All banks

are feeling the latency squeeze, Barker

says: “Latency is an issue all the major

banks recognise. It does get and will

continue to get a lot of attention. The way

the FX market is moving in terms of

electronic execution means it will all

come down to speed.”

Speed is of vital importance to clients

trading in an electronic world, Barker

says. He points to three key issues, with

speed: the speed the price is distributed

out from UBS reaches the client; the

speed of notification of a deal to the client:

and the speed that execution is visible in

a risk management system.

“We need to give the most accurate price

out to our clients, as quickly as possible,”

Barker explains, “Clients have increasingly

sophisticated rates engines. They want the

fastest prices into their engines so they can

identify trading opportunities. If the client

says they want to trade with UBS, they

have to know as quickly as possible

that they can deal, or they lose the

opportunity to go elsewhere. Executions

must be quickly visible so engines can

react accordingly.”

John Eley, president and CEO of Hotspot

FX, believes latency in trading systems


Heather McLean is a freelance writer.

Off market foreign exchange trades are the inherent problem oflatency in this industry. This applies to both sides of the trading coin.Traders and trading systems lose out if the price opted for is so oldthe bank declares it obsolete and cancels the deal, and banksthemselves lose out if latency in prices allows traders to takeadvantage of arbitrage opportunities. And here, latency between themoment the button is pressed to select the price and the time it takesfor that deal to complete may only be a matter of split seconds.

Nick Barker

Tradinglatency –

feeling the squeeze

“The bar of acceptable latency

keeps getting lower.”

“All market participants want to

know immediately if they attempt to

deal on a price if they were

executed or not”

stems from market structure, in terms

of request-for-quote, last look and

delayed re-pricing protocols, as well

as telecommunications and platform

performance stemming from both software

and hardware.

He explains why latency is important to the

industry: “All market participants want to

know immediately if they attempt to deal

on a price if they were executed or not,

otherwise it’s frustrating and can create

significant position risk. The more

systematic the client, the more

demanding they are on latency, as the

greater their need for speed. Less latency

is better than more of it, so we spend a lot

of our time and energy at Hotspot

working to reduce our latency.”

Reasons for latency

There are a number of reasons for

latency, Mark Smith, director and COO at

LavaFX, part of Lava Trading, says. “Lack

of bandwidth, poor connectivity stability,

and FX’s background in voice, all

contribute to latency,” explains Smith.

“LavaFX helps address these issues by

employing fast, reliable and intelligent

technology. It aggregates multiple

sources of liquidity into a single access

point, which can be tapped via a fast,

intuitive user interface or through a FIX

API for model and program traders.”

Active dealer needs

Mark Warms, general manager for Europe

at FXall, says that latency is a particular

focus for active dealers like hedge funds

and commodity trading advisors. He says

that the advent of electronic trading

means algorithmic traders have been able

to automate their trading on online

platforms like FXall. "Latency can frustrate

active traders, but it's not just about

speed for these clients - it's about

liquidity. If their trading models tell

them to buy $50 million at a certain price,

they need to be able to execute the entire

amount as soon as the market hits that

price, otherwise their whole model falls

over. So they're looking for a system that

combines speed with the depth of market

they need.”

This active dealer base is growing its use

of electronic FX trading. In a survey of 1436

top tier FX users worldwide, Greenwich

Associates Research showed that online

FX trading by hedge funds went from $251

billion in 2003 up to $1,699 billion in 2004.

John Eley


Mark Smith

Mark Warms

>>>

“For active dealers it's

not just about speed, it's

about liquidity”

“Lack of bandwidth, poor

connectivity stability, and

FX’s background in voice, all

contribute to latency”


The research stated that overall, online FX

trading grew from $7,209 billion in 2003 to

$15,671 billion in 2004.

FXall's system is designed to maximize

speed of execution. To keep latency to a

minimum, the company has implemented a

Latency Monitoring System that watches

trading activity in real time, every step of

the way. "This enables us to very quickly

analyse and locate issues, and deal with

them," Warms states. "Our approach to

latency isn't about fixing a problem, it's

about seizing the opportunity to reduce the

round trip time it takes to complete a trade."

EBS improved its market data feed

product, EBS Ticker, at the request of

customers. Customers notified the

company that latency in the system was

increasing to a second, and in times of

high activity, to a couple of seconds, Bill

Moran, COO at EBS, says.

Moran explains how his company

handled the information: “Traders and

banks asked us to develop a product with

less latency and more consistency. We

needed a speed increase to get

information to customers faster, but also

wanted it to be consistently faster

regardless of activity in the market. So we

delivered a direct feed product which

we deliver direct to the bank, called EBS

Live Product.”

Kelly Adams, chief technology officer at FX

Concepts, states that latency issues would

make his business change FX service

provider. He comments: “Bad latency

would affect our choice of FX provider. You

have to look at a provider’s networks,

in terms of the speed of connectivity,

redundancy, reliability and speed, and

they also need to have good break points,

so if there’s a glitch in the network you

get to know if your trade is cancelled or

whatever. You have to have 100 per cent

clarity from your provider.”

However, Adams adds: “From a

technology standpoint, there is not a lot

of transparency. You’re at the mercy of

what the banks decide to distribute, the

connectivity and electronic content

managers they choose, where they are

tasking the feeds and doing the aggregate

of feeds. This middle tier you have to

deal with is where latency kicks in and

prices change.”

Everyone involved in electronic FX

trading is simply trying to better

manage risk through improving latency,

Moran states: “People are using and

leveraging technology to manage

positions so risk is mitigated. We will

continue to be in an environment where

risk has to be managed, going forward,

but we’re always looking at speed.”

To improve the efficiency of its systems,

Hotspot FXi has divided its core

applications server and split it into

separate components. These component

processes are reduced to ever smaller

pieces which are worked on by separate

programmes, but in parallel with each

other, reducing latency through an

increase in computing power.

As a bank, UBS has to continuously

concentrate on improving latency across

its channels, Barkers comments. He says

if UBS is slower than another bank

at getting a price out, it can be

advantageous for the client, but UBS is

off market as it is slow and out of sync

with the market. Barker explains: “You

will never get rid of latency, but the key

point for us is the need to always be

reducing latency in a particular channel

and reducing latency at each step along

the processing chain. We continuously

look at addressing latency through

management information systems on

each of the flows. We look at the overall

time each component is taking and

continuously upgrade our Infrastructure

with new technology. We are on a

continual evolutionary path.”


Kelly Adams

Bill Moran

“Bad latency would affect our

choice of FX provider”

“Traders and banks asked us todevelop a product with less latency

and more consistency.”

Barker says the driver for improving

latency at UBS is the bank’s efficiency. “If

a client clicks at 54 and the market goes

against us and is at 56 by the time the

trade gets into the risk system we are

losing money.

That’s why the banks focus on latency. For

our clients, we have to improve latency so

they are trading at the best price available

to them, they know when a trade is done

and that we are not being left with off-

market trades.”

Yet off market prices are a problem for

others in the market in terms of arbitrage

opportunities, Smith says. “The more

latency that exists, the more potential

there is for arbitrage, which is only bad for

the market,” he states.

DynexCorp’s CEO, Peter Panholzer, says

that taking advantage of inefficiencies

between banks’ technologies with arbitrage

is unethical. He says that arbitrage

opportunities through technology latency

disrupt and damage the market overall. He

explains: “Arbitraging between two

different speeds of quote supply is criminal,

in my opinion. People that systematically

exploit latency will be driven out by the

banks and they will push the price up for

the rest of us.

A technology flaw should not be costingthe banks, which are being level andgiving us the opportunity to trade. If I exploit the failure of a technology fromone particular provider, it is ruining it forothers as the liquidity providers will stopgiving us such high limits.”

Paul Chappell, managing director at C-View, says he suspects that bankssometimes play games with prices, andlabel it trading latency. “Where this stopsbeing a level playing field is when you usea multi-bank platform that allows you tosee a number of different banks’ prices,you pick the best price on the screen, andas you hit the button, it becomes theworst price on the screen. This hasbecome a case of technology wars, wherepeople can manipulate their engines todeal at the worst price.”

Chappell continues that when he noticesodd pricing behaviour from a bank, he iscompelled to change provider for the sakeof returns for his business’ investors: “It’sa learning experience for us. There arecertain banks you can recognise dealinglike this. If we find a bank that consistentlychanges its price, we will remove themfrom that quoting panel and replace themwith someone else.”

Latency as a cloak for scouting out prices

MAN Financial’s global head of FX sales,distribution and financial, Julian Knight,agrees that banks use latency as a cloak forscouting out prices. “If you’re trying tointeract with a price and not getting the dealdone, you’re showing your trading side. Ithink banks do send out reconnaissanceprices to find out what people are trading,but this happens on just two or three of thelarger bank platforms run by the biggestbanks. This latency is just part of the naturalrespiration of systems.”

And Adams says that although banks areinvolved in ‘tweaking’ and labelling itlatency, it should not be regarded asanything but the norm: “Like in trading, theway banks decide to tweak these enginesis another way to make money. So they’regoing to do it and be clever about it.”

Peter Panholzer

Paul Chappell

Julian Knight


“If you’re trying to interact with a

price and not getting the deal done,

you’re showing your trading side”

“...suspects that banks sometimes

play games with prices...”

“A technology flaw should not

be costing the banks”

What markets do you operate in?

Most major futures exchanges, across a variety of

bond, interest rate, commodity and of course

currency futures. For currencies we operate

exclusively in the CME’s currency futures products.

What is your trading methodology based upon and

what inefficiencies is it exploiting?

It is automatically arbitraging latency within the

exchanges’ matching engines and also the inability

of those engines to detect certain matches across

orders in the market. In a sense, you could also say

that we are arbitraging the latency in other market

participants’ applications and networks.

Can you give an example?

While we actually have multiple arbitrage strategies

per market, one extremely simple example would be

where we take advantage of the mispricing between

a quoted front/next month spread and the price

achievable by executing that spread as two

independent legs.

Such opportunities are seldom available for very

long and only tend to occur with any frequency

during very intense market activity, when spread

prices can get out of kilter with the individual legs.

As a result, minimising latency in our application and

connectivity is an absolute prerequisite for profitable

trading of these strategies. Many of our arbitrage

strategies are quite complex and can involve

multiple inter-month spreads.

However, because CME FX futures typically carry

most of their liquidity in the front month, most

opportunities for these more sophisticated

strategies usually only occur during contract

rollover, when you can see reasonable liquidity in

three contract expiries simultaneously.

Millisecondarbitrage


Vladan Jovanovic

Cas

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tudy

e-F

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e-F

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e-Forex talks with Vladan Jovanovic,MD of Communicating Ltd, about how

his technology and trading firm arbitragesthe latency and matching algorithms of futures exchanges.


Presumably the fact that liquidity tends to concentrate in the

front month with CME currency futures imposes some

limitations as to the size in which you can execute your

strategies?

Absolutely. We do not take directional positions; so the leg of

the trade with the minimum available size always dictates the

overall trade size. Ultimately, we have to be sure of locking in

the complete trade, as we do not wish to end up carrying the

residual risks of an unmatched element.

How does FX compare with the other markets you trade?

The FX market moves extremely quickly (certainly faster than

most other markets we trade) so it is the market for which we

have developed the most complex strategies. In fact it is also

the market for which we have been developing strategies the

longest and where we are still continuing to develop them.

Is there a direct relationship between the latency of a market

and its profitability from your perspective?

Yes, but not quite how you might expect. For example, the CME

exhibits latency, but it isn’t excessive when compared to some

other exchanges. Response times to order submission are

around 50 milliseconds, but perhaps more importantly these

response times are reasonably consistent.

By contrast, a certain other exchange exhibits response times

that range from 150 to 3500 milliseconds. This is so poor and

so inconsistent that it makes it impossible for us to arbitrage

the inefficiencies of that exchange’s matching engine (which

are also significant), as we cannot execute the relevant

orders reliably.

Did you develop your technology in house and was it always

intended for arbitrage?

Yes, we developed all our technology in house - and no, it was

not always intended as an arbitrage application. The

application, which is called Aquarius, was originally built as a

matching engine for exchanges. It was capable of processing

and rapidly matching very high transaction volumes across

multiple contract months and spreads.

We spent a great deal of time trying to sell Aquarius to various

exchanges with no success. We therefore decided to reverse

engineer it, so we could use its matching technology and low

latency to arbitrage the exchanges’ own matching engines.

In what ways are you further developing and updating

Aquarius?

We are constantly looking at reducing latency, both within the

application/strategies and in our networks, as well as

developing new arbitrage strategies.

Another important area for us lies in monitoring and

responding to changes in the matching algorithms used by the

exchanges. Changes in these algorithms can have a dramatic

impact on our strategies. For example, if an exchange switches

to a size priority model, this means that the time that you

submit an order becomes immaterial if somebody

subsequently submits a larger order.

Their order will take priority and, if your order is small, you

may find yourself progressively shunted to the back of the

queue by other larger orders placed after yours. This means

that we have to build in the trading logic to compensate for

this, so trades can be scratched automatically if it excessively

delays their execution.

Presumably, given the emphasis on minimal latency, the

hardware you use must be cutting edge?

No, not necessarily. For example, the workstations that

automatically trade our strategies for each contract often only

have 1Ghz processors. We are not interested in throwing

expensive iron at an application – our emphasis is instead on

fine-tuning its efficiency of operation. For example, any

processes on our production workstations that are not actually

required for trading are turned off by default. Why waste CPU

cycles on something irrelevant?

Even so, a 1Ghz processor is hardly state of the art; surely this

affects speed of operation?

In practical terms, no. Far greater gains can be made in other

areas. For example, the Aquarius application is by design

miniscule – even in its original incarnation as a complete

exchange matching engine it fitted comfortably onto a floppy

disk. In practical terms this means that it can also fit

comfortably into a 2Mb onboard CPU cache. Therefore the CPU

does not have to make calls to the main system memory, which

is a notable latency saving.

What about networking?

We spend a lot of time on this, from figuring out the properties

of the exchange’s gateway to fine-tuning our own internal

networks. The general philosophy is that unless a network

component is absolutely essential to the reliable operation of

our trading strategies, it will be omitted.

We also spend quite a lot of time thinking about the way in

which hardware operates. For example, we won’t just use the

first “name brand” network switch that comes to hand.

Instead, we’ll be more concerned with things that determine

whether it is suitable for our exact purposes, such as whether

it is a “store and forward” or “cut through” switch, or whether

it uses layer 2 or 3 forwarding.

>>>e F X & L A T E N C Y

What is your approach to risk management?

We have absolutely no opinion on the market’s

direction - our arbitrage strategies are purely

concerned with capturing a small margin per trade

from inefficiencies and latencies. Therefore we aim

to end each trading session completely flat and

carry no positions overnight. Risk management is

an integral part of the strategies and the way that

Aquarius applies them.

But surely your brokers/clearers still require you to

route your trades via their gateway for risk

management purposes?

Firstly, we don’t use brokers at all, as we have

memberships for all the exchanges upon which we

trade. Though there is a significant cost to that, it is

a necessary expense as it ensures that we have our

own dedicated gateway to the exchange and

therefore our performance is not degraded by

other users’ trading activity - as it would be if we

were using a shared broker gateway.

Obviously clearers are ultimately responsible to

the exchange for their clearing clients’ financial

performance. As a result, in the early days we had

to spend some time explaining our risk

management functionality to our clearers. Now we

have been up and running for six years (in which

we have never caused a problem to any of our

clearers) this is much less of an issue.

Looking ahead, how important do you think

automated trading will become in FX markets?

I think it is inevitable that it will continue to

increase in importance. You only have to look at

the new traders entering the market today -they are

completely comfortable with technology, so they

are unlikely to regard automated trading as a

major hurdle.

Where do you see the most potential to reduce

latency in FX trading?

At the fundamental re-engineering level and in the

use of appropriate technology. One thing I have

noticed is that people don’t really ask the right

questions about latency – i.e. what is really causing

it? If something runs slowly, the temptation is just

to throw more bandwidth or faster processors at it.

Pressure for enhanced functionality has resulted in

faster upgrade cycles and to meet those cycle times

people are resorting to extremely inefficient

languages and protocols that simply result in further

latency through network congestion. The existing

foundations need rebuilding, rather than

overloading with more and more bells and whistles,

which only exacerbate the latency problem.

Your trading methods depend upon the

inefficiencies of the exchanges. Presumably they

must be well aware of this by now, so how have

they reacted?

I think they choose to ignore our activity because

we are of course contributing to the liquidity of the

market. Every trade we make provides liquidity to

at least two other parties, and when FX futures

contracts roll over it is not uncommon for us to be

trading tens of thousands of lots per day.

What plans do you have for trading new FX

instruments and strategies?

The CME is currently upgrading and changing the

way it distributes FX options. Once that process is

complete, we will be looking very closely at the

possibilities for automated trading of FX options.

As to strategies: our current arbitrage strategies

have proved effective, but in the future we would

like to explore the possibilities of coupling them

with some very short term high frequency

directional strategies using AI.Case S

tudy

e-Forex C

ase S

tudy

e-Forex C

ase S

tudy



In recent months, the FX market has witnessed the emergence

of a new trend in electronic trading: algorithmic trading

strategies designed to capture market opportunities in

increasingly automated and fragmented marketplace. This

article examines the market reality for algorithmic trading in the

FX market, assessing the potential for growth as well as

identifying possible pitfalls.

Introduction

The FX market overall has been undergoing major changes in

recent years. After a lackluster growth between 1998 and 2001,

the market experienced a surge driven by low interest rates,

declining equities markets, and increasing volatility in the FX

market. As a result, the daily turnover in the FX market

increased from US$1.2 trillion in 2001 to approximately US$1.9

trillion at the end of 2004.

Figure 1: Expanding FX Market

Source: BIS

Some of the key trends in the FX market which has formed the

basic foundation for the initial adoption of algorithmic trading

include the following:

• Lackluster equities market. Immediately following the

dot.com bubble bust, the equities market has remained

stagnant at best with ever decreasing trading opportunities

for market participants looking for higher returns. This reality

and similar situation in the fixed income market has forced

market participants to look at alternative investment

opportunities, including FX which is now clearly seen as a

legitimate asset class in its own right.

• Increased adoption in electronic trading. Not surprisingly,

with the expanding market, the adoption rate for FX electronic

trading has also increased dramatically. In 2001,

approximately 35% of all trading in FX occurred electronically.

At the end of 2005, electronic adoption accounted for more

than 50% of all trading in FX. Initially led by the interbank

platforms such as EBS and Reuters, multi-dealer platforms

have in recent years played an increasingly important role in

expanding the electronic trading market. Platforms such as

FXall have moved beyond just trade execution by providing

robust STP (QuickConnect) and post-trade processing

services (Settlement Center). Single-dealer platforms have

also seen their trade volume increase dramatically over the

last couple of years, as those clients looking for analytics,

research, and multi-asset class trading capability turn to

single-dealer platforms to meet their trading objectives.

Sang Lee is Managing Partner at the Aite Group

Algorithmic Trading in FX –Charting the Voyage of Discovery

Over the last decade, electronic trading has moved from acompetitive novelty to competitive necessity. While most of thepublic attention has focused on the rate of electronic tradingadoption in the equities market, enormous market opportunitiesnow reside in other asset classes. The emergence of foreignexchange (FX) as a legitimate asset class has led to rapid adoptionof electronic trading in the FX market, sustained by the tirelessefforts of various interbank, multi-dealer, and single-dealerplatforms to create greater market transparency and support for fulllife-cycle of a FX trade.

Figure 2: Estimated Adoption of Electronic Trading in FX

Source: Aite Group

• Growing transactions from active trading market participants.

Perhaps more importantly, the make-up of market

participants has changed over the last three years. Between

2001 and 2004, the share in total turnover between dealer to

dealer transactions decreased from 59% in 2001 to 53% in

2004, continuing the trend which can be traced all the way

back to 1998 when the dealer to dealer share stood at 64%. On

the other hand, the level of transactions between dealers and

other financial institutions (i.e., pension funds, insurance

companies, hedge funds, CTAs, proprietary trading desks,

and currency overlay managers) has increased from 28% in

2001 to 33% in 2004. Increased activities from the investment

management community have been one of the major drivers

in recent boost in FX trade volume.

Figure 3: Reported FX Market Turnover by Counterparty

Source: BIS

• Adoption of FIX. After a slow start, the adoption rate for FIX in

FX has picked up considerable momentum, especially during

the last couple of years. At the end of 2004, approximately 9%

of FX transactions occurred through FIX. With the increasing

adoption of electronic trading, coupled with aggressive

entrance of hedge funds and CTAs into the FX trading

arena, FIX adoption is expected to pass well over 25% by end

of 2008.

Figure 4: Project FIX Adoption Rate in FX

Source: Aite Group

Algorithmic Trading – Just the Beginning…

Although algorithmic trading began in the equities market, it

has quickly spread to other asset classes, including FX. Most of

the development of algorithmic trading in the FX market has

been driven by the hedge fund community as well as

proprietary trading shops and currency overlay managers. Thus

far, hedge funds have relied on self-developed algorithms to

seek opportunities in the FX market.

When compared to the equities market, there are certain

similarities that exist in the FX market that may be attractive to

algorithmic trading:

• Liquid;

• Market fragmentation;

• Rapid adoption of electronic trading; and

• Declining spreads/commissions.

However, one major difference is that unlike the equities

market, the FX market is largely an OTC with no centralized

authority for developing, implementing, and maintaining

industry standards. Market data may be available, but is highly

fragmented and still costly. Price discovery mechanism is

convoluted and inconsistent. In short, despite its progress, the

FX market still lacks the necessary market infrastructure to truly

support full-blown electronic trading.

In recent years, the hedge fund community has become a major

participant in the FX market. Leveraging the credit relationship

forged with their prime brokers, hedge funds have become very

active in the FX market, increasingly relying on various

automated trading strategies to capture alpha. As a result, a

growing number of leading execution venues have stepped up

to the meet the demands of hedge funds:

EBS. A leading interbank platform, EBS opened up its API to

hedge funds to enable more active participation in their

marketplace.

>>>



Although it did place certain restrictions to discourage

arbitrage behavior, EBS clearly sees market

opportunities that currently exist with the growing

hedge fund activities.

FXall. One of the most dominating platforms in the

multi-dealer space, FXall has seen increasing business

coming from the hedge fund community. FXall has

also issued APIs to hedge funds to encourage

additional participation as well as robust post-trade

processing capabilities.

Hotspot FXi. Hotspot has made an entire business out

of catering to the needs of hedge funds with innovative

features such as streaming quotes, sophisticated order

types, view into complete depth of book, anonymous

trading, and client-to-client trading. Hotspot FXi

appears to have set the market standard for meeting

the growing demands of hedge funds.

FlexTrade. Is leading the market in the FX algorithmic

trading space. Launched in 2004, their FlexFX product

has quickly gained traction amongst significant buy

and sell-side players. It is renowned for its

high performance, flexibility and ‘DLA’ - Direct

Liquidity Access to all major banks and ECN’s in the

market today.

Portware. Is also providing order management and

aggregation services for the FX market. Forming

partnerships with leading platforms..

Competition amongst the leading trading platforms and

vendors are just beginning. Before a baby can walk, he

or she must learn to crawl. Similarly, before algorithmic

trading can hit mainstream in the FX market, market

participants must first get used to the idea of electronic

trading in general.

Currently, Aite Group estimates that approximately 4%of all FX trading is being conducted by algorithmictrading. This pales in comparison to the equitiesmarket which currently stands at 25%.

Food for Thought

One the major impediments to the progress ofalgorithmic trading will be the resistance from the vestinterest that exist in the FX market. While there areclear signal for changes in the marketplace toaccommodate the growing adoption of electronictrading and algorithmic trading, certain firms or platforms will try to leverage their incumbentposition as long as possible at the detriment of theirlong-term success.

Limiting the activities of hedge funds in certainplatforms for fear of being taken advantage of byarbitrage behavior is not a sustainable policy in thelong-run. Certain investment activities of these newermarket entrants will certainly go against the interest ofthe current and larger clients. However, thecompetitive landscape in the FX market is beingtransformed fairly quickly and those firms unable toadapt and evolve with the changing environment willfind themselves suddenly vulnerable in a rapidlyevolving marketplace.

There are many lessons to be applied from the equitiesmarket when it comes to FX algorithmic trading. Oneshould never lose sight of changing demands fromclients. One should also never lose sight of the fact that today’s small clients may dominate themarketplace tomorrow.

Finding the right balance between the current andfuture clients will be the winning formula for most ofthe players out there. The fight for market share in theFX electronic market has just begun and it appears thatalgorithmic trading will have a pivotal role in thatcompetition.

Algorithmic Trading in FX – Charting the Voyage of Discovery

Figure 5: Projected Adoption of Algorithmic Trading in FX

Source: Aite Group

“One the majorimpediments to the

progress of algorithmictrading will be the

resistance from the vestinterest that exist in the

FX market”

North American Sales:+1 516 627 [email protected]

European Sales:+44 (0)20 7796 [email protected]

www.flextrade.com

< algorithmic trading >

< direct market access >

< streaming prices >

< market depth >

< risk management >

< possibilities > …

Trade your best.


With the steady growth of the FX markets

and the increasing adoption of eFX

among the market participants,

algorithmic trading is emerging as the

next level of trading technology for

market participants to contend with.

Coupled with the growth of the FX

Markets, there has definitely been a

steady movement away from phone and

RFQ trading behavior to one-click trading

platforms (Proprietary Bank systems and

Portals) and the emergence of trading over

API live streaming prices. In parallel to the

change in trading behavior on the buy-side,

there has been movement from liquidity

providers to better manage their risk within

a compressing margin environment. Both

market participants are realizing quickly

that algorithmic capabilities will be a key

component of any electronic trading/risk

system being implemented.

Demand for faster ways to trade

We are just at the beginning of a

fundamental shift in the way the FX

marketplace trades overall. Learning from

our ten years of experience in the equity

and futures markets; we have recognized

very similar market conditions shaping up

within FX.

There is significant demand from both

model-driven and discretionary clients for

faster, more efficient and consolidated

ways to trade within the FX markets.

When there is a need like this within a

marketplace, technology innovation is not

far behind. From a product standpoint, an

eFX technology must consolidate

multiple streams of liquidity and risk

into a single location while providing

visual/algorithmic customization to suit

the needs of the end trader.

Algorithmic trading has been available for

a number of years within the equity space

providing exactly these types of tools and

rich functionality. Both buy-side & sell-

side participants are now looking to bring

this technology to FX.

>>>

Assessing a fundamentalshift in the way the FX marketplace trades

Lee Ratner, Vice President, FX sales atFlexTrade discusses why the next levelof trading in FX markets is likely to be

more algorithmic in nature.

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Differentiation amongst liquidity providers

With the burgeoning of eFX, liquidity providers are confrontedwith the issue of providing competitive pricing while effectivelymanaging risk over multiple distribution channels such asportals, proprietary platforms and APIs. With the growth ofportals and the evolution of standards such as FIX, liquidityproviders will be dealing on a more level playing field from adistribution standpoint then in previous years. They will belooking for ways to better differentiate themselves in themarketplace.

At the same time the buy-side is getting increasinglysophisticated at sourcing liquidity from multiple sources andtrading algorithmically. In order to stay competitive, banks areembracing technology solutions that provide fastexecution, multiple order types, intelligentquoting and real-time risk controls.

As the buy-side demand for betterquality and faster execution hasincreased, the sell-side has beenin an ever demanding race totighten spreads, decreasequoting latencies andincrease executionthroughput. With theadvent of streaming FXquotes, the buy-side nowhas access to quickefficient quotingtechnology through ECN’slike Hotspot, Lava andCurrenex or through directAPIs. If the buy-side firmdecides to go direct usingAPIs they have two choicestoday; develop the technology inhouse themselves or use a brokerneutral vendor like FlexTrade toconnect with these APIs.

Embracing technology to stay competitive

Algorithms are needed not only to manage real timequoting to clients (on a client to client basis) but also to managethe trade flow from various platforms and from liquidityprovider’s perspective, more importantly, to manage the risk oftheir electronic trading volumes.

These are split second decisions that will define whether thistrade flow is profitable or not. To stay competitive, liquidityproviders are starting to embrace technology solutions thatprovide millisecond execution, multiple order types, the ability toprice intelligently and manage risk in real-time over multipledistribution channels such as portals and proprietary client-sideplatforms using algorithms to manage the entire trade process.

From a product standpoint, an eFX technology must consolidatemultiple streams of liquidity and risk into a single place whileproviding visual/algorithmic customization to suit the needs ofthe end trader.

The sell-side on the other hand, in addition to the above type of

functionality, requires an eFX platform that has the ability to

price intelligently and manage risk in real-time over

multiple distribution channels such as portals and proprietary

client-side platforms.

Impact on both sell-side and buy-side

The FX technology marketplace is a quickly changing landscape.

Most of the consolidation is happening with companies and

products that are not able to clearly differentiate themselves from

the competition. The buy-side is finding it difficult to figure out

which company offers the right solution for them, while the sell-

side is finding it difficult to figure out which product to participate

on. As the market place and the products mature we will see

less consolidation, stabilization in pricing, clear

product offerings and a market where clients

have choices of top quality products and

where the sell-side feels comfortable

participating.

Both the buy and sell-

sides are cost conscious

when implementing new

technologies. The buy-side

typically has to keep

their investor cost down

while the sell-side

has to maneuver in

an environment of

tight margins with the

increasing need to better

service their clients. In our

experience, we have seen

that the buy-side is typically

quick at picking up and

embracing new technology.

This is not to say the sell-side is not

innovative or willing to embrace new

technology, but there is a tendency to build

the technology internally versus purchasing a

vendor product.

The Sell-side – need to know where the market is and the price is

constantly based on current conditions. They need to execute on

price and manage risk in real time. They can either match the

trade internally, of lay the risk into the market place or warehouse

it internally. They make or lose money with these decisions.

This is the best combination for algorithmic trading tool. If there

is a market maker, they cannot survive without that. The margins

are tighter and risk management determine and management of

technologies to determine if the market looses money.

Conclusion

FX algorithmic trading technologies are available today and we

will continue to see significant growth in this space over the next

few years as the FX market continues to mature.

Assessing a fundamental shift in the way the FX marketplace trades

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Bottom line? If Foreign Exchange is your business, you should be talking to us.

The pace of eFX platform innovation has

been dramatic over the last few years and

consequently Retail FX clients can look

forward to the benefits of their advanced

features and functionality. Are customers

driving this rapid pace or are providers

trying to differentiate themselves by

continually raising the technology bar?

Mehmet: The development of eFX

platforms can be attributed to both

competition within the market place, as

well as the increasing sophistication of

retail clients. As the retail FX market

continues to witness an influx of seasoned

traders from equities and futures markets,

retail FX providers such as CMC Market’s

have developed their offerings so as to

cater to varying needs of traders offering

such features as a 1 click trading as well as

the ability to write bespoke indicators and

back test trading strategies.

Darst: Clearly a function of both, in fact, we

would also suggest that the rapid

evolution of technology encourages all of

us to advance our solutions. It’s simply too

tempting. In a rational environment where

each input, each variable is available, the

sane response is to make something

better, more manageable, more adaptable.

Rasoul: It is a combination of both. Each

retail customer has their own idea of what

should comprise an FX trading solution,

and at the same time each broker-dealer

wants to differentiate themselves to make

their offering unique. The two really play

off of each other quite well, especially if

you look at the innovations you find in the

marketplace. The market-leaders take

into consideration both sides and blend

them together through innovation (e.g.

creating a sophisticated and easy-to-use

trading platform/offering) that exceeds

the expectation of the customer.

Bang: As the market expands and

competition becomes more intense,

online fx providers that wish to remain at

the top have no choice but to constantly

add new features and functionality and

generally improve their platforms. It is

definitely customer driven, just consider

where retail spreads were 3 years ago and

where they’re now, pratically the same as

institutional spreads. The race to attract

more customers is more aggressive now

than it’s ever been.

Nemirovsky: From our experience as a

technology company providing white

label trading platforms to multiple trading

firms—and by extension their 30,000+

traders—I think it would be fair to say that

the answer is ‘both.’ On one hand, retail

customers are becoming increasingly

sophisticated and are demanding more

advanced features and tools, such as

execution from charts, new instruments,

customizable interfaces, etc. On the other

hand, trading firms are responding to

increased trading activity with a desire

for seamless connections to liquidity

providers and other partners via STP or

API. Finally, technology companies such

as ActForex are raising the technological

bar via constant R&D efforts that are

driving the progress of eFX technology.

What sort of basic functionality and

standard tools would typically characterize

today’s entry-level? e-trading platform?

Mehmet: Entry level platforms are on the

whole reflective of the requirements of


Charting the continuing evolution of Retail eFX Platforms

T H E e - F O R E X F O R U M

With Enis Mehmet, New York Manager for CMC Markets, Daniel Darst, Executive Director Sales

Strategy & Marketing at Saxo Bank, Muhammad Al-Amin Rasoul, Executive Vice President & COO,

at Global Forex Trading, Nicholas Bang, Executive Director & Partner at ACM-REFCO and Leo

Nemirovsky, VP, Marketing at ActForex, Inc.

Enis Mehmet

“The development of eFX platforms canbe attributed to both competition within

the market place, as well as the increasingsophistication of retail clients.”


entry level participants and consist of real

time pricing, order execution and position

keeping. In contrast the functionality and

features of platforms such as CMC

Market's Marketmaker platform are

tuned to the requirements of active

sophisticated traders, encompassing an

array of advanced features ranging from

the ability to place sophisticated strategy

orders to advanced technical analysis.

Darst: Use the web. High level of security

in funds transfer. See the prices and trade

on those same prices. Read the news.

Spot, vanilla options, forwards. Some

stop order functionality. Real-time

margin management. That’s the winner’s

hand, frankly.

Rasoul: Entry-level may be somewhat of a

misleading term because most entry-level

platforms can be very sophisticated if the

traders desire. Today’s technology is not

as limited as most trader’s experienced in

the past. Now, the entry-level platform is

generally the same as the advanced

platform but with fewer bells and whistles

highlighted during the installation

process. The efficiency in the delivery of

the actual technology to the clients as

well as in development have moved more

companies away from offering different

programs to different users. Instead,

many have moved into offering different

“screen layouts” that arrange the look of

the software to cater to a particular

trader’s needs.

Bang: Today any worthwhile platform

directed to even the smallest customers

offers a full range of functionality. Not

only execution and position monitoring

but integrated order placement &

monitoring, real-time statement

generation, real-time charting, news and

analysis. Additionally demand is so

varied now that customers on an

international level have begun to

require trading platforms translated in

their own language. At ACM-REFCO

customers have our platforms available

in 14 languages.

Nemirovsky: An “entry-level” platform I

think is shaped by retail customers’

already well-defined portfolio of baseline

expectations of execution, of platform

functionality and of tools. Execution

means uninterrupted connectivity, rapid

and efficient execution on streaming

prices, liquidity at all times and a broad

range of instruments (and this increasingly

includes FX derivatives, i.e. Futures and

Options). Trading platform functionality is

characterized by a user-friendly interface

with immediately-accessible trade- and

account-management. Basic tools include

integrated charting and information such

as news, analytics, etc. as well as easy-to

use analytics. Our approach to the concept

of an “entry-level” platform, however, has

been to provide our client trading firms

with a product that is rich in both basic and

advanced features which can be activated

or deactivated to fit their business model.

Many retail investors are now extremely

active. What type of specialized features

are these more active, professional

traders likely to be looking for from their

online platforms?

Mehmet: The active and professional

trader appreciate the fact that one of the

key factors in being able to successfully

capitalize from movements within

markets, is the ability to trade active

markets as swiftly as possible.

Accordingly, having listened to the

feedback of such clients, CMC Markets

has recently introduced 1 click trading

that allows a trader to place and execute

orders with "1 click" of a mouse button

with pre defined trade sizes per currency

pair. Feedback from clients had

demonstrated that whilst the order

placement process had on the whole been

streamlined within retail FX platforms

there was still scope for improvement by

being able to predefine the order quantity

prior to the order placement.

Darst: They’re looking for platforms like the

SaxoTrader. Functionality. Transparency.

Stable, consistent pricing. The legitimacy

and regulatory above-board-ness of a fully

licensed Scandinavian bank, regulated by

the EU’s financial authority.

Rasoul: There are a host of needs for

these types of traders, but some of the

chief features we see include: speed of

execution, the percentage of deals

accepted without rejection or requote

from their dealer, trading directly from the

charting interface, trailing stop orders,

alarms that can be delivered to your e-

mail or mobile device as well as

contingent orders. All of these items are

key to the active traders. More and more

traders are also looking to run their own

custom-designed trading systems on the

trading platform to cut down the amount

of visual analysis the trader is doing while

also limiting the emotion that can distract

from the decision-making process.

Bang: Active traders essentially seek two

things above all else: the tightest spreads

available and reliable, rapid and liquid

execution. Good trading conditions are

simply the main requirement of the active

trader which of course stands to reason.

Extremely active traders however are not

necessarily the most professional though.

Nemirovsky: Our clients’ most actively-

trading customers fall into both the

institutional (money managers and funds)

and retail (day traders) categories, so we’ve

included—and are constantly adding)

features to the ActForex ICTS® Online

Trading Platform that cater to both groups.

These include the ability to manage and

trade multiple segregated accounts

simultaneously, advanced reporting,

integration with third-parties (for

customized news feeds or the connection

of an algorithmic trading system,

>>>

Daniel Darst

“..the rapid evolution of technology encourages all of us to

advance our solutions.”



for example) and advanced sell-side

negotiation features that allow our

clients—trading firms—to properly

manage highly active trading customers.

Of course, it is important remember the

basics—the platform has to perform

flawlessly as trading volume and trade

sizes rise. The infrastructure of the

ActForex ICTS® platform, for example,

was fundamentally designed to be both

scalable and burstable so that as traders

become more active, there is no downtime

or slowdown and the dealing desk is able

to cope with incoming orders regardless of

their number.

Can you give us some examples of how

your own trading platforms are being

developed and customized to cater for

the differing trading styles of clients?

Mehmet: Since launching its first online

trading platform back in 1996, CMC

Markets understood the fact that it was

near impossible to satisfy the needs and

desires of individual traders with a

standardized interface. Accordingly, CMC

Markets's Marketmaker platform offers

the end user the ability to fully customize

the specific layout of the platform, with

the ability to save multiple layouts where

desired. Such functionality not only

allows the individual trader to configure a

layout specific to their trading style but

also the ability to switch from layout to

layout dependent upon a particular

trading strategy.

Darst: Our approach is both market-

driven and technology-driven. As an

example, we have enhanced, even

radically upgraded our margin

management, account summary and

business management / risk management

tools in our award-winning platform, the

thick client, SaxoTrader. At the same

time, we are introducing the Saxo

WebTrader, which will be a full internet-

based platform. The functionality is

powerful; in fact, it embraces the

capabilities of the SaxoTrader without the

multi-product dimension. We are a global

provider and many retail clients are

limited to web-based solutions, unable to

upload a thick client. Hence, the Saxo

WebTrader, which is also a Mobile Phone

Trader as well.

Rasoul: The flexibility of the front end is

the most important part of the

development. The platform needs to be

able to be setup for different users. We

are constantly looking at our screen

layout system to re-factor components

that are used to display the organization

of the windows. GFT is focused on

designing solutions for entry-level retail

customers as well as what has historically

been our staple customer-base –

professional and institutional traders.

Bang: At ACM-REFCO we essentially offer

the most competitive trading conditions

from the smallest customers upwards

which allows for all sorts of trading styles.

We constantly re-assess our technology

and have a keen eye as to what the

competition is offering so we’re

constantly improving our platforms. One

example is the upcoming development of

our new greatly advanced charting

package which should be available in a

few weeks from now.

Nemirovsky: We provide the ActForex

ICTS® Online Trading Platform to a broad

range of trading firms worldwide, each

with its own regulatory, business and

trading requirements.

Therefore, we’ve had to to cater to the

needs of the broadest base of retail

clients—starting from individuals trading

“Mini” accounts with an FCM in the U.S.

to money managers day-trading on behalf

of hundreds of individual accounts with a

trading bank in Japan. We’ve addressed

this by providing a great depth of

functionality that can be activated at will

by the trading firm. Trading in currency

terms (as opposed to lots), fully

customizable workspaces, advanced

charting with customizable technical

analysis tools and un-dockable/floating

trading windows are just a few examples

of advanced functionality.

In what way can e-trading providers

leverage technology to maintain and

improve their client relationships? For

example, by improving services such as

technical analysis?

Mehmet: Trading platforms are

increasingly encompassing an array of

third party professional trader tools such as

technical analysis and news features that

would previously be accessed along side a

trading platform, at an additional cost. For

example CMC Markets Marketmaker

platform provides its clients with not only

advanced charting capabilities but also

professional news and technical analysis

from third party specialists such as Dow-

Jones Newswire and IDEA Global, free of

charge and fully integrated.

Darst: That sounds right. One example is

the sort of intuitive, black box modelling

and trading technology that the Bank has

developed. It’s an example of introducing

a technology-based solution that meets

and even exceeds client requirements.

People want to develop strategies and

test them, put them into use, monitor and

optimize them as carefully and closely as

they desire. We’re making that possible.

Additionally, our Bank has a fairly robust

analytical team including product experts,

researchers and analysts and economic

analysts. We have always provided our

own, and other banks’ analysis, data and

research free of charge. Our approach to

this is that a better-informed trader is a

better trader.

Muhammad Rasoul

“Each retail customer has their own idea of what should comprise an

FX trading solution”

Rasoul: E-trading in FX has proven that

you can do both from the same product.

For a long period of time it was thought

that you needed to have more than one

product to trade and analyze the markets.

Retail FX has shown even professionals

that this is not the case. I think that the

retail market will continue to evolve what

makes up the trading interface moving

both sides of the trading interface arena,

execution and analytics, closer together.

This could certainly be the case outside of

FX in other markets as well.

Bang: That’s a good example. Customers

are increasingly demanding. Whether it’s a

more advanced technical analysis package

or other features, and online broker must

constantly improve technology and

services in order to keep let alone increase

market share.

Nemirovsky: For retail trading customers,

the technology – i.e. the trading platform –

is the primary delivery mechanism for the

services that they utilize. The key elements

of the client’s experience, for example the

depth of functionality, ease of use and ease

of communication are defined by the

technology. Therefore, maintaining the

client relationship means constantly

improving the technological elements and

tools that the client uses every day – from

trader-dealer messaging to one-click

trade placement.

Offering robust technology, consistent

liquidity and fast execution is clearly crucial

in being competitive and acquiring new

clients. But how important are value-added

services such as 24 hour trading support,

multilingual trading and IT support going to

be in maintaining client loyalty?

Mehmet: Such areas are paramount to

maintaining client loyalty. In addition to

providing 24 hour access via telephone as

well as internet to dealers as well as

support staff, CMC Markets has found that

having a truly global presence, with offices

in 7 countries throughout the world,

provides an additional degree of client

understanding in terms of desires and

needs at a local level.

Darst: All of these capabilities you mention

are highly critical, important dimensions to

success. Multi-lingual platforms are the

basic ante if you seek to participate in the

non-US or non-Western civilization part of

the market. The markets are open 24 hours

and traders in China, Japan, New Zealand,

aren’t going to wait for a London-based

firm, or a NY-based firm to finish their

coffee before placing trades.

Rasoul: Having the ability to trade 24-hours

is a must in FX. Even in the offline world

you have to have the ability to call in and

place the trade if you need to. No one can

operate without this, period. Multilingual

and IT support during off hours depends

really on your customer-base.

If you are targeting certain regions then

these are also critical, it just depends on

your target market. Customer loyalty is

going to be based on a wide variety of

things, these components are going to be

important, but at the end of the day loyalty

will be dependant on the stability of your

systems and the execution that your

customers receive online or over the

telephone with your dealing desk.

Bang: The latter tend to be almost as

important as the former. Obviously

frequent traders need good trading

conditions above all else, but that is not

necessarily the case of non-frequent

traders who can nevertheless be sizeable

customers. Most online brokers tend to

neglect customer service, dealing desk

availability and the multilingual element

because these aspects of our business can

be quite intricate to manage correctly and

require inculcating a strong sense of

responsibility and a well defined corporate

culture within the firm. Strong customer

support in all areas and a multilingual,

global approach to customer acquisition in

my opinion is just as important as effective

execution and will ultimately attract the

better, larger customers but one cannot

afford to neglect any aspect of the online

execution business.

Nemirovsky: Ceteris paribus, value-added

services are significant in maintaining end-

user loyalty, but not for the obvious

reasons. The most important intangible that

inspires customer loyalty (again, all else

being equal) is trust, and from my

experience, end-users trust providers that

offer the best information (this includes

both educational material and trade-specific

data such as news and analysis), the most

accessible (read: personal and in-language)

support and a platform that includes both

advanced and basic features so that the

product can serve the needs of end-users as

they grow in knowledge and sophistication.

Some online trading providers license

their technology whilst others have

developed their own proprietary trading

platforms. What advantages do clients

gain from using a proprietary platform?

>>>

Nicholas Bang

“Active traders essentially seek two things above all else: the

tightest spreads available and reliable,rapid and liquid execution.”

Leo Nemirovsky

“For retail trading customers, thetechnology—i.e. the trading platform—isthe primary delivery mechanism for the

services that they utilize.”


Mehmet: The first major advantage of

proprietary trading platforms is the added

security of knowing that the provider is

able to respond as and when needed to

client technical support needs, without

being required to relay information to

third party companies over which they

have limited access and control.

Secondly, CMC Markets with a history of

online FX trading services dating back to

1996 has found that an understanding of

FX markets and the mind set of FX traders

is paramount in providing a platform that

not only is adaptable to the individual

traders requirements, but that also

provides functionality that enables a

client to trade with confidence and

control. Accordingly, with a team of

software developers working solely on

behalf of CMC Markets, we can be

assured that client feedback can be

incorporated within the development of

the platform on an going basis.

Darst: It all comes down to the technology

advantage. If you have a proprietary

platform and the basic tech IQ to support,

enhance and evolve it, you’ve got a better

mousetrap to offer the marketplace. If

you’re renting some one’s solution you’re

playing in yesterday’s sweepstakes.

Rasoul: I think that a proprietary solution

comes with better technology and more

functionality. When you control your own

destiny you can do a lot more than if you

are depending on another provider for IT

solutions.

To not be able to control the development

pipeline can impede the ability to quickly

make adjustments to meet the needs of

your traders. However, for some start-

ups, licensing may be the only model

that’s fiscally viable.

Bang: Clients using a proprietary platform

will tend to have slightly more competitive

execution and faster technical support.

Both our platforms are proprietary.

Nemirovsky: For all but the largest

financial institutions, there are actually

very few advantages to building and

maintaining an in-house trading platform

along with all the trappings thereof, (e.g.

an IT department, technical support,

administrators, data warehousing, data

centers, etc.). For smaller and start-up

trading houses, there are in fact strong

disadvantages, as development and

maintenance only add to business risk and

consume enormous amounts of vital

capital that should in fact be used to grow

the company. One of our philosophies at

ActForex is that is it best to focus on core

competencies. Trading firms need to do

what they do best (make sales, service

clients, run the dealing desk, manage risk)

and allow technology and software

providers to create and maintain software.

This is simply more efficient, and allows

trading companies to have the best, most

forward-looking technology that is shaped

by a partnership with a dedicated financial

software provider. Licensing a platform

allows trading firms to forego the cost of

initial development, enter the market

immediately, capture economies of scale

in terms of maintenance, hosting and

support and benefit from constant

development and innovation that is driven

by the requirements of multiple firms from

across the entire market.

What sort of new technologies, for example

mobile communications and voice

recognition, are likely to play a key role in

the next level of eFX trading development?

Mehmet: As third generation mobile

phones continue to increase in usage

globally we will likely see an increase in

demand for the ability to trade directly

from phones, in real time. In addition to

mobile technology, platforms will likely

offer greater flexibility and customization

capabilities to clients, with the ability to

not only customize the look and feel of

their platforms but also key features of

the platform specific to their

requirements.

Darst: Certainly mobile phone trading is

here and it’s not going away. Security is a

factor in new connectivities, but we’re

looking at advances in every facet of the

process. Again, we think it’s about

transparency, consistency and legitimacy.

Rasoul: For us, the two are very important

as we are intent on continuing to move

the technology ahead for traders. If you

look at the generation of traders that are

moving into trading retail, it is clearly a

“technologically savvy” generation.

Certainly they comprise a group that will

help drive this market further. Having the

ability to deliver software and technology

that meets this group’s needs will be

important for choosing a business partner

in FX.

Bang: Offering mobile telephone trading

is undoubtedly one of the winning

strategies in the future but to reach full

effectiveness, foreign exchange will have

to become more widespread as an

investment choice for the wider public.

This is not yet the case but could very well

be a few years from now.

>>>



Enis Mehmet

“Trading platforms are increasinglyencompassing an array of third party

professional trader tools”

Daniel Darst

“People want to develop strategies andtest them, put them into use, monitor

and optimize them as carefully andclosely as they desire.”

Nemirovsky: At ActForex we’ve identified

and are actively integrating new

technologies to our ICTS® platform on

several levels: infrastructure, connectivity

and features. Microsoft’s. NET framework

and associated advanced data

processing, storage and management

technologies are allowing us to ensure

that our platform infrastructure will

remain robust and “ahead of the curve”

for years to come. In terms of

connectivity, we see integration with FIX

and SWIFT protocols, as well as STP, as

key to allowing clients to build their

networks of liquidity and value-added

services providers. As far as features are

concerned, we see the continued

evolution of mobile trading – including

the development of advanced trading

applications for 3G mobile devices – as

the next wave. Finally, on the sell-side, I

think that platforms – like the ActForex

ICTS® – that can bring together multiple

products and multiple dealing desks

across physical borders will define the

next level of eFX technology.

Providing Institutional services has

become a major growth area in the retail

FX environment. What are clients likely to

be looking for when choosing an FX firm

to handle the trading and management of

their accounts?

Mehmet: Arguably, the two main factors

that are likely to be taken into

consideration when choosing a money

manager will be firstly, the regulatory

status of the money manager and

secondly, their performance record

Darst: This is, and always has been, a

significant area of our market. Pricing,

consistent and stable liquidity, execution

and service.

Rasoul: Stability. Regulatory oversight.

Proprietary technology. For the larger

Institutional firms they really are looking

for stability in the company they are

partnering with, regulatory oversight, and

technology that is controlled by their

partner. The Institutional deals generally

are made or lost on the integration side,

so the technology component is critical.

Bang: Some brokers offer money

management services to their clients. We

believe that an online broker must focus

purely on providing execution and

everything surrounding that core

business in order to be good at it. We

offer money manager percentage

allocation platforms but they’re meant to

be used by external money managers that

partner with us. Customers looking for

money management services should

consider a long term audited track record

which shows consistent profitability.

Nemirovsky: From what we have

seen from our clients, advanced

(and compliant) reporting, timely

news/information delivery and the ability

to trade multiple segregated accounts

simultaneously are all integral to

the delivery of Institutional services.

Institutional clients need to know that

their provider is operating technologies

that are both dependable and advanced.

For example, the ActForex ICTS® is hosted

at facilities that are SAS-70 Level 2

compliant, providing a level of

dependability that is a competitive

advantage for our clients as they offer

institutional services to their customers.

In what way do you see e-trading

platforms evolving in the near future to

meet the needs of more demanding and

sophisticated clients such as Hedge

Funds who may use API?s and have

trading styles involving automated and

Algorithmic trading systems?

Mehmet: A likely development will be an

increased level of integration between

clients automated trading systems with

that of provider’s eFX trading platforms.

Such integration allows for the

automation of increasingly sophisticated

trading strategies, involving not only

multiple scenario based strategies, but

also including multiple products, for

example strategies involving not only

spot and forward positions but also OTC

options. In addition further integration

will likely be offered between a clearing

firms back office reporting system and

that of the clients.

Darst: We see the evolution very clearly

as one of combination and engagement.

The blurring of the distinctions between

these client types is a very real and

meaningful development for our Bank.

Our expectation is to see new players,

new business models and new

participants step into the hedge fund

space in the near future. Smart

technology and strategic business

planning brings the winners closer to the

action; and naturally with such generous

cash flows in hedge funds, we believe

that this will be the Petri dish for more e-

trading development.



Muhammad Rasoul

“If you look at the generation of tradersthat are moving into trading retail, it is

clearly a “technologically savvy”generation.”

Nicholas Bang

“If you’re renting someone’s solutionyou’re playing in yesterday’s

sweepstakes.”

>>>

WYCIWYGWhat You Click Is What You Get

Swis

s fx

rev

olu

tio

nar

y o

nli

ne

dea

lin

g

www.ac-markets.com

• Consistent liquidity

• Integrated real-time

charting

• Integrated real-time

statements

• Detailed real-time margin

analysis

• Full market resources

• Proprietary dealing software

• 3 pip spreads on all major

currency pairs

• 1% margin trading

• 24 hour dealing

• Instant execution

• No request for quote

• No slippage

• No commission

Advanced Currency Markets is a primary market maker offering both individualand institutional customers the most competitive, instant execution, online fxdealing facilities in the marketplace.

You can reach ACM representatives at the following numbers and addresses:Main switchboard +41(22)3192200Customer support +41(22)3192203 [email protected] development +41(22)3192204 [email protected] desk +41(22)3192205 [email protected]

Rasoul: We are experimenting with a

new system to allow large prop shops to

run our front-end trading applications

and distribute price data and historical

data from one, local server. The routing

of all orders and transactions are then

done through a single point of access.

Certainly an application like this would

provide more advanced installs for prop

shops and better support for APIs. Many

operations only support one standard

and only in a limited capacity while GFT

is one of the exceptions – we support FIX,

Java, Win32, and MQ standards.

Bang: API integration is definitely

something to look at in the future, but

integrating an API in an effective way

(which will provide consistent, liquid

execution) is easier said than done. We

believe that white labeling is structurally

much more reliable and effective than

API integration. With a white label

partnership a bank or broker can become

an online fx provider overnight at no cost

and at no risk, effectively tripling or in

some cases quadrupling their customers’

trading volumes. We specialise in white

labeling on both our Java and .Net

platforms. Of course API integration and

WLPs cater to different market segments

and both will undoubtedly play a solid

role in the future.

Nemirovsky: As the industry matures and

we move beyond primarily servicing early

adopters, the key evolution will be in open

and transparent connectivity. By providing

seamless access to our platform via

proprietary and open-source protocols, we

enable our clients to guide the evolution of

their business. Clients can integrate a

nearly limitless array of value-adding

applications into the ActForex ICTS®

platform and can expand their network

of liquidity – connected via STP – as their

credit relationships evolve. This provides

for a natural evolution, a joint effort

between the primary platform provider,

trading firms and value-added

product/service providers that offer almost

unlimited possibilities to service the

‘demanding and sophisticated’ clients.

Leo Nemirovsky

“As the industry matures and we movebeyond primarily servicing early

adopters, the key evolution will be inopen and transparent connectivity.”


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Daniel Darst is Executive Director at Saxo Bank

Real-Time PositionManagement

The world is changing.

For many, the world has already changed, long ago. While the idea of online, tradeable prices might seem like yesterday’snews for many of us, the concept of trading on a live price is only arecent swing up the path of modernity. The Internet continues to usherin a new dimension in serious trading. Transparency, clarity and rapid,real-time pricing establish a vivid new landscape for the seriousforeign exchange trader. What you see is what you trade. Prices onthe screen are prices you can use. This is a different world than that ofearlier years when voice brokering and telephone-based ordering andconfirmations were the standard.

Real-Time PositionManagement

The Internet has brought real-time data to the

desktop of traders from Moldavia to Portugal, from

the US to London to Japan. And this is only the

beginning. Following the travels of equity and

futures markets from the last decade or so, the

foreign exchange market is now deep in its embrace

of the World Wide Web for the delivery, execution

and management of foreign exchange trading.

Serious trading demands efficient, real-time

integration of risk, margin and account information.

The concept of transparency

Real-time position management draws deeply on

the concept of transparency. Think of the difference

between the telephone and the Internet in the

trading environment. The transparency inherent in

an online order-execution model where what one

sees is what one trades is vast. The Internet and the

technology that enables connectivity is built strongly

on a foundation of clear and visible data. There are

fewer places to hide than ever. The Internet has

made rapid data delivery standard practice. For the

great majority of industry participants, data via the

Internet is clean and useable. For a few, though, the

Internet has significantly retarded various business

and pricing strategies. However, the pace of

acceptance of a new standard of transparency via

the Internet is unstoppable. The man on the street,

the little guy, is increasingly standing on the same

level playing field as the banker in the corner office,

or the trader in front of his or her screens.

Real-time position management is, among other

functions, an expression of the confluence of smart

data, real-time data, and intelligent integration of

front-end, middle-office, and back-end systems.

Real-time position management is, among other

functions, a logical extension of the packaging of a

“dashboard” of intelligent and needed information

so that traders – large and small – can manage their

portfolio against the high risk occasioned by price

fluctuations in the instruments being traded. Real-

time position management is how today’s traders

live their lives and their work.

In a world defined by rapid dissemination of data,

information and transactional status, the serious

trader benefits significantly from the linkage of

execution information with account information.

Margin management, for example, requires real-

time management. Updating the amount of

collateral available and the inherent margin

expansion that can be put to use is a fundamental

reality for any serious trader. In a platform with

aggregated collateral and real-time margin

recalculation by product, the transparency is

complete and at your fingertips – always.

Each step along the transaction path compounds

into the finished effect of real-time management:

Your price is live.

Your chart is live.

Your execution module is live.

SaxoTrader2 SaxoTrader1

Your confirmation is immediate.

Your position confirmation in your account blotter is live.

>>>



Your margin position is adjusted immediately.

Your available collateral is adjusted immediately.

The pricing in your P/L is live.

Imagine a transaction built on less than current data. Imagine

the problems of slippage as a way of life, the challenge of

booking trades that slip from the positions and prices originally

quoted. For the back office, for the sales force, and of course, for

the trader, a world without such rapid integration of clear and

accurate data is an unpleasant recall to yesterday. It

challenges credulity to conceive of a fiscally rational, financial

professional able to trade without the benefits and assurance

of real-time margin management, risk management and

account consolidation.

Of the several platforms that meet professional standards in the

industry, all inherently recognize the importance of connectivity

from the front end to the middle to the back end. Charts, data

and research are made available in real-time to support the

trading and execution activity of the user. At the same time, a

full accounting of margin positions, available equity and profit

and loss calculations complement the trading platform.

Consider the critical elements of the technical logic that

supports this approach:

One – from a compliance perspective, nothing is obscured.

Real-time linkage enables a full look-through in trading, margin

management and equity positions. For back office, compliance,

risk management and legal professionals, the ability to see

data, executions, activity and positions is essential. And now,

as we are witnessing a rapid increase in regulatory oversight,

working in a real-time, data rich environment establishes a

stable and truer baseline.

Two – from a trading perspective, the trader can be a smarter

trader. The investor gains real-time access to profit and loss

calculations for his account at the aggregate level, and in more

preferred systems, at the asset category level (for multiproduct

platforms), at the instrument or currency cross level.

Three – from a risk level perspective, knowledge enables

appropriate caution. Risk management is a function of real-

time position management. In preferred systems, margin

management, collateral availability and market exposure are

embedded in the trading and execution environment. These

critical indicators are clear and visible at all times on the trader’s

dashboard.

Four – from an account management perspective, real-time

information supports accurate data accounting. The platform

should allow current and historical snapshots of trading activity

are essential to the management of a professional account to

include patterns, trends and prior trading results.

Five – from a multi-product trading perspective, aggregated

margin management encourages smarter, efficient trading.

Serious traders must be able to review margin and net positions

across FX, Futures, CFDs and other traded products to ease risk

management concerns and efficiently establish back office

oversight to meet regulatory and sub-account needs.

Conclusion

In the last several years, the movement toward full integration

of data – from accessing market information to trading on real-

time pricing, through to managing net exposures for individual

products and aggregated for the complete roster of instruments

– has become a standard. Traders, their clients, and institutions

serving a broader population welcome this evolution. In

consideration of the generations of obscured and difficult-to-

access client information, this change may be a revolution. The

real-time management of positions, the transparency of

account activity and the historical record of trading activity,

dealer chat and transaction-related issues help assure a more

precise, well-managed and orderly industry.

Real-Time Position Management

ACI – 50 Years Academic Session Friday October 28th 2005

ACI – 50 Years Academic Session Friday October 28th 2005Palais Brongniart, Place de la Bourse, 75002 Paris

Registration fee:

ACI members Euro 300.00

Non-members Euro 500.00

Corporate tables for 8persons Euro 5,000.00

TO REGISTER PLEASE CONTACT:

Natalie van Drenth

ACI Secretariat

8 rue du Mail

F75002 Paris

Tel : +33 1 42 97 51 15

Fax : +33 1 42 97 51 16

Email: [email protected]

ACI - The Financial Markets

Association was founded in France in

1955 following an agreement

between foreign exchange dealers

in Paris and London. In the years

that followed, other national

associations were formed and there

are now affiliated financial markets

associations in 64 countries and

individual members in another 10

countries. ACI, with over 13,000

individual members, is the largest

international trade association in the

wholesale financial markets.

P R O G R A M M E

15.30 Opening film: 50 Years of Financial Markets (sponsored by Reuters)

15.35 Opening address ACI President:Presentation of ACI & Euribor ACI working groups

16.00 Mr Guido Ravoet, Secretary General of the European BankingFederation: “Market Initiatives towards the Euro ZoneIntegration”

16.20 Musical intermezzo

16.30 Mr Fabrice Demarigny, Secretary General of the Committee ofEuropean Securities Regulators: “The place of CESR in the World Regulatory Environment”

17.00 Break

17.15 Presentation of ACI’s 50th Anniversary book by Mr ColinLambert

17.30 Musical intermezzo

17.40 Mr Jean-Claude Trichet, President of the European CentralBank: “The place of the Euro in the World Financial Markets”

18.15 Closing followed by cocktails and dinner

S P O N S O R S

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The e-Forex Interview

The e-ForexInterview

With Björn Lundvall, Vice President, Head of e-commerce markets at Handelsbanken Capital Markets

>>>

Björn, in Euromoney’s annual ranking, Handelsbanken Capital

Markets was the highest climber among the world's largest foreign

exchange trading banks. Is the level of your investment in FX

trading being matched by a similar one in developing your e-

commerce services?

Yes, the development of our e-commerce platform is one of the key

factors for us in order to be able to move our position forward in the

market. We are putting a lot of effort in development both of our

own platform, MarketOn-Line as well as the integration of multi-

bank systems. It is also important to remember that the corporate

customers are looking at your e-commerce offering as a whole. This

means that the FX-trading service is just one part of what the

customers require. Other electronic cash-management services are

at least as important. We are therefore putting a lot of focus into

developing other services within the cash-management and

payments area, as well as development of our settlement and

matching offerings.

How pivotal a role is e-commerce now playing in the acquisition

and retention of your clients?

e-commerce is today an absolute must both in the acquisition of

new clients and in our effort to enhance services for our existing

customers. e-commerce has become a part of the basic services.

Do you still see some reluctance from some clients in adopting

electronic FX and if so, why is that and what efforts are you making

to overcome their concerns?

Yes, there is still some reluctance to adopt electronic trading from

some customers but as a percentage of our total customer base,

they are rapidly decreasing. It is absolutely necessary that you in the

role of a sales-person put yourself in the situation of the customer

and make a lot of effort explaining the benefits the services will give

the customer. It is also very important to point out to the customer

that the tools will give the sales-person more time in his advisory

role rather than the opposite. Also, customer concerns about

security issues must not be taken lightly.

Many banks are now reporting significantly increased e-volumes.

Are you experiencing this and if so, are certain types of client fueling

the demand?

Yes, we also see increasing e-volumes at Handelsbanken. All types

of clients contribute to the increase. The customers are growing in

numbers, and we also see that the users are becoming more mature

and show more confidence in e-trading in general. There are more

deals being done, but also the average volume is increasing for

each deal.


Your own e-commerce portal, MarketOn-Line is part of

Handelsbanken's online corporate services and can be used as an

independent service. What sort of flexibility and functionality does

it offer clients?

MarketOn-Line provides the customer with a flexible tool for FX-

trading and deposits. It is designed to fit the needs of a wide range

of customers, from small to large clients. Apart from real-time,

automatic deal-execution it also offers streaming market rates and

a real-time interface to the customers’ TMS systems. We have no

minimum amount requirement in the system and it is also fully

flexible when it comes to broken dates and amounts which make it

easy for the customer to hedge their flows down to the last cent.

MarketOn-Line also contains a flexible limit-order system, that gives

the customers the possibility to manage both take-profit and stop-

loss orders online.

In what way has electronic trading changed the role of your FX

sales people?

Electronic trading is taking away the manual intervention in plain-

vanilla deal processing. This development has started to transform

the role of the sales person from deal executioner to financial

adviser. A deeper knowledge of the client’s core business and of the

structure of their balance-sheet is required in order to be able to

present him/her with the proper business-proposals. Our customers

require a broader competence from our sales-people. Good

knowledge of the FX-market is simply not enough. They tend to see

FX-trading as an integrate part of their cash-management process.

This means that the FX-sales person now also will have to know

something about payment-solutions, cash-pooling, zero balancing

etc. The Sarbanes-Oxley Act and IAS has put operational risk and

working capital management very much in focus with our

customers.

You have a very strong research offering. How important is

providing good advisory and research services going to be, as a

means of adding value to e-trading services?

The quality of our research gives us a competitive advantage. It is

very hard to differentiate from our competitors with the

functionality in the system. Any new features are easily copied. And

I don’t think it is a coincidence that the look and feel of many e-FX

systems is basically the same. The customers prefer a certain

layout. With quality research we can build confidence in our e-

offerings.

What areas are you currently focusing on to enhance your existing

FX e-commerce offerings?

Developing the functions in MarketOn-Line as well as always

seeking to meet the customers need to trade, regardless of

platform. One area that I want to single out is to improve our limit-

order functionalities. Bringing order-management out to our

customers is one of our key developments right now.

You’ve introduced an additional Internet service called FX

Transaction Confirmation. Who is this product aimed at and what

prompted its development?

This service is designed for corporate customers who prefer to settle

their deals directly with us, rather than using a settlement system

like FX-Match. This system replaces the confirmations that we

previously sent out via mail. The customer has the possibility to view

their confirmation over the Internet and also to sign the

confirmations electronically. The service also contains a search-

engine where the customer can look at their outstanding deals with

the bank, for instance the maturity structure of their forward book.

Handelsbanken is a liquidity provider to several multi-bank portals

who continue to sign up customers in increasing numbers. Looking

ahead, do you expect to see consolidation amongst these and other

eFX providers and how would that change your own eFX strategy?

We are already trying to limit our engagement as a liquidity provider

to as few portals as possible. However, we have to be represented

where our customers prefers to meet us. I definitely think that we

will see a consolidation among the multi-bank portals. The increased

usage of e-FX systems has made the market more transparent and

the difference in pricing between the liquidity providers is almost

gone. This means that the FX-portals will have to provide the buy-

side with other services such as settlement services and straight-

through processing. I still think that our single-bank platform will be

an attractive choice for our customers. Not only because we can

provide the customers with settlement services and systems

integration, but also because we can provide a broader cash-

management service over the Internet. And by the end of the day,

when the electronic offerings are becoming more alike, relationship

will matter.

The e-Forex Interview


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