Chip Lowry Head of Global Link, Europe, at State Street
Chip Lowry Head of Global Link, Europe, at State Street

With Chip Lowry, head of Global Link, Europe, at State Street.

Chip, State Street launched FX Connect®, its foreign exchange trading system in 1996 and last year it surpassed $45 billion in daily trading volume. Why do you think its value proposition has become so attractive for real-money managers over the last 10 years?

FX Connect solves a very real problem for fund managers: How do I handle the multitude of orders I need to deal with on a daily basis? Many systems in the market concentrate on price and price is an important factor, but we take a different view that price is just one piece of the larger conversation around trade lifecycle management. FXConnect has also far surpassed the $45 billion in daily trading volume figure as well.

In the past, you’ve talked about how FX Connect® "re-engineers" the FX trading process. Can you explain what you meant by that and how this benefits Fund Managers?

The main problem fund managers have faced in the past is not price per se, but the Price, Process and STP problem. Those are the factors that get you to best execution. We spend a lot of time with managers discussing their trade process philosophies. We work with them to create efficient business processes which can be incorporated into their internal systems and provide best execution. I remember one client we worked with several years ago. We had a person on-site for a week doing process discovery. The trader received a report in the form of a printout but didn’t know what system it came from. Someone else printed the report and gave it to the trader but didn’t know if he could get the data in electronic format. The system that created the report was an in-house legacy system. We had to follow that trail all the way back to trade origination. At the end of a week, we mapped out the process and showed it to the traders who were really amazed at how awkward their process was. We worked with them to create a more efficient business process enabled by FX Connect.

State Street’s multi-asset class network, Global Link®, now features 46 liquidity providers representing over 140 dealing room locations and delivers unique fact-based research, decision support tools and trading technology for six asset classes to clients in 24 countries worldwide. What has that success taught you about what institutional investors are really looking for from an electronic trading network?

One thing that stands out is that one size does not fit all. Whether it’s something like FX trading styles, FIX versions, or futures clearing, clients want choice and open access. We’ve been very proactive with providing client choice over the last 10 years. Clients also want to see innovation, and we’ve been equally proactive in innovating across asset classes. In FX, we quickly realised that the point of execution is a small part of best execution. As a result, we’ve provided innovative solutions across the workflow process, both before and after the actual point of execution. In FIX we have an ability to offer FIX translation at different end points in our network. In futures, we’ve collaborated with a third party to offer a unique futures clearing capability tied to State Street’s custody systems which completely streamlines processes and offers compelling operational benefits.

Our focus in this edition is on the impact of e-commerce on FX Order Management. How important is the arrival of so-called Execution Management Systems (EMS) likely to be, in improving the handling of FX orders?

EMSs have been around in the equity space for some time now. Ideally, a trader would like one system on the desktop that could trade all asset classes from a single blotter. Unfortunately, with the pace of innovation in the financial markets, it’s very difficult for one system to keep up with financial innovation. So you are faced with the decision to go with one system that does everything but not particularly well, or go with specialised trading systems with deep functionality but which only deal in a specific asset class. With the increased focused on best execution, managers want to be able to demonstrate that they can handle complex orders among different asset classes efficiently while adding value with the trading process. The way to do this is with the use of EMSs. We are now seeing the concept in the FX space as well as other asset classes. Some of our workflow solutions incorporate our own EMS solution which represents our 10 year experience in the electronic FX area.

State Street has recently developed a comprehensive foreign exchange execution management workflow solution via Global Link® for Merrill Lynch Investment Managers (MLIM) in London. Do you see the collaboration with MLIM as representing an important step in the evolution of e-FX?

The MLIM project allowed us to pull together several types of processes that we had done for other clients in one important workflow EMS solution. The challenges MLIM faces in FX order handling are not unlike other large investment managers. We partnered with them to create a truly efficient business process that allows them to maintain full control over how they trade a myriad of orders while adhering to specific compliance and ERISA requirements. Working with MLIM, we have expanded the concept of what an FX EMS can be. It is a multi-user, multi source system that really defines leading edge thinking in this area.

We’ve seen figures that suggest that 50% is a fairly accurate reflection of current institutional participation in online trading. If that’s the case, what factors are likely to stimulate increased uptake? Will issues surrounding FIX and CLS be at the top of the list or will the need to demonstrate Best Execution, or compliance with the new, more onerous regulatory environment, be the main drivers?

Some surveys I’ve seen suggest that phone trading is still a factor for over 80% of fund managers’ processes. That doesn’t mean that the phone is the only venue, but one of many venues including multi-bank and single bank portals. That really doesn’t surprise me however, as FX is still a relationship business and larger trades are still done on the phone. It’s not uncommon for a large trade to be done via a call and the associated splits to be subsequently sent via FX Connect. It really is all about having a range of trading options available and choosing the right one for the situation.

With respect to FIX and CLS, those are important drivers. Standards will certainly increase market uptake. I don’t think regulations and compliance will be the direct drivers to wider adoption of electronic execution. They will however push the market towards better business processes of which electronic trading will be one.

How much progress has been made on enabling the FIX standard to handle the business processes embedded in FX Connect® and do you believe there will be a greater focus on how the standard can be used to improve automation in the FX arena?

I think creating standard processes in FIX for FX is one of the most active areas that the FIX group is working on currently. I co-chair the FX Business Practice Subcommittee for FIX and it’s great to see all the industry participation in this area. Because FX trading can be so unstructured, we have some lively debates about how things should be done. We’ve bedded down some of the simpler flows and are looking at what we will do next in phase 2 of the project. As you can imagine, given all the different ways of trading FX, the number of processes is very large.

FX Connect is a very flexible product and there hasn’t been a workflow yet that we haven’t been able to accommodate. FIX is also very flexible and I think there is a good fit between the communication that FIX provides and the detailed workflow provided by FX Connect. The two complement each other very well. We are well down the road of FIX enabling our FX Connect workflow capabilities if a client should require this.

Earlier this year, State Street partnered with SSISearch to provide an automated link between Global Link’s FX confirmations network, GTSSSM, and third party SSI databases. What was the rationale behind this initiative and what benefits does it bring?

There are two important points about the work we are doing with SSiSearch. Firstly, standard settlement instructions (SSIs) are the bane of every fund manager’s existence. No one really wants to deal with them. Every fund manager either handles it inhouse or outsources it to a reluctant custodian. The problem is that the same instruction for receiving euro for a given bank exists in multitudes of databases spread out across the industry. If an instruction changes, everyone has to know to update their databases. That is clearly very inefficient. With the work we’re doing with SSiSearch, banks enter their own instructions once into the database. If that bank changes their instructions, anyone who uses that database automatically gets the updates. It’s a really simple but powerful idea. The other point has to do with CLS. SSiSearch also provides the instruction database for CLS Bank. All parties that settle through CLS list their instructions in this other database.

Bringing these two points together allows us to provide some great benefits to our clients through GTSS, our FX settlement center product. After a trade is confirmed in GTSS we check the SSi databases to see if the trade is CLS eligible. If it’s not, we check to see if the settlement instructions are listed. Either way, we will populate the SWIFT messages with the appropriate instructions. Fund managers no longer have to worry about SSIs and when their custodians begin to settle fund activity through CLS, the instructions will automatically update. This is exactly the simplicity that fund managers have been seeking.

We have recently started to focus on the opportunities that the FX market presents for Algorithmic Trading, which has seen exciting growth in the equities space. Are the complex currency trading requirements of most institutional money managers likely to present significant barriers to the adoption of Algo FX trading?

Algorithms in the FX space will certainly fill a niche. For fund managers I think they will be used for low value trades where a trader just needs to get something done. These might be dividend payments or interest repatriation. For those types of trades some sort of VWAP, TWAP, or other benchmark could be appropriate. Larger value trades will be worked by the trader. The issue is that trades in the institutional market are really proxies for a lot of allocations that can number in the thousands. To use an algorithm like slicing-over-time, you will inherently get back partial fills as discrete trades. Allocating these partial fills back to underlying breakouts can create compliance issues about how the prices are assigned. For hedge funds or where people are trading on behalf of only a single entity or account, algorithms can play a major role, especially proprietary algorithms. However this is not a typical workflow for investment managers.

In Global Investor Magazine’s 2006 Foreign Exchange (FX) Survey, State Street was ranked number 1 in the GI 100 Best Overall FX Service category, which included respondents from the 100 largest third party asset managers. Do you see this as mainly a reflection on your comprehensive breadth of FX offerings or more on your commitment to superior customer service?

It is really a reflection of both. It underscores our expertise at providing the most comprehensive breadth of offerings in the industry spanning multiple FX requirements. In addition it is a reflection of our 10 year history of working closely with institutional investors and consistently providing them with superior client service. We are not standing still either. There is a lot more in the pipeline to come from us.