As 2002 began, the financial world was still reeling from the shock of September 11 and the Enron affair. Business confidence was at a low ebb and e-business was all but stopped in its tracks as banks continued to slash their technology budgets Ã¢â‚¬â€œ in some cases, by up to 90% of 2001Ã¢â‚¬â„¢s allocations. Yet 2002 was the year in which e-FX started to grow up.
In e-FX, several models were competing for a nascent business. Atriax, the multi-provider FX platform (MPP) in which Reuters, Citibank and Deutsche Bank had heavily invested, was the casualty, closing to business in April. It was less well-executed than its main rival, FXall, and suffered the consequences.
Fewer platforms, more access to liquidity
This seemingly negative development has, in fact, had a largely positive effect. The number of MPPs competing for buy-side business is now reduced (too much choice acted as a considerable brake on the market last year, we believe) and liquidity is now more evenly distributed across the remaining players. For example, following the Atriax closure, Citibank moved to provide liquidity to FXall and FX Connect, Deutsche Bank to FXall and Currenex and JP Morgan to all three MPPs, allowing potential users to trade with more of their FX banks via more channels.
In fact, in a gloomy trading environment overall, we see reasons to be positive about the development of the (still very young) e-FX market this year. According to research carried out by ClientKnowledge between April and June (The FX Study 2002), buy-side appetite for multi-bank FX trading is sharpening. First, it must be stated that the use of MPPs is still very low. For example, 80% of European institutions did not trade via MPPs in the twelve months from June 2001 to June 2002. But of those who did, 9% were trading between 1 and 25% of their FX and a further 8% were trading more than 50% of their volumes this way. But in the next year, 10% of institutions in Europe expect to trade up to 25% of their FX via MPPs, and 14% will trade more than 50%.
Predicted growth figures for the US market are more promising still. Here, among institutions trading via MPPs 19% of institutions traded more than 50% of their FX via an MPP last year and this looks set to grow to 28% next. In Asia Pacific, 15% of online users will trade more than 50% via MPPs next year, compared to 13% last year.
Refining the models
The closure of Atriax has not brought us closer to a single solution for e-FX this year, but rather, the differences between the remaining offerings have become more defined. We see this as a positive Ã¢â‚¬â€œ the market is segmenting, enabling the needs of different types of users to be met more cost effectively by their counterparties.
For example, the number of FX providers offering prime brokerage facilities Ã¢â‚¬â€œ a model that is very dependent on electronic communications between the counterparties Ã¢â‚¬â€œ has grown substantially recently. Currenex has reacted to this market need (from, largely, hedge funds) by introducing a model that allows access to multiple providers via a hub bank. Other online providers, for example Hotspot FX, target margin trading business.
We also see FXall emerging as a potential provider of choice to high volume, strongly trading-oriented clients, while State Street continues to successfully target institutional buyers of FX with Global LinkÃ¢â‚¬â„¢s FX Connect. Centradia is for mid-market corporations with a multi-lingual offer providing access to multibank pricing via an existing banking relationship. Multi-product sites include Global Link, Centradia and 360T Treasury Systems. Meanwhile, single dealer platforms continue in parallel with the multi-bank offerings and in some cases, doing significantly more business. We believe that UBS, for example, is trading around 3000 + electronic tickets a day over its single dealer platform.
So, as at October 2002, e-FX remains very much a multi-channel environment. A necessary situation, we think, given the diversity of buy-side needs, from those of a GE or Coca Cola to an SME. And it is chastening to note that still the major competition for the e-FX providers (be they single or multi-bank) is the ever-popular telephone trade.
This desirable situation for the buy-side does, of course, present the sell-side with the considerable challenge of managing multiple offerings (with their associated costs) and potentially conflicting marketing imperatives. Should sales teams be directing business towards MPPs or their own e-trading platforms, for example? Diversity wonÃ¢â‚¬â„¢t disappear, so a coherent strategy with careful coordination of sales forces and marketing messages is an imperative for providers.
Shifting focus signals a maturing market
e-FX has justified its existence by its ability to provide fast, competitive and transparent pricing and do the deal within a few mouse clicks. ThatÃ¢â‚¬â„¢s a given now (this year, weÃ¢â‚¬â„¢ve seen an increase in auto-pricing direct into MPPs) and a discernible trend is that both buy and sell-side focus is starting to shift away from a pre-occupation with the point of execution (ie, pricing) towards gaining the benefits of automating the whole transaction chain by integrating e-FX closely with trade order management and treasury management systems.This is where e-FX really beats the telephone trade: when a trade can be executed direct from a trade order or treasury management system and a single input can automatically update positions, and pass the trade details on to the back office for confirmation and settlement. And, on the sell-side, the bank can also seamlessly process the trade from front-office to back. The cost to the sell-side of manually processing a deal is around US$20, but that cost can more than treble if intervention is required, while the cost of processing an e-ticket is in single digits.
What will the coming year bring? We can expect the battle of the channels to continue, and there will be some more consolidation and re-trenchment among the MPPs in the coming year, despite the predicted growth in volumes. e-FX is on the road to maturity. ThereÃ¢â‚¬â„¢s still a long way to go, but those providers who can stay the course will, we are convinced, get returns.