Celent, a strategy consultancy, predicts that in the period between 2009 and 2010, daily turnover in the foreign exchange markets could rise to $4 trillion, with 75% of the interdealer spot market volume and 50% of the dealer-to-client volume conducted electronically. However, a recent internal survey conducted by Citi found that 60% of foreign exchange deals between the bank and its customers done in the US and Europe were on an e-trading platform, compared with only 16% in Asia.
Citi is attempting to improve that statistic. On September 9 Citi launched CitiFX Pro, its new online foreign exchange (FX) trading platform for individual and small institutional traders, in Hong Kong. CitiFX Pro will be rolled out in other Asian countries in the next few months. CitiFX Pro allows investors to trade 24 hours a day, with settlement in the customerÆs base currency, thereby eliminating the customerÆs requirement to open bank accounts in each of the currencies being traded. Through the platform, clients have more than 130 currency pairs to choose from.
Todd McDonald, global pricing and trading head of Standard CharteredÆs FX electronic trading and pricing business, agrees that Asia is behind the US and Europe when it comes to trading currencies online, but he believes that the region will quickly catch up. ôWe feel that the next era for financial markets, as well as electronic trading, will be centred in Asia, Africa and the Middle East.ö
There are a number of obstacles that hinder the spread of FX e-trading in Asia. One is the law: the regulations that individual countries have controlling the trade in their currencies. And each country limits different kinds of transactions. For example, China prohibits spot deals between onshore dealers and an offshore counterparty, while the Philippines will allow such a trade only if there is an underlying transaction.
The more complications there are, the more difficult it is to develop the electronic market. Countries that are particularly challenging are ones where the central banks are very strong.
McDonald says that it is important to be in position when the markets deregulate and, in the meantime, work within the pre-existing regulations. Standard Chartered has done this by developing a SharÆiah-compliant version of its online treasury FX trading and hedging platform targeted to corporations and institutions operating under Islamic principles, and by offering onshore local currency trading in places such as Indonesia, Malaysia and India.
Another problem is the level of technology û the internet might not be a problem in techno-savvy countries like Korea and Singapore; but in less wired countries, such as India or Indonesia, it can be more of an issue. ôThe internet is good enough for day-to-day usage, but when youÆre talking about milliseconds, the network might not be able to cope with it,ö says Lung Nien-Lee, co-head of corporate sales and structuring, Asia fixed income, currencies and commodities at Citi.
A choppy line can be especially troublesome now that FX e-trading platforms have moved to using a model where prices are streaming, replacing the older system where each price was individually requested. If the local internet infrastructure is not good enough, a company might require a leased line to get the connectivity it needs to trade.
Another reason why Asia may have been slow to pick up on electronic FX trading is similar to why there was resistance to labour saving devices introduced during the industrial revolution. A chief operating officer might be interested in the benefits of using an FX e-platform, but down at the dealing room floor, the person who makes the deals in the company might feel that the new technology could make them redundant.
The diverse range of regulations across Asian countries means that one solution does not work for all markets, and it can be beneficial to partner with a local institution. ôWhere Saxo has a physical presence and is authorised to conduct direct retail marketing, we take the opportunity to do so,ö says Kevan Ward Hull, head of marketing and business development Asia Pacific at Saxo Capital Markets.
Due to differing regulations across countries in the region, the best option can often be to white label a platform to a local bank. This means that a platform provider will take its platform, modify it so that it is in the local language and has the partner institutions logos, so that it fits into their website. The result is that a local bank gets quick access to a high quality platform and the platform provider gets exposure to a new market.
When it comes to e-platforms, different partners are looking for different functions. ôOne size does not fit all,ö says Alistair Duff, BarclayÆs Asia-Pacific head of e-FX. While the functions will all be in the platform, it is up to the platform provider to bring them out for the partner. ôTraders who are trading for the first time might want to be able to check the price before they make the trade. More active traders might be happy to complete a trade with a double click, and if they really want to get into the market quickly, maybe even a single click.ö
A hedge fund, which might make numerous trades within the same day, would be interested in the accumulator function, which takes several trades and aggregates them all on to the same ticket. An asset manager however, might find the split function more useful, which allows for the results of a trade to split among a set of funds. A corporate treasurer, however, may require the ability to roll spot trades to a forward date.
The net effect of white labelling a platform is that it enables more people to benefit from e-FX trading more quickly. For companies like online foreign exchange company FXCM, which take a cut from all the trades conducted on their platform, the more traders, the better. ôItÆs a high volume business û the profits keep up as long as traders keep trading,ö says Francis Lee, FXCMÆs Asia Pacific director.
A longer version of this story initially appeared in the August issue of FinanceAsia magazine.
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