Variety spice of online forex trading

From silos to multi-bank platforms to multi-product portals. The future is looking colourful for online foreign exchange trading.
Imagine: A foreign exchange market where you are able to trade with any foreign dealer via the internet at any time from anywhere at the price you want and with the privacy you need. And not just plain vanilla trades, but multi-products, like fixed income and interest rates. Imagine further, a system that takes your trade, which took a couple of seconds, and updates and recalculates your position in just a few more seconds. Your enterprise resource planning (ERP) system is able to "talk" to the trading platform, thanks to standardized formats. And no need to worry about your credit line, or delivery of the foreign currency - straight through processing (STP) takes care of it.

Sound good? That was the vision painted by Irene Lim, manager of GMG e-Commerce and currency options specialist at Bank of America in Hong Kong. Speaking at a recent conference in Singapore, Lim sought to outline how banks should position themselves to compete for clients in online forex trading.

Already, 11% of accounts trade online via systems other than the electronic broking service (EBS) system, or Reuters Dealing 2000, which are systems used for inter-banking dealing. Currently, approximately $1.5 trillion of foreign exchange is traded daily. That means some $165 billion in foreign exchange is traded by companies and retail traders themselves, either on silos (point to point), multi-bank platforms, or on third party hosted portals .

For the end user, STP is perhaps the biggest drawcard. "It only takes two seconds to make a trade," says Lim, "But it takes about two hours to complete the transaction in the back office." STP means that once the trade is completed, the appropriate accounts can be debited or credited, and accompanying details sent through to the company's back office treasury and back office system.

Banks also benefit from STP. For example, payment processing is labour intensive, with clients faxing, phoning or sending instructions via telegraphic transfer. Bank staff then have to manually verify and initiate the payments. Overall, STP can decrease costs and increase operational efficiency. "I truly believe that STP will make the difference between the platforms and models," says Lim.

Competitive advantage

Where such links into corporate banking and cash management systems are important, bank platforms have an advantage over third party foreign exchange systems. Combine this with the lure of a credit line and the strong potential for client loyalty is there. Where the amounts traded are relatively low, the reality is that clients may prefer to deal with their relationship bank rather than the inconvenience of setting up multiple accounts to take advantage of a few pips.

Other advantages to the end user are improved price transparency, ease of execution and access to value added resources such as market research and analysis.

Banks need to differentiate themselves in other ways, providing a range of products on the one platform with STP and integrating other financial services, says Lim. In addition, clients should have access to directed and relevant research, and commentary. Analytical tools should also be available. For example, clients should be able to enter in their exposure, the option they wish to take and have the analytical tool work out the potential impact of the hedge on their profit and loss profile.

From a human resources perspective, Lim adds, specialist single product traders will be made obsolete. As portals start to offer multiple products, dealers and sales staff will have to be re-allocated to more "value-added" and advisory functions.

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