The head of the United States Patent Office, Charles Duell, is credited with arguing in 1899 to close the Patent Office because “everything that could have been invented, has been invented.”
In the early 1940s, IBM’s president, Thomas J Watson, reputedly said: “I think there is a world market for about five computers.”
Jon Corzine, then-CEO of MF Global, in a company-wide email after a downgrade by Moody’s wrote in late October 2011: “While I am disappointed by this action, it bears no implications for our clients or the strategic direction of MF Global.” And: “The sun will come up tomorrow.”
In July 2012, one can read in an article in FXWeek that “The flurry of new trading platforms that have launched in the foreign exchange market in recent months is unsustainable …and will undoubtedly lead to further consolidation as the successful ventures are acquired and the unsuccessful ones are pushed out of the market, according to speakers at the FX Week USA conference in New York last week”.
Leaprate.com echoed this sentiment stating that “It is also hard to believe that all these firms will each build up enough volume to create worthwhile businesses.”
If you started out chuckling about how woefully shortsighted some people were in previous centuries, you can tell by now that we have comfortably arrived in the present and the current discussion about the proliferation of FX platforms. Are you still smiling? I am not. It baffles me to read story after story about ‘platform proliferation’ as a result of a measly 6 new ones that were announced by a variety of industry participants in the last 2 months. In that time frame, Integral alone launches that many and more on behalf of its customers.
Seeing the forest for the trees
I am not trying to make fun of any of these individuals but again and again, people seem to be repeating the same mental mistake of looking through the lens of the past when trying to understand new things. When personal computers entered the corporate offices in the late 80s, nobody really understood how to make use of them. At the time, the only people in the office who were using desktop machines in a significant way as part of doing their job were secretaries who had typewriters. And when asked, how many PCs were needed, the usual answer was one per department. Depending on the ego of the boss, it either continued to collect dust in his office, or in a spare room somewhere. People considered it to be a distraction, a time waster. These debates occurred while every office worker had a phone on their desk. But guess what, when the phone was introduced into the workforce decades earlier, the exact same discussion had happened. Who needs a phone at work? To do what? Well, maybe we take one for the department but it is really a distraction and there is a great danger that workers will waste corporate time. Here is my last example: When finally, in the early nineties, office workers had PCs on their desktops and were using them on a daily basis, along came the Internet. Again, its roll-out got delayed along the very same patterns. Who needs it? It’s a distraction, employees will waste time on it. Fast forward to 2012. Imagine you, in the middle of your workday, and suddenly there is a serious power outage and you lose your phone, your PC and access to the Internet. It will be painfully obvious how all these developments enhanced your ability to do your job and dramatically have increased your profitability. That’s how − in hindsight, everyone understands the power of paradigm shifts.
“The sky is falling! The sky is falling!” (Chicken Little)
For the record, in the last 18 months, Integral has launched 80 FX platforms for customers, an average of 4 per month. I am happy to report that the FX world is still in order. But, there might be a new FX world order emerging.
This shift is driven by two factors; one is that technology can now deliver discrete functionality similar to what human traders or salespeople can do (see the recent Tullett Prebon announcement) and b) that by partnering with someone like Integral, any bank or broker can launch their own FX platform for basically free and with very little risk. It can happen with no capital expenditures on their part and be deployed in a matter of weeks, because they benefit from the pre-existing connections with all major sources of liquidity and prime brokers that we have aggregated over the years. And, given that they have no ongoing fixed costs, the sustainability issue goes away. So why wouldn’t they?
Are we online yet?
Decades ago, it was extremely expensive and very time consuming to set up an electronic brokerage system. As part of the planning, one had to decide on one way to execute (i.e. order book) and that was that because the technology was very limited in its flexibility. Subsequently, everyone else who wanted to join in and trade on that platform was forced to change their own business processes to fit those of the electronic venue. Because one size doesn’t fit all, many stayed away. As a result, FX markets are already highly fragmented in the off-line world with thousands of sustainable individual businesses who trade FX in any non-electronic way imaginable.
Today, technology has advanced to a point that high-level customizations are economically feasible. The saying ‘what you see is what you get’ has evolved into ‘what you want is what you get’. Integral can take what you have, and automate it the way you have it. No need to compromise. I know from the many inquiries we get that organizations that are currently on the fence, or are not yet participating in e-FX, are taking note. These FX market participants look at their existing way of trading FX and decide to automate it, exactly the way they have it because that is what works best for them. Exclamation point.
I postulate that many of these new platforms are simply on-line versions of existing off-line businesses and we’ll see their number increasing in the future, not consolidating.
Greenwich Associates reported in April that “strong growth in electronic trading activity last year pushed electronic foreign exchange volumes above 60% of the overall global FX market for the first time.” That means nearly 40% are still out there to be captured. My prediction is that only a small amount will go to the traditional platforms, and that the vast majority will go to new ones.
And I am convinced that this prediction will stand the test of time. You can quote me on that.