Clarity of Thought

One of the traditions at year end is to take stock. Reflecting on the past 12 months is an exercise that brings clarity of thought. Going through a crisis can have a similar effect.

As the economy finally stabilizes following the events in the fall of 2008, we are looking over a changed landscape. There has been a lot of change in the FX market place, in the number of participants, and in how the survivors do business. In the world of financial services, we have noticed a renewed focus on core competencies. Banks and brokers who owned real estate, sold their offices and leased them back. They outsourced proprietary operations and are leasing back services that do the same.

On the positive, the state of the Internet economy allows for many business services to be delivered On Demand.  While consumer-focused businesses embraced that trend and started to reap its benefits years ago, we see it finally taking hold in FX markets as well. A crisis brings clarity of thought.

Instead of investing millions of dollars in a proprietary IT infrastructure to run foreign exchange operations in-house, while simultaneously assuming operational and market risk, FX brokers and banks took stake and realized there is a smarter, low-cost way to do the same:

  • Participate in a shared FX infrastructure that spreads operational cost and system risk amongst hundreds of participants
  • Subscribe to On Demand services that scale seamlessly up and down in line with customer demands
  • Only pay for services when actually using the system, i.e. generating revenue for oneself
  • Free company resources to focus on marketing efforts to build one’s business

Fear, Uncertainty, and Doubt (FUD) Strategy Applied in Foreign Exchange

In my many years working in foreign exchange markets, I have seen many innovations that shattered business models and changed the way things are done. One truth that I still consider to be relevant is the distinction between the role of an agent and that of a market maker. Agents are incentivized to maximize a customer’s welfare because that is how they make the most money. Market makers are incentivized to learn as much as possible about how markets function, and about the various strategies of market participants (including their own customers), so that they can use this proprietary intelligence to their advantage by being smarter than the next guy. Or in other words: An agency broker makes money charging a fix fee for best execution; a market maker makes money from the bid/ask spread by internalizing the order flow. You can imagine my surprise as I came across a marketing pamphlet of one of the largest banks in the world that seemed to have melded the two roles into one

There are Friends and Enemies, but no Frenemies

In its brochure, the bank claims to be able to fulfill the role of being both an agency for a customer and a market maker. An agent/market-maker-hybrid sounds to me like something straight out of Dr. Frankenstein’s laboratory. To illustrate the inherent lethal conflict, let’s look at key elements such as order creation, order execution, and order completion. Continue reading Fear, Uncertainty, and Doubt (FUD) Strategy Applied in Foreign Exchange

A Retort on Euromoney’s “Have Reuters And EBS Lost Control Of FX?”

There is an interesting article in the November 2009 issue of Euromoney titled ‘Have Reuters and EBS lost control of FX?’ It’s a good read that tries to assess the punch that the two interdealer brokers still carry with respect to overall price discovery in foreign exchange. Euromoney then attempts to answer the question where the market is going to be tomorrow, now that it obviously is no longer with Reuters and EBS. I think this is the wrong question to ask. Continue reading A Retort on Euromoney’s “Have Reuters And EBS Lost Control Of FX?”

TrueFX.com — The Way FX Is Supposed To Be

You might have heard already about our most recent initiative, the launch of TrueFX.com. We are very excited about this project! I would like to take the opportunity to highlight some key aspects that that might have gotten lost in the initial media coverage.

What is TrueFX?

TrueFX is Integral providing retail FX brokers with direct market access to the interbank FX market. This is a disruptive move in the tradition of other Silicon Valley companies, using more-advanced technology solutions to fundamentally change a market for the benefit of everyone in it. More on that later.

On TrueFX.com, market participants will find streaming real-time tick-by-tick data of all major currency pairs for free. We are also publishing historical market data, again tick-by-tick at no cost. We believe that this will to some extent change the way foreign exchange markets are organized. I encourage you to register to get full access to everything www.TrueFX.com has to offer.

The disruptive but benevolent nature of TrueFX

While some brokers already have embraced TrueFX, it is a disruptive move and here is why: In today’s retail FX world, brokers often face a conflict of interest because it is so easy for them to trade against their customers and make extra money. For some it proves to be too big of a temptation as too many lawsuits illustrate bear witness.

We are convinced that at the end of the day, most everyone will be better off with TrueFX. On the TrueFX platform, when a customer trades against a broker, that broker immediately and in real time offsets that price directly against the TrueFX price. That TrueFX price is immediately and directly executed against the market, against the aggregated liquidity from major market banks. And since their price is always in competition with other banks, they can’t skew it because another bank might take the deal.

By handing over trade execution to a neutral technology provider, everyone wins. Market making banks who were always hungry for retail flow, love the exposure and easy access TrueFX offers them. Brokers are supportive because instead of working with a larger broker (and a potential competitor), they now get direct market access by working with a neutral third party. Plus, their customers get better prices and service, which enhances their competitive standing.

I call TrueFX a disruptive but benevolent move because it is hard to imagine strong criticism from anyone other than brokers that (ab)use the current system by acting as a market maker and broker in unison. As such, they are not acting as a neutral agent that is providing customers with best execution. The way markets are organized today, there can be a strong conflict of interest because brokers can influence currency rates to their advantage and, if there is no transparency, most customers will never know that they were taken advantage of by unfair business practices. Continue reading TrueFX.com — The Way FX Is Supposed To Be