If you missed last week’s webinar on the power of cloud computing in FX, I encourage you to listen to the recording here. The panel discussion that included Joe Conlan from FCStone; Javier Paz, an analyst with Aite Group; and me, was moderated by Saima Farooqi, the executive editor of FX Week.
In what I believe was a lively exchange between a provider of a cloud-based platform, a user of such (FCStone) and an analyst who ponders these developments from a more academic point of view, we touched on all kinds of issues from the theoretical to the practical.
I hope you’ll get a lot of ideas for how cloud computing could deliver for you. I am looking forward to hearing about them.
How inventory got its bad rap
Traditionally, enterprises viewed inventory as a way for a company to store value, and as a safety feature to ride out market fluctuations. It was perceived to be a good thing. That view has changed dramatically with the advent of information technology that made just-in-time (JIT) delivery possible. As I will explain, reducing inventory also reduces market risk. In FX, just-in-time delivery of currency rates holds the promise for FX brokers to eliminate a major headache that has been a source of major risk taking in the past: Internalization of deal flow. I think JIT will fundamentally improve the risk structure of a broker. Given the reduced risk, brokers will begin to divert their energy to marketing and sales with the eventual goal to lower their prices to the optimal level to maximize market share and overall profits, not marginal profitability.
Why holding inventory equals holding market risk
The simple truth is that inventory is costing you money in more ways than one. Obviously, it is tying up capital because there are costs associated with you acquiring products and holding them. It might be less intuitive that you also just bought yourself market risk, i.e. you are now on the hook for your product to sell as predicted. If it doesn’t, you will have to discount it later just to get rid of it. Because companies know all this, their initial go-to-market price needs to be higher to account for said risk, in addition to covering costs and a profit margin. Continue reading ‘Just-in-time’ — Just in time for FX Brokers?
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