Some Businesses Take a Really Long Time to Build, FX isn’t One of Them

Recently, Euromoney Magazine published its annual FX Survey 2012. Whether or not you like the survey and trust its findings, at least there is entertainment value in the media coverage that discusses the results. A very entertaining article in the Wall Street Journal provided insights into the great lengths that several participants went to drum up support for their institutions. But there are statements from some of the protagonists that make me smile. Here are two examples:

“Instant results are difficult to achieve in foreign exchange.” (…) Coming in, you need to invest for three to five years before you see results on the scale that the top handful of banks have been [having].”

It’s a matter of perspective but I disagree. There might be some businesses that require multi-year investments before delivering results but FX is not one of them. I can think of a few wineries in Napa Valley where new crop has to mature for years before delivering world class product. Virgin America, on the other hand, launched an entire airline in three years. They achieved this by leveraging a variety of third party service providers to assemble their final product in record time. Likewise, launching your FX business need not require multiple years of investment to deliver a world-class FX product to the market. It can be as simple as setting up a network connection to Integral. You can be up and running in weeks. More complex deployments on FX Grid® might require several weeks or a few months but nothing in the neighborhood of three to five years. That’s just wrong. If you’re in the middle of such a project, consider cutting your losses and give us a call now. Continue reading Some Businesses Take a Really Long Time to Build, FX isn’t One of Them

FX markets are experiencing a paradigm shift and many are hurting. Don’t be afraid. What you are experiencing are growing pains.

Precursor:

Reading industry-related headlines over the last eight months or so must have been scary. Volumes dipped to historic lows towards the end of last year and some major players including many market making banks and large ECNs have been experiencing internal reorganizations with the associated departure of high-profile executives. Let me state for the record that this is not an attempt to judge anyone as they are going through tough times. This is an attempt to put what is happening into perspective and provide FX market participants with a better understanding of what we are experiencing. Where many see only gloom and doom, I also see a story about opportunity and growth.

One-size-fits-all era is coming to an end

In a recent commentary on personnel changes at EBS, Colin Lambert, Profit & Loss (restricted access), puts the finger for the firm’s difficulties at “increasing competitive pressure” and suggest among other things that EBS is “feeling the squeeze from internalisation and more granular streaming from banks”.  I don’t want to make light of what this may mean for individuals affected by these restructurings, but for the industry as a whole, these changes are a positive sign. They prove that FX markets are maturing, that competition is increasing and that the one-size-fits-all area in FX is coming to an end. The future will see a much larger number of different business models, liquidity sources, risk management approaches, FX exchanges, all co-existing in an even larger market than FX is today.

Continue reading FX markets are experiencing a paradigm shift and many are hurting. Don’t be afraid. What you are experiencing are growing pains.

WEBINAR: Cloud computing a “transformational technology”

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.

Not all Clouds Are Created Equal

Not all clouds are the same, and I am not talking about the different ones you see up in the sky. The term cloud computing has reached true buzzword status by now, with everyone having a different understanding of what it means — which by the way is one characteristic of a buzzword.

I don’t want to add to the many interpretations of cloud computing out there, rather outline the most important characteristics that in my view define it: 1) Market participants receive and deliver services over the Internet. 2) They are sharing a common pool of IT infrastructure. 3) They have the ability to easily scale these services up or down in line with how their business needs change. 4) They pay for these services in a pay-as-you-go business model and, and 5) these services are managed by a provider. If all these statements are true, you are looking at a real example of cloud computing.

Open matters

Today, Integral announced an open platform for FX. While ‘open’ to some might just be yet another buzzword, it is critically important in this context. Continue reading Not all Clouds Are Created Equal

Custodian Banks vs. Pension Funds — A Comment on The Ongoing Discussion, And The Most Recent WSJ Article

On May 23, the Wall Street Journal published a front page story: “Inside A Battle Over Forex” by Carrick Mollenkamp and Tom McGinty.

“Bank of New York Mellon Corp. has been fighting accusations that it took advantage of clients while trading currencies,”  it began.  “A Wall Street Journal analysis of more than 9,400 trades the bank processed over the past decade for a large Los Angeles pension fund could provide ammunition to its critics.”

The article advances recent reporting about lawsuits filed by public pension funds against custodian banks, alleging that the banks had fleeced the public funds on fees by filling FX trades at disadvantageous (though arguably legal) prices over many years.   The Journal’s article of May 23 seems to offer proof.   The newspaper filed a freedom of information request with the Los Angeles pension fund for its FX trading records and examined more than 9,000 trades.  Even the bank in question “confirmed the accuracy of the data and said the bank’s employees ‘tend’ to price foreign-exchange trades at one end of each day’s “interbank” trading range…”

Particularly interesting is the bank’s response that clients like the Los Angeles pension fund knew—or should have known—that the bank doesn’t act in their interests when pricing the trades.

There will no doubt be further calls for increased regulation to induce change in FX market practices.  But in my view more powerful and faster remedies are education and the use of available technology to fight imbalances caused by information asymmetry.

Yes, global foreign exchange markets are opaque and difficult to navigate but technology has greatly increased transparency. On our system, pension funds can see their custodian bank’s price feed and those of its competitors, in real time,  on one screen and draw their own conclusions. By bringing to bear all the advantages of modern technology, including access to a shared IT infrastructure, data centers, and support, we have dramatically lowered the cost and barriers of entry for new market entrants to deliver a highly competitive global FX offering. My advice to pension funds is that if your particular provider is not competitive, switch to an institution that is. Multi-venue platforms like Integral’s FX Grid are aggregating and displaying prices across the market from hundreds of sources of global FX liquidity and offer a clear alternative to the single-bank systems like the one on exhibit in your article.

The combination of free historic data and real-time market movements are sufficient to help pension funds become educated and turn themselves into informed market participants. As importantly, a price provider on our platform knows that they are always doing it in competition with others. Thus, competition is built-in. What better way to ensure fair treatment through market self-regulation?

To paraphrase a famous philosopher:  “Fleece me once, shame on you.  Fleece me thousands of times a day, shame on me.”

Here’s a link to the original article.

2011 — The Year of the Platform?

The French web entrepreneur Loïc Le Meur identified “platforms” as one of the key technology trends at the World Economic Forum in Davos in January. American Airlines started to feel its power when combating Orbitz and Expedia.  Apple recognized its value when it created the app store for the iPhone; and is now trying to repeat that success with the Mac store for its computers. Your kids are inhaling the many benefits of a platform through their use of Facebook. When Ford launched its efforts to change how people interact with their cars through SYNC® and MyFord Touch™, Ford is banking on the power of the platform to ensure drivers will enjoy an ongoing flow of updates and added services. To me, it sure looks like everything is becoming a platform.

Why stand-alone applications fall short

Stand-alone applications are a thing of the past. They just cannot compete with the cost effectiveness, flexibility, extensibility, innovation cycle and rapid time-to-market that platforms offer. An application is a closed environment that does whatever its original developers intended it to do, and nothing more. That is not sufficient for the demands of today’s FX markets. Continue reading 2011 — The Year of the Platform?

Aggregation works at any rate (no, really!)

When trading in larger sizes, liquidity takers have come to understand that FX aggregation services have a profound positive impact on the quality of the execution they see. They know the risks involved and want to be sure that they are getting the best deal possible. An FX aggregation and Execution Management System (EMS) understands how to aggregate different streams from liquidity providers who each may have imposed their own trading rules, and still ensures that you’ll get what you clicked on. To that end, an FX aggregator is a trader’s best friend in ensuring competitive bids. It virtually guarantees (pun intended) tight spreads on the top of the book, full fill in the market with little slippage, and even possible price improvements.

While a majority of traders intuitively understand its value when trading $20m,$50m or more, they are sometimes ignore its advantages when trading $500k, $2.5m or $5m. That might be because with large trades, the monetary value often is self-evident vs. with smaller trades, the value is strategic and harder to quantify.

Short-term gain but long-term pain
Long term trading strategy, not short term cost concerns, should be driving your trading system choices. Here is why you shouldn’t trade smaller amounts on a single-bank system, even if it offers tighter rates.

Continue reading Aggregation works at any rate (no, really!)

From Stonehenge to the Asteroid belt or How FX Markets Have Changed

FX markets have come a long way. In the late 1980s and 1990s, the market resembled Stonehenge in that a few silos dominated the landscape. They were, in fact, the market. It was a very static affair with high barriers of entry and almost no difference in what the few banks offered. Today’s market looks more like our solar system’s asteroid belt. There are thousands of market participants that come in all shapes and sizes. They are independent but connected entities. Barriers to entry are low. As a result, the entire market is in a state of flux which fosters innovation. Customers have many choices and competition is strong.

The original banks are still around. I liken them to the planets; a small number of larger entities that still dominate the area around them but exert much less influence on the market at large.  In FX, like in other markets before it, a number of forces came together to affect this change. Continue reading From Stonehenge to the Asteroid belt or How FX Markets Have Changed

The New Meaning of ‘Mine’

Sometimes I get the question how Integral’s products and services fit into all the different FX solutions offered to banks and brokers today.  Let me clarify and explain how what we do is unique, but also uniquely apt to augment the solutions of others.

The largest FX network of its kind in the world…

For starters, Integral helps FX market participants by organizing and automating their FX business.  We provide what we do as a service that is delivered in the cloud.  That means our customers never have to worry about issues that come with buying a software package such as addressing installation problems, building adapters, ensuring connectivity, etc.  We take care of all of that for them. We also offer access to an FX network that we believe is the largest network of its kind in terms of scope of reach. By connecting once to Integral, you gain access to basically every kind of business that is involved in foreign exchange. Integral’s FX Grid is the place to connect with all the different entities (i.e. liquidity providers, prime brokers, banks, brokers, hedge funds, corporates) and venues that comprise today’s FX markets. Once on FX Grid, you’ll find every potential business partner, from retail and institutional brokers, prime brokers, buy-side and sell-side banks, to algorithmic trading firms — on a global scale.

… plays extremely well with others

Integral is a neutral technology provider, not a broker or a bank. This simple statement already gets us a long way to being an acceptable partner for many. However, unlike other technology providers that offer a stand-alone software package or framework to enhance the business fortunes of one customer at the time; from the beginning, we designed our system with the concept in mind of providing a utility-like service that has the potential to serve the entire FX industry.  Every customer benefits from not only our expertise, but also from the network effect that comes from having created a virtual business community. Whether you’re looking to expand your customer base, add to your list of liquidity providers and prime brokers, or want to do what you do more efficiently, FX Grid delivers.

The new meaning of mine

Unlike systems set up by competitors, where participants are forced to adapt their unique business to the cookie cutter approach of their vendor, Integral’s approach is completely different. We believe that OTC market participants have unique business models which require custom configured deployments. By giving users the ability to differentiate themselves while also using a shared service environment empowers them with the best of both worlds: increased flexibility with reduced costs.

Integral’s new advertising campaign

You might have seen our new advertising campaign (Mine) in various trade publications and online.

Mine is a term from the world of FX voice trading. The counterparty that’s saying it indicates that they are willing to buy at the conditions outlined to them.  I propose an extended definition of ‘mine’ to mean; the direct ownership of one’s FX trading and aggregations. It means that the bank or broker has the complete control over their world while still reaping the rewards of using a shared cloud infrastructure. That way, they benefit from all the advantages of this business model with the knowledge that it’s uniquely their liquidity, their customers, their algos, their brand and ultimately their profits.

Integral puts you back in control of your FX business. Who is in control of your FX business?

If you want to discuss this further and happen to be at the Profit&Loss Forex Network show in Chicago, I encourage you to stop by our booth.

Why Single-bank Systems Are Losing Ground

As the operator of FX Grid, a global inter-institutional connectivity and trading network, linking market making banks to FX market participants, we are getting good visibility in how other systems are performing. During the hectic days in May that put strains on everybody’s systems, we know for instance who had outages. (Integral did fine by the way. Read more in our press release and in an earlier blog post.) Single-bank systems were among the ones that suffered the most severe outages. I see this as a clear indicator that their decline is ongoing, despite some marketing hype.

Greenwich Associates already reported in April 2008 that “single-bank systems are failing to keep pace with the growth of multi-dealer platforms.” (E-Forex Comes of Age, Greenwich Associates, e-Forex Magazine, April 2008). In analyzing the results of its 2010 FX survey, Euromoney magazine made several observations that substantiate this claim. Euromoney writes: “The top three banks in the survey accounted for 40.44% of the total market in 2010, compared to 45.99% in 2009.”While Euromoney doesn’t say to where the market shifted, the fact that it continues to move away from the largest financial institutions suggests that single-bank systems are still losing market share. In my opinion, multi-dealer systems have clear advantages and the market seems to agree. Here are the four key arguments that proof my point. Continue reading Why Single-bank Systems Are Losing Ground