Banks Waver over Funding Quotron's Currency System
The electronic currency trading system that Quotron Systems Inc. plans to develop with with 12 major banks could be hindered if details of the project's funding are not worked out, bankers said.
The banks participating in the project -- Bank of America, Barclays, Chase Manhattan, Chemical Bank, Citibank, Credit Suisse, Lloyds Bank, Midland Bank, Morgan Guaranty, National Westminster, Swiss Bank, and Union Bank of Switzerland -- have much at stake.
A survey last year showed that currency trading averages more than $650 billion a day, making it the biggest global financial markets and a source of substantial earnings for larger banks in the United States and elsewhere.
New Direction for Quotron
Quotron, a subsidiary of Citicorp, is also counting on the new system to grow beyond its traditional market strength of delivering stock market data to securities brokers.
Quotron officials said they expected to create a company in the next two or three months that will develop the actual electronic trading product to be used by the banks. The company would be owned by the banks and Quotron, with each footing an equal portion of the system's development costs.
However, the formation of such a company is hardly a done deal. Officials at several banks testing the matching system have voiced concerns that they might not be able to justify their investment.
Morgan Not Convinced
"We ourselves are not yet ready to ante up the X amount of dollars that it will cost to fully develop the system," said Jack Morris, a spokesman for Morgan Guaranty. The investigation stages of the project have not been expensive, but when actual development of the system begins, Morgan officials said they expect costs to rise dramatically.
"This is not something we are going to fund without knowing what the return will be, and the return has yet to be demonstrated," said Mr. Morris.
Part of the issue for bankers is whether enough banks will participate in electronic currency trading to generate a volume that will offset the system's cost. Should some of the banks get cold feet as the stakes rise, the system's effectiveness would be seriously undermined, bankers said.
Volume Is Essential
"Solitaire does not work on a system like this: you need a partner to match trades with," said one banker close to the project, who asked not to be named.
Quotron officials said they do not expect the financial institutions to back out. The project was the brainchild of the bankers, not Quotron, and their mutual need for a cheaper way to trade currency will compel banks to cooperate and make the system work, they said.
If completed, the project, announced Monday, will automatically match and then execute foreign exchange trades according to criteria supplied by a bank's trader.