A cyber-battle is heating up among the global powers in foreign exchange. The proposed Atriax portal, which had been one of the worst-kept secrets in finance, finally announced in October that, indeed, it would come into existence.

Its spine is made up of Citigroup, Chase Manhattan Corp. and Deutsche Bank. Atriax is a for-profit cyber site through which corporations and others can compare pricing, transact trades and obtain research. It won't be free. Participants will be required to pay to join and pay transaction fees.

Atriax will be further crowding an already crowded field. At least six online forex trading forums have been created within the past year. Among them is the 13-bank portal, FXalliance, known as FXall, which is slated to go live before yearend. Atriax's founders reportedly considered joining FXall, which was announced in spring.

The aim of these portals is to streamline currency trading. They are motivated both by the benefits of automation and the threat that others will make online currency trading available to customers first.

Automated forex trading is in its earliest stages. Currently 88% of forex trading is done manually, compared with 67% of equity trades. Thus, the potential is tremendous. Currency trading is the world's biggest single market--about $1.5 trillion worth of foreign exchange transactions are done worldwide every trading day.

Traditional institutions are trying to avoid making the same mistakes that were made in equity trading. In the equity market, upstart rivals to traditional stock exchanges--Electronic Crossing Networks (ECNs)--took away substantial business before investment banks began to create their own ECNs to automatically connect buyers and sellers.

Banks are hoping that automating forex trading will allow them to save money while broadening their customer bases. Today, corporate treasurers typically call a trader at his bank and are quoted a price based on the size of the trade and, possibly, relationship considerations. The treasurer may call a few banks. When an order is placed, the trader writes it on a piece of paper and hands it to a clerk to be keyed in.

The current system presents numerous problems.

First, since only large corporations qualify for such trading relationships, lots of smaller companies get largely cut out of the wholesale forex market.

Second, the system is inefficient on both sides. Prices aren't immediately obvious to the buyer and may fall across a wide range. In other words, there's a lack of "transparency" and a wide "spread."

Third, the market can move during delays in consummating transactions. Manual processes limit the number of deals traders can handle and create more possibilities for error. The trading firm's liability can be significant if, say, it double books an order for a trade while the market moves against the position it took.

Also, buyers are expected to prefer getting side-by-side quotes from several institutions.

Additionally, an automated site could process more trades: multiple, parallel trades from existing corporate customers, as well as new business from customers previously considered too small to merit a relationship with a trader.

Many of the new forex trading sites continue to use traders to execute the transactions although technology makes the quotation process more efficient. Some web portals, such as New York-based MatchBookFX, eliminate traders in the same way that ECNs automatically match purchase and sale orders. (Technically, the financial institution is the licensed trader, but there are no individuals on the trading floor.)

The sites fall into five categories (see table, below). Two of them are designed to allow corporations to trade only with participating banks with which they have existing relationships. They include trading sites owned by individual banks, such as Chase Manhattan's ChaseFX and trading sites owned by several banks, such as FXall and Atriax.

Internet Foreign Exchange Services

Service/Web site Type Launched Monthly trading
volume (billion)
Atriax
www.atriax.com
Multi-bank sponsored Expected Q1 2001 NA
FXall
www.fxall.com
Multi-Bank sponsored Proposed Q4 2000   NA
CFOWeb.com
www.CFOWeb.com
Independent match maker Jun-00   --
Gain Capital
www.gaincapital.com
Independent market maker   Jun-00 $2.60
ChaseFX
www.chase.com
Single Bank sponsored May-00   --
Currenex
www.currenex.com
Independent multi-bank Apr-00 $8.00
MatchbookFX
www.matchbookfx.com  
Independent matchmaker Dec-99 $3.30
Global Forex
www.globalforex.com
  -- Mar-98 $2.00
G.E.N. Forex
www.gen-fx.com
  --   -- $1.50

Another variation, giving corporations the ability to trade currency with anyone, are independently owned multi-bank sites, such as Currenex.com. There are also nonbank trading sites, either owned by forex trading firms, such as GainCapital.com, or by technology firms that provide a trading infrastructure, such as MatchbookFX.A similar site, CFOWeb.com, which counts foreign exchange as one of its many functions, was announced last fall. Its roster of participating banks include Bank of America Corp. and ABN AMRO Bank N.V.

Observers say no site will have the scale or institutional backing of either FXall or Atriax. Bank of America is one of the 13 banks behind FXall, as is HSBC Inc., J.P. Morgan and Co., and Goldman Sachs Group Inc.

Forex sites sponsored by individual banks are an extension of the traditional commercial bank--institutional client trading relationships, which account for the lion's share of forex transactions. ChaseFX, launched last May, in Europe and the United States, is geared mainly towards active traders such as portfolio managers who often execute complex trading strategies spread over a multitude of accounts. ChaseFX mirrors the traditional trading protocol in that clients must work through a trader.

Bob Flicker, managing director of Chase's global trading division, sees ChaseFX as beneficial to both the bank and its clients. "Online trading allows Chase to realize operational efficiencies of straight-through processing (STP) between the trading desk and trade settlement areas. Additionally, there is less chance of a trade inadvertently being duplicated or misrouted to the wrong account, which eliminates the cost and time associated with correcting such occurrences," he says.

"From the client's perspective," Flicker adds, "a trader looking to execute a strategy involving multiple currency pairs and spread over a multitude of accounts is able to upload all of the trade details in spreadsheet format through the client interface on ChaseFX. This allows clients the flexibility to execute multiple trades in a timely manner, thus garnering a tighter pricing spread across their trades."

As of early October, no multi-bank forex sites were live, yet Flicker and others see them as the wave of the future. "While there will always be a need for the one-to-one relationships represented by point-to-point systems, multi-bank systems will streamline the trading process by allowing institutional clients to access a multitude of dealers through a single point of entry," the Chase executive says.

The scheduled debut of one such service, FXall, is imminent. FXall will allow clients to simultaneously request prices from any participating bank with which they have a relationship. This will allow corporate treasurers to quickly see the competitive rates offered by the various banks and select the best deal without having to call around to multiple trading desks. That will be especially important during periods of market turbulence, when making a profit or loss depends heavily on the speed of trade execution.

Philip Weisberg, interim chief executive of FXall, contends that his heavy-hitters' collective will dominate. "The liquidity and market leadership that will be provided by FXall's member banks will provide clients with greater price transparency, tighter pricing and quicker order execution then is currently available offline or through sites sponsored by individual banks."

But Atriax, operated with Reuters' technology, is likely to give FXall a run for its money.

But other powerful portals may arise. Larry Tabb, a group director at TowerGroup and a recognized securities' guru, suggests that FXall and Atriax are just the tip of the iceberg. "At this stage clients are overwhelmed with the number of choices they are being offered for online trading, which is driving demand for the creation of centralized distribution outlets."

Yet, the Needham, MA-based analyst foresees a possible corporate personality clash within multi-bank forex consortia. "It may prove difficult for these successful institutions to agree on a common vision and work towards a common goal," Tabb says. "This would require the member banks to give the goals and values of the consortium precedence over their own corporate goals and values."

Currenex of Redwood City, CA is not owned by its 25 participating banks. Launched in April, Currenex allows clients to simultaneously request pricing from any of the 25. Currenex allows its corporate customers to pick their trading counterparts and gives them a high degree of privacy regarding their trading data.

"Being independently owned allows us to serve the needs of our clients, whether it be facilitating a new trading relationship with one of our member banks or bringing an outside trading partner of theirs into Currenex," says Mark Pey, vice president of strategic relationships at Currenex.

Another foreign-exchange trading portal, created specifically to serve the middle market, is sponsored by independent market makers, such as Gain Capital, which handles transactions valued at anywhere from $100,000 to $10 million. Gain Capital buys and sells currency itself, allowing it to publish bid/ask quotes in real time and execute orders almost instantaneously. This practice leads to price transparency and spreads that are often 5 basis points less than elsewhere.

As a market maker, Gain earns its money from trading, not commissions, so it charges no transaction fees. (Banks, by contrast, receive income from retainer fees as well profiting from differences in the bid and offered prices.)

According to Glenn Stevens, head of trading and sales at Gain, "increased trading on both sides of the market affords us a greater opportunity to make money, which makes it imperative for us to offer clients a low cost, transparent market to trade in."

New York-based MatchbookFX also caters to the smaller end of the market, requiring a minimum deal size of only $100,000. It trades only in currencies that are the staple of foreign exchange: U.S. dollars in exchange for Swiss francs, yen, euros or sterling. Matchbook's clients are mostly the treasurers of smaller corporations and currency traders at smaller financial institutions.

Matchbook differs markedly from the bank services by allowing corporations to bypass traders. On MatchbookFX, a client prices a trade, enters it into the system, and denotes that he is either a price taker or a price maker. MatchbookFX then anonymously matches up the best bids and offers against all trade requests within the system. The fact that there are no minimum bid/ask spreads or third-party involvement allows clients to receive transparent pricing while remaining anonymous.

"By virtue of MatchbookFX not having a stake in the trades that are arranged on the service, we are providing a safer and more efficient environment within which smaller institutions may trade currencies online," says Mark Smith, president and chief operating officer.

TowerGroup's Tabb expects such firms to succeed, in part because they are catering to those who have been overlooked: small institutions and individual investors. Services focused on small customers are not only providing access to the capital markets, but competitive pricing, he says. These factors combined with the move towards international equity investing--which will require currency hedging--bode well for the low-end forex portals.

Foreign currency trading is finally making its way onto the Internet. But whether banks and traditional players retain control of the market in a new arena--as they initially failed to do with equities trading--remains to be seen.


Tom Condon is a free-lance writer based in Nanuet, NY. Orla O'Sullivan, editor of Bank Technology News, a Thomson publication, contributed to this article.

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