In the world of foreign exchange trading on the Internet, where most bank participants have elected to form or join a consortium, State Street Corp. is a proud independent.

In 1996, long before most banks considered the business a possibility, State Street introduced FX Connect, the first part of a system called GlobalLink, which would ultimately allow fund managers to trade foreign exchange, investment funds, money markets, equities, fixed-income, and futures products from a single place.

But rather than setting up FX Connect as a partnership and inviting other banks to join as owners, State Street took a risk. It bet that other banks would be willing to participate as customers in a trading network that a competing bank operated.

It was a risk that executives at FXall and Atriax, two bank consortiums formed over the past year, think they have overcome by inviting multiple banks to become owners.

State Street’s Simon J. Wilson-Taylor, a senior vice president who is the worldwide head of GlobalLink, said coaxing other banks to use its system has been an uphill battle.

“When we first went to other banks saying, ‘Your customers are on our platform and would like to trade with you,’ they found that very offensive,” he said. “But they were missing the point.”

Six years after plunging in, State Street is reaping its rewards. GlobalLink now has 25 other banks providing liquidity on the platform, and 420 fund managers trading through it. All GlobalLink banks have access to FX Connect, which processed its first trade with another bank, Deutsche Bank, in March of last year.

Within the electronic foreign exchange market, which moves $1.5 trillion a day, FX Connect processes about 2,200 transactions a day. Its average trade size is about $2.6 million, compared with $500,000 18 months ago, and Mr. Wilson-Taylor said the network has processed several $100 million trades.

In a big vote of confidence, five major Canadian banks — Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Toronto-Dominion Bank, Bank of Montreal, and Royal Bank of Canada — said last week that they would offer electronic foreign exchange trading through FX Connect.

Said State Street’s global head of foreign exchange and money markets, Mark J.A. Snyder, “We could have formed a consortium, but there is no way we could have done this in a consortium.”

Plenty of consortiums have formed over the past year, and Mr. Wilson-Taylor welcomes the competition. “The best thing for State Street’s FX Connect is the launch of Atriax and FXall,” he said. “We have known they were coming for a year, so they have been overhyped. Now that people are seeing the product they are coming to FX Connect and signing up rapidly.”

FXall, founded last June by 14 banks, announced live trading last week. Atriax, formed in October by Reuters Group PLC, Citigroup Inc., Deutsche Bank, and the former Chase Manhattan Corp., is scheduled to launch this quarter.

The number of nonbank foreign exchange competitors also continues to grow. Last week SunGard announced the beta testing of its online foreign exchange platform, STN Connect, and Currenex has been trading currency since last year. Bank One Corp. said Monday that it would join Currenex, becoming the 40th bank to do so.

State Street began examining opportunities in the online foreign exchange trading market seven years ago. Management concluded that the looming shorter settlement cycle would cause a processing crunch, and that rapid growth in cross-border trading, which according to Mr. Wilson-Taylor has quadrupled in four years, would lead to an explosion in the number of foreign exchange transactions.

He said that in sizing up possible competitors State Street eliminated proprietary bank systems, reasoning that clients would not want tens of trading systems on their desktops. Technology companies would try to forge ahead in the market, but they had neither clients nor banks, he said.

State Street finally decided to build a portal that would provide a single point of access for trading in multiple asset classes, with multiple banks, and over multiple platforms.

“We decided there was a niche” for an organization like State Street, which “understands the needs of fund managers very well,” Mr. Wilson-Taylor said.

“There was a leap of faith in solving the problems, but we were sure we would be rewarded sometime,” he said.

Before online trading, processing fund managers’ trades could take as long as four days, Mr. Wilson-Taylor said. “Foreign exchange is only 3% of an asset manager’s day, so we just needed to make it more efficient. And remember, it’s only a small part of our customer’s day.”

The FX Connect platform set out to make pretrade, trade, and post-trade processing more efficient by tapping into electronic data and eliminating the paper tickets, faxes, and phone calls.

“We thought we had a three-month lead, so we tried to get as many clients as possible onto the system,” Mr. Wilson-Taylor said. “But the three months turned into three years.”

In 1996 State Street handed over its specifications for the GlobalLink platform to an outsourcing firm, which could build it more quickly. Three months later FX Connect was hosting live trading.

“We delivered a product that met 70% of our clients’ needs and then built out the rest according to what they needed,” Mr. Wilson-Taylor said. The system now offers research, online chat, pretrade, trade, and post-trade services.

State Street updates its research every day and supplements its database records with academic research from a team at Massachusetts Institute of Technology. “The most innovative element is our research product,” said Mr. Snyder. “We have a unique data base of well over 1,000 cross-border money mangers.”

Scotia Capital, the capital markets division of Bank of Nova Scotia, may be typical of many FX Connect users in that it offers clients a number of online foreign exchange options, including FXall, Atriax, Currenex, Bloomberg, and its own proprietary single-bank system, ScotiaFx.com.

The decision to add State Street’s FX Connect is part of a strategy of giving clients the widest range of choices, said Garry Fredrickson, managing director of e-commerce and alternate delivery for foreign exchange and money markets at Scotia Capital.

“We are in the business of giving our clients choice and good service, and if the market chooses to go in a different direction and clients go to one system or the other, we will follow them,” Mr. Fredrickson said.

Robert Iati, a senior analyst at TowerGroup, said the various systems target different client needs. “I think FX Connect is very different from Atriax and FXall,” he said. “FX Connect is going after the custodian market, and the other two aren’t. But the more that goes to electronic trading in general the more it will become the prevailing mode, and State Street will be able to capture more business.”

State Street is among the top custodian banks, Mr. Iati said. “They are an acknowledged leader in technology, and that undoubtedly helps them bolster their products and makes customers more comfortable with using State Street.”


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