Wednesday, April 18, 2007

Giving up the phone

The stats indicating uptake of online trading of FX certainly look impressive. Despite a slow start back in the late 1990s when online trading portals first came online, recent estimates indicate that more than half of all corporates execute foreign exchange trades online, particularly those companies that are "cash rich" or have revenues in excess of $1 billion.

The online trading phenomenon has given rise to various online portals for trading FX and money market instruments; traditional multibank providers like FXall and Currenex have now been complemented by specialist providers such as Hotspot FX, which targeted hedge funds with its anonymous ECN model, 360T which covers a wider range of asset classes including money markets and derivatives, and Reuters and the Chicago Mercantile Exchange's recently launched FXMarketSpace, which provides an exchange central counterparty clearing model for FX trading.

Not a day goes by without some new platform or additional functionality for trading FX-related instruments online emerging. Bearing that in mind I was surprised to find the general lack of adoption of web-based trading tools by US corporates attending EuroFinance's international cash management conference in Miami.

While all other indicators appeared to suggest that corporates favoured the price discovery and aggregated liquidity provided by trading FX on multibank web portals such as FXall and 360T, US corporates appeared to be less progressive than their European counterparts when it came to giving up the old-fashioned telephone.

Some US corporates were not convinced of the business benefits of moving their FX business online when compared to the more 'personal touch' of speaking to a trader on the telephone and leveraging the long standing credit relationships corporates enjoyed with a particular bank.

However, Christoph Perger, managing partner, of Frankfurt-headquartered 360T, was at pains to explain to US companies that online trading did not mean they had to give up the phone or entrenched banking relationships altogether.

"Automation is not drying out relationships.It is more of a hybrid approach [telephone and online trading]."

In addition to obvious benefits such as price transparency and the ability to access liquidity from multiple providers, as well as in the case of 360T's online platform, the ability to access multi-bank liquidity across multiple asset classes (FX, money markets, interest rate swaps, derivatives ) via a single web interface, Perger pointed out that online trading could also help companies with their Sarbanes-Oxley compliance by providing an electronic audit trail of FX deals and confirmations.

It appears that European corporates may be slightly ahead of their US counterparts, when it comes to realising the benefits of web-based trading tools for FX and other instruments, which I found slightly satisfying given that on the flight over to Miami I was bombarded by comments from an American tourist that had recently visited the UK about the differences in plumbing between the two countries.

I asked him what he thought of London, and instead of commenting on the virtues or otherwise of the usual tourist hot spots, he proceeded to tell me that he could not understand why there were two different taps for hot and cold water in the UK, whilst in the US one tap dispensed both at the same time which made it easier to wash your hands in warm water.

While European plumbing may be slightly archaic to some, it appears Europe has the upper hand when it comes to appreciating the finer points of web-based or electronic trading platforms.