EMAIL DETAILS

>
> Innovation drives trading surge
> By Jennifer Hughes, Senior Markets Correspondent
> Published: September 27 2010 17:38 | Last updated: September 27 2010
> 17:38
> Among the 225,000-plus iPhone applications in the Apple store sits
> one called Merlin, an app named after Credit Suisse’s online trading
> platform. Clients armed with a password can see, and deal, the
> bank’s live options prices from their iPhone.
>
> “Its simple to use,” says Martin Wiedmann, head of global foreign
> exchange sales and distribution at Credit Suisse.
>
> Foreign exchange, or FX, came out of the credit crisis well, but the
> point to take from Credit Suisse’s iPhone app and rival bank
> offerings is that the market is not resting on its laurels and
> instead is developing new technology and ways of trading.
>
> The market’s momentum was also captured in a report from the Bank
> for International Settlements this month. The triennial market
> survey is the industry benchmark and showed average daily trading
> volumes in FX have reached $4,000bn a day – a new record and up 20
> per cent on the last survey in 2007. Market insiders say the BIS
> numbers probably do not reflect the actual market peak. The BIS
> collects data in April and volumes spiked higher in early May as the
> eurozone sovereign debt crisis reached its height. With short-term
> interest rates around the world held at extremely low levels, many
> investors have turned to FX.
>
> “It used to be that FX was relatively stable and the volatility took
> place in [interest] rates. Now with quantitative easing, rates are
> basically zero, and when you take out that volatility, it goes
> elsewhere – and one of those places is FX,” says Alan Bozian, chief
> executive of CLS Bank, the FX settlement system.
>
> Other themes were evident in the BIS survey.
>
> In spite of the borderless trading that characterises the FX world,
> London, the traditional centre of the market, actually increased its
> dominance, taking 37 per cent and seeing off threats from New York
> (17.9 per cent) and a resurgent Tokyo, which pipped Switzerland to
> third place with 6.2 per cent.
>
> A lot of the rise in trading came in the spot market, where a near
> 50 per cent rise took volumes to $1,500bn a day. While some of the
> biggest emerging-market economies raised market share, the bulk of
> the rise came in the so-called majors – trading in dollar, euro and
> yen and to some degree, sterling and the Swiss franc.
>
> This probably means the rise is in no small part the result of
> algorithmic, or “algo,” trading – the use of fast-moving computer
> models. These hit the headlines in the equity markets following
> their suspected involvement in the May 6 “flash crash” in the US
> markets.
>
> Could a similar event disrupt FX? That could be more serious because
> of the market’s role as part of the global payments system, giving
> it a day-to-day systemic importance no other asset class has.
>
> Market observers think a “flash crash” unlikely. They point out that
> FX trading is concentrated in far fewer currency pairs than there
> are stocks in any major market and, as a result, each pair is
> watched by more people than virtually any single stock.
>
> “FX is emerging as an asset class where people can and do speculate,
> but mostly people are still trading because they need to buy or sell
> that particular currency,” says Giles Nelson, deputy chief
> technology officer of Progress Software, which develops algo-related
> products.
>
> “The FX marketplace still has banks at its centre. I don’t believe
> there is the same potential for high-frequency traders to influence
> prices as there might be elsewhere.”
>
> The vast sums traded in FX have indeed given the banks a central
> role they long ago gave up in some other asset classes. Currently it
> is one they welcome as FX has become increasingly popular with
> senior bank executives keen to develop revenues that do not rely on
> increasingly expensive bank capital.
>
> This does not, however, preclude technological investment. The top
> FX banks have warned their would-be rivals to be ready for a long,
> expensive, IT-driven slog if they want to compete.
>
> Kevin Rodgers, global head of FX derivatives at Deutsche Bank, the
> biggest FX bank by trading volumes, says: “The question is, do they
> have the strategic patience to grind out what they need to build in
> the face of the incumbents who are continuing to forge ahead?”
>
> For Mr Rodgers, this is work on developing electronic options trading.
>
> “The options market is light years behind spot in terms of e-trading
> since anything to do with derivatives is several orders of magnitude
> more complicated,” he says. “But that’s where the market is going
> and as more and more volume gets transacted then that prompts banks,
> and the algo shops, to work on the challenges.”
>
> Mr Rodgers reckons about 30 per cent of the bank’s FX derivatives
> volumes comes from the bank’s Autobahn platform – and that has
> tripled as a percentage in the past three years.
>
> “More and more of our volume is electronic,” he adds. “Where I’m
> spending resources and IT is on our e-commerce platform.”
>
> That goes for all the big banks.
>
> “Star traders are great but they aren’t scaleable,” says Frederic
> Boillereau, global head of FX and metals at HSBC. “FX today is
> mainly about e-distribution, e-risk, and managing the flows. We’re
> always thinking about how to do that business better.”
>
> Just down the road from HSBC in Canary Wharf sits Barclays Capital,
> which has invested over a number of years to build itself into a top-
> three force.
>
> “What I work on and worry about is making sure that I’m getting the
> electronic platform married up with high-quality content and other
> value-adds,” says Ivan Ritossa, who oversees FX and e-commerce at
> the bank. “Now the challenge is we have to think a little like a
> content provider online – it’s not just about trading but what else
> you can offer, too.”
>
> The process has been helped by the increased importance of FX to
> bank profits and also by other, longer-term trends, such as the
> increasing correlations between asset classes.
>
> Jeff Feig, global head of G10 FX at Citigroup, says that has meant
> growing links between the asset classes within the bank.
>
> “When we first merged with Travellers [in 1998], the equity traders
> and the fixed-income guys had no interest in sitting down and
> talking to us. Today there’s interest from every market and trading
> desk. The correlations and interactions have increased massively,”
> he says.
>
> Combine greater interest from other asset classes with the
> development of new technology, such as Credit Suisse’s iPhone app,
> and you have a market very confident about its future.
>