A seismic shift in FX trading
Foreign exchange markets, like many others, are undergoing a profound change. We believe the impact of the internet and its associated technology is causing a seismic shift that will transform the way currencies are transacted. It will also change the relationship between clients and banks.
Banks that can fully utilise the technology that makes online trading possible will be able to bring their full execution, operation and advisory resources to customers around the world. They will empower their customers to capitalise on new opportunities in cross-border commerce and investment. In its simplest application banks will be able to help clients automate their processes. The end-user of foreign exchange will benefit from an increased level of customisation and automation that was previously not possible.
Evolutionary banks will realise new exciting opportunities by overcoming traditional obstacles and dramatically increase connectivity across products and geographies. The product silos that previously existed will be broken down, as groups partner to provide new client solutions. Through internal and external alliances, and partnerships with outside vendors, enhanced foreign exchange services will be integrated into the end-user’s processes and risk management platforms.
Technology and intense competitive pressure from new players will lead to unbundling of processes allowing clients and banks to build more efficient end-to-end processes. The internet is a highly effective distribution system, and again will expedite the netting of interests. What it will not do is increase the total liquidity available. As price transparency improves and client sophistication increases, cost pressures will force banks out of the FX market, leading to fewer liquidity providers and market- makers. The barriers to entry in terms of credit and controls have also increased. Internet trading will reduce the cost of entering a market which is in equilibrium, but the same transparency will make it obvious to all when there are significant imbalances. The paradox might be that the internet extends extremes of high and low liquidity. Ultimately clients want to pass their FX risk on. Risk management remains a core product.
There is an even greater need for interpretation and relevant advice in the world where instantaneous information generally means too little knowledge. Universal access means banks have to compete globally and provide best of breed solutions. The flexibility and relatively modest cost of the new technology will allow us to increase the level of customisation in our client solutions, and deliver our products with improved efficiency.
Superior banks will seek to add value to their investor clients’ business in distinct areas. Firstly, by offering first class currency risk management research and advice; and secondly, by delivering automated solutions designed to increase process efficiency.
A major opportunity for financial institutions will be to provide state-of- the-art risk analytic applications to their clients. Simply by definition, to be on the cutting edge of risk analytics and of technology delivery, platforms will be costly. A financial institution with such development capabilities will be able to distinguish itself from the field by offering tailor-made risk management applications to its clients. The bank will also be able to benefit from economies of scale, as the costs associated with developing these analytical applications will be spread across its client base. The banks that can be first to market and deliver these types of applications will profit.
Banks would also do well to position themselves as currency risk advisers and as the currency market research arm of their best clients. Successful investor sales teams will consist of people that thoroughly understand currency risk management and issues that drive currency markets. The investor sales person that can develop long-term relationships with investor clients and position themselves and their firm as a superior provider of advice and consultation will be able to command a premium in the marketplace.
Additionally banks that can provide automated end-to-end solutions and guarantee fair, market pricing will see their share of the international investor market increase.
To some, the advent of online trading may seem to be the end of the world, but to those financial institutions with vision, it is a tremendous opportunity. As the complexity and reach of online businesses grow, the idea of partnering with a large and internationally experienced institution becomes an important decision. We aim to be the global leader in online and integrated foreign exchange solutions and services.
The only way to achieve that goal is to listen to and partner our clients. Intense customer focus has always been our priority and we look forward to continuing that tradition in the wired world. Our clients not only have access to transparent pricing, but also have much more valuable expertise available from us. Freed of the historical grind of executing and booking transactions, it allows for the development of sales teams into true value added advisers and consultants. Corporations, investors and bankers alike can focus on core issues. The true revolution is not online trading itself, but what can be accomplished as a result of having online trading available.
This is not a time of gloom and doom at FX trading banks, but one of optimism and growth. The dot.coms may be dead, but the enthusiasm they exuded last year is spreading to the so-called ‘bricks-and-mortar’ companies. New business opportunities await those with the vision, technological expertise and the ability to deliver. Managing liquidity risk, developing more efficient end-to-end processes for clients, providing state of the art analytical applications and risk management advice, and participating in the new e-marketplaces are only a few of the fertile fields that await development.
Vikas Srivastava is global e-commerce sales manager at CitiFX