The recent demise of Atriax, a foreign exchange trading platform, might seem to have driven yet another nail in the coffin of internet trading exchanges.
But while B2B exchanges have failed so spectacularly in many other industries, experts believe internet trading is here to stay in the foreign exchange market even if Atriax and perhaps one or two other FX portals fall by the wayside.
FX is the most commoditised of financial products and despite the growth of online trading systems to manage and settle orders, much of the initial price discovery is still done on the phone.
Today, a vast majority of FX trades are initiated using the telephone and the adoption rate of online system use is slow, says a report from Meridien Research, a financial consultancy.
Phone-based trading is seen as essential to the inter-dealer FX market, and big multinationals with sizable currency exposures also like the human touch. They typically have FX relationships with several banks and so phone around to find a better deal. But most smaller corporate clients deal with one bank and their FX business is too meagre to justify banks reducing their standard bid-offer spreads. These customers see FX trading not as a way to make money but simply a means to an end.
"For a lot of customers, FX is just a headache. It is a by-product of another transaction or a trade in real-world goods," says Jas Singh, business development director at AVT Technologies, a supplier of FX trading systems.
The arrival of the internet promised to "democratise" the FX business by allowing anyone to obtain competing quotes from a range of FX players simultaneously displayed on their screen. Atriax was the most ambitious of these multi-bank FX portals and was founded in 2000 by Citibank, JP Morgan Chase and Deutsche Bank. At the time of its launch, in mid-2001, around 65 banks had agreed to participate in the venture, accounting for over 50 per cent of global FX dealing.
Nevertheless, it failed to revolutionise the FX world and, after struggling against low volumes, it closed its doors in April 2002. The three founding banks now contribute prices to FX Connect, a rival online portal set up by State Street, the custodian bank.
According to a recent Tower Group report, FX Connect has a 75 per cent share of the online FX market. Nevertheless, this market has failed to live up to early expectations.
The daily volume of FX trades between banks and customers is around $500bn but that done via online portals is only a few billion dollars.
"I remember seeing predictions that 70 per cent of FX transactions would go online. I still see the same charts, but now the dates get pushed back," says Mike Whitaker, director of marketing and strategy for Reuters' treasury business. Reuters was one of the founders of Atriax.
Some observers blame the slow uptake on online FX portals on flawed trading models. For example, FXall provides a stream of prices in real time, but these are only indicative. The counterparty can move from the advertised price once a request is received.
Atriax used a different approach, in which users submitted a request for a quote, but to many potential users that seemed to offer little advantage over the old fashioned way of picking up the phone and asking for a quote.
But perhaps the biggest flaw facing the FX portals is that they were designed primarily to cut transaction costs and neglected the fact that FX trading is already highly efficient.
"With telephone trading, there's no exchange floor, so there is very little opportunity to reduce costs," says Andrew Murphy of PA Consulting Group.
"Users of multi-bank trading portals such as FXall are likely to be disappointed if they were expecting to see tighter spreads from the banks."
The demise of Atriax is seen as a small setback rather than a major catastrophe for the online FX industry, and indeed, by eliminating one competitor, it strengthens the chances for the remaining portals.
The backers of Atriax seem not to have lost their enthusiasm for online FX trading. As well as supplying FXConnect, Citibank now also provides liquidity to FXall, a rival multi-bank portal.
When the news came that Atriax would close, Citibank wasted no time in reconfiguring its system to supply the rival portals.
Once, such a reconfiguration would have required a major IT project. But the use of off-the-shelf web technologies and IP-based networking made the job relatively straightforward.
"Citibank had been using our network to connect to Atriax and once they made the decision to switch, we had them connected to FXall by the end of the day," says Brennan Carley, chief product and technology officer at Radianz, which runs an IP-based extranet for the financial industry.
According to Mr Carley, this flexibility to rapidly plug into different liquidity pools is one of the biggest benefits of the internet revolution. In the past, banks would have to "hard-wire" their computer systems into a trading platform and install proprietary software.
As for the future of the FX portals, experts believe they are not going to go away, although they will have to rethink their business models and do more than display prices.
"Multi-bank portals have a role to play but I do not think they are suited to all clients in the marketplace, and they will need a higher adoption rate than is currently there," says Richard Estes, head of e-commerce at the Bank of New York, the custodian bank. BoNY holds a stake in FXall and developed multi-bank order management technology for the portal.
BoNY claims it remains committed to the multi-bank portal idea but the bank is also promoting its own proprietary FX trading software iFX Manager, which was developed jointly with AVT and on which the multi-bank version is based. This software automates the complete order management process of FX trades and so improves post-trade efficiencies, which is the real challenge facing the FX industry, Mr Estes believes.
Ironically, perhaps, iFX Manager automates everything apart from the price quotation process. This is because BoNY believes its customers still prefer to obtain prices the old-fashioned way - over the phone.
