Banks Look To Build FX Order-Matching System Quotron Eyed As Vendor, Minex As Co-Sponsor?

After years of whining about the dangers of Reuters Holdings PLC's virtual monopoly in the market for foreign exchange transactional systems, the major money center banks appear to be getting serious about building and operating their own order-matching system. A group of member banks of the FXNET consortium, which operates a bilateral foreign exchange netting system, are investigating the possibility of developing a rival to Reuters' long-delayed Dealing 2000-2 order-matching system.

The group--under the banner Electronic Broking Services (EBS)--is talking to a number of systems vendors, and has emerged as the inspiration behind the efforts of Citicorp's Quotron Systems Inc. unit to develop an order-matching facility for its F/X Trader conversational trading system. Quotron is facilities manager for the FXNET system, providing systems, telecommunications and marketing services.

At the same time, the EBS group is trying to enlist potential participants as co-sponsors. Sources say the group is talking to members of Minex Corp., a consortium of Tokyo-based banks and brokers and Kokusai Denishin Denwa (KDD), in an attempt to get them to join the EBS group's order-matching development.

If the EBS group succeeds in getting Minex member on board, it could provide a user-sponsored alternative to Dealing 2000-2 that would have the support of brokers and banks alike. In addition, unlike the now-defunct RADAR Financial L.P. venture between MAI PLC and Cable & Wireless PLC, the EBS system would be owned by many of the key users of such a system.

Reuters' dominance of the foreign exchange trading systems market has long concerned bank users and brokers. Banks have worried that the lack of competition raises the prospect of high transaction fees. Brokers believe that Reuters' Dealing 2000-2 could threaten their very existence.

Reuters' Monitor Dealing System and Dealing 2000-1 conversational trading systems account for 14,500 keystations between them. Its Dealing 2000-2, which will add an order-matching capability to Dealing 2000-1, has suffered delays stemming from technical difficulties and liability questions.

According to sources close to the project, EBS comprises around 12 of the core FXNET member banks. These sources say the venture is being spearheaded by five of those banks. The sources weren't able to identify those banks or the other banks involved, but say there is a "close correlation" between the 12 banks that sponsor FXNET and the 12 EBS banks.

FXNET's owners are: American Express Bank, Bank of America, Bank of Scotland, Chase Manhattan Bank, Chemical Bank, Citibank, ABN-Amro Bank, Lloyds Bank, Manufacturers Hanover Bank, J.P. Morgan & Co., Swiss Bank Corp. and Union Bank of Switzerland.

FXNET is an electronic bilateral netting system that allows participating banks to settle currency trades with their counterparties through a daily, single net payment. The FXNET consortium was brought together by FXNET chairman Peter Bartko, who was formerly at Chemical Bank in London. Bartko couldn't be reached for comment.

Sources say the trading system the EBS group has in mind would feature order-matching a la Dealing 2000-2. Quotron has been quietly developing an order-matching facility for F/X Trader for some time (FX Week, March 1). The company has yet to announce the system. A spokeswoman declines to comment on any aspect of Quotron's order-matching efforts.

According to sources, the EBS group has also talked to Dow Jones & Co.'s Telerate Systems Inc. unit, developer of The Trading Service (TTS). But these sources say that Quotron is almost certain to be chosen to build the group's proposed system, despite Quotron's ownership by Citicorp. Some bank executives are wary of supporting Quotron's move toward foreign exchange transactional systems because of fear of aiding a rival.

Quotron's chances of selection by EBS, sources say, may also have been boosted by some old relationships among key executives involved in the project. Quotron's project to develop an order-matching capability has been led by vice president Mike Togher, formerly at Citicorp, and then vice president of trading systems at Chase Manhattan, where sources say he coordinated Chase's participation in the FXNET project. FXNET's Bartko, with whom Togher negotiated while at Chase, recently left Chemical Bank to join Citicorp.

By pulling Minex's banking participants into EBS, the group would spread ownership among a bigger number of users. The move would also go some way to appease the brokerage community: Minex has been spearheaded by Tokyo Forex Co., the Japanese arm of Tullett & Tokyo Forex International Co., and is believed to include money brokers R.P. Martin PLC, Fulton Prebon, Euro Brokers Ltd. and Ueda Harlow, a unit of MAI. It isn't clear what role, if any, Japanese telecommunications company KDD would play in the venture.

But some industry observers say that the wider involvement of user banks could develop into management of the project by committee. Indeed, sources close to the EBS project say that Quotron's order-matching capability is physically ready to roll but that lack of agreement among EBS member groups--over such issues as who will pay for the system and who will assume liability for broken trades--is slowing progress.

Past joint ventures in the area of foreign exchange trading systems have ended in failure. Telerate's joint venture with AT&T--Global Transactions Services Co.--was dissolved after Telerate bought out AT&T's share of GTS, which developed TTS. More recently, RADAR Financial collapsed after one of the co-sponsors--Cable & Wireless--got cold feet.

While Telerate may still be in talks with the EBS group, the banks' apparent decision to go with Quotron seems to quash a recent industry rumor that Telerate and Quotron executives were discussing some kind of cooperation, possibly in the foreign exchange area. Telerate had been in talks with Minex Corp., apparently to discuss a joint order-matching effort (FX Week, April 12), and more recently with RADAR Financial about picking up the pieces of the canceled project (FX Week, April 26). Those talks haven't borne fruit.