Banks gear up to fight online traders

Chiefly it's the extension of retail trading services into the institutional client market. For example, online trading company FXDD launched a second institutional platform called PowerTrader last week. This is in addition to the version launched in 2005, which it said was more of a one-bank portal that didn't have an integral order-management system.

Some banks are concerned that more of these trading companies are capturing a market that they too are gunning for. They feel that the pricing coming from the banks themselves adds insult to injury, as essentially they are helping the trading companies take the business.

According to one institutional broker, these clients are too small and messy for big wholesale banks to get involved with. The broker said they do not generate enough profit to justify the effort involved in incorporating them into the business.

But as technology develops, so does the ability to better evaluate the risk versus reward of clients. Some of this technology enables bank dealers to quantify the value of this particular type of flow. That changes the proposition somewhat, when you know who you are dealing with and what they are worth.

As banks launch platforms of their own to capture this market segment, one obvious way of getting rid of the competition is to cut them off. At least that's what one banker said last week, although neither of us knew when that would actually happen.

Of course, some banks have chosen to work with the competition via white-label or prime brokerage relationships. Or, if possible, by offering them risk management services. If the estimated figures are anything to go by, there may be a big enough pie for everyone to have a slice. It is thought that the volume generated from Japan alone is worth $12–15 billion a day.

Outside of that, it's literally a case of 'on your marks, get set, go'. By next Monday, FXMarketSpace, the Chicago Mercantile Exchange/Reuters joint venture, will have gone live. The electronic communications network has generated so much debate and publicity before it has even launched.

How that platform does is crucial to the future of the FX market. For better or worse, it will put an end to the long-running debate on the success of an exchange over the prime-broker model in foreign exchange.

Saima Farooqi, Editor