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Banks Set To Open Hi-Tech Forex Trading Programs To Funds
29.03.07 16:03:00- BNEU
By Katie Martin
Of DOW JONES NEWSWIRES
LONDON (Dow Jones)--In what is looming as the next big trend in foreign
exchange markets, more banks are expected give out their 'secret weapon'
computer-based trading programs to valued hedge fund clients to give them an
edge.
Barclays Capital (BARC.LN) was one of the first banks to offer this kind of
service, and some trading technology companies support it too. Now a number of
other banks are about to follow suit.
Credit Suisse (CS) - a top-20 forex bank by market share - already allows some
of its equity clients to trade shares through programs dubbed Advanced
Execution Services. Foreign exchange could be next.
"We have not gone to market in a big way with AES for FX," said Ian Green,
head of algorithmic and electronic trading for fixed income and foreign
exchange at the bank, speaking at a conference in London Tuesday. "But we want
to be there and we want to be the best," he added.
As more banks open up this kind of technology, it's likely to further bolster
the appeal of the currency markets as an asset class to hedge funds, boosting
liquidity and volumes.
"A number of serious banks are looking into this space right now," said one
senior forex banker at one of the largest banks in the industry. "We have some
capability already, but we're not quite ready to talk about it. It's a bit of
an arms race," he added.
Another senior banker at a European bank said that the firm has systems that
pull in rates from various different systems...The next step is to give access
to that to our clients. But we're keeping that quiet for now."
The $2 trillion-a-day foreign exchange market is fragmented, with various
trading systems pooling prices from different banks and churning them out in
subtly different ways.
Human traders are too slow to pick out and benefit from pricing discrepancies
between these systems when executing deals. And slicing up transactions to feed
them out to different systems at different times and grab the market's best
rates is a complex task.
Enter the computer traders, which banks have developed to crack this problem
over several years.
Up to now, though, these highly sophisticated computer programs have been
closely guarded by banks, as their superior trading methods give them a price
advantage over their clients, providing one way to gain income from the
business.
But competition between banks for forex flow from hedge funds is now so
intense that banks are increasingly prepared to forego that advantage for some
favored clients.
Some banks may be prepared to make advanced dealing styles available to any
client that wants it, but it's a technique that's most suited to highly
price-sensitive high-frequency funds.
"Part of it is a bid to ensure the business goes through a given bank," said
Justyn Trenner, chief executive of ClientKnowledge, a London-based consultancy.
"Also I think it's an acceptance that banks will not be capturing the spreads
on certain customers so they may as well get other types of income. Banks have
always provided services like research to clients in order to capture flow.
This is the newest service they offer," he added.
But Trenner also said that if banks are to provide this service, they need to
beef up their pricing and risk management processes - a tough task that may
explain why it's not yet standard practice.