A Billion Dollar Fine For Being Late

The impact of the internet on the financial markets has not yet been fully realized. Nowhere is this more apparent than in the foreign exchange business. Now that fears over the security and reliability of the internet are being comprehensively addressed, market players need to take the plunge if they are to avoid being left high and dry in the future.

Four years ago companies were concerned about the return on investment from embarking on the route of internet dealing. The reality is that the cost savings and efficiencies of internet dealing in the early stages gave adopters massive competitive and technological advantages.

Some stayed away from adopting the internet in the early stages because of the threat it posed to vested interests. Parties with a vested interest include information suppliers who spread disinformation about the ability and reliability of the internet.

Sales staff also have a vested interest in retaining legacy systems and telephone dealing, as the internet will require staff to have new skills to operate screen-based trading systems.

Collective resistance or ignorance within a company to the opportunities of the internet will leave any late arrivals to the market severely disadvantaged.

One man’s meat is another man’s poison. There is no better example of this than the Liffe floor, where late adoption of technology has resulted in a huge loss of business to the German futures exchange, Deutsche Termin Boerse. The benefits DTB has attained from Liffe’s failure to react has allowed DTB to establish itself as an advanced electronic exchange where outside computer links can be interfaced.

But such a clash of the titans is not typical in internet trading at present. There is an undercurrent of small-to-medium-sized institutions that are gaining market share in the massive pool of internet-savvy investors. While the Goliaths of the banking world are happy to service the exclusive club of a few hundred thousand customers, the Davids are declaring themselves open for business with hundreds of millions of internet investors.

It is also important to consider how the internet has empowered organizations and customers to gain vast cost savings and improved information flow to the retail market. It is a marketing dream – a company finds that by introducing a new product costs actually decrease, while the quality of customer service increases.

The benefit to the innovators has been their ability to gain market share. The unique selling point is that they can provide information and dealing facilities to people previously deprived of such a service. Examples of success stories include the start-up share-dealing services operating over the internet, which are now capitalising well into billions of dollars in the US.

Some say the traditional banks now trying to enter the market with e-solutions will never regain the market share lost through tardiness. It has cost them dearly in staffing and technology, as well as loss of potential business for being late.

CMC has calculated that it would require 63 dealers to process 1,000 orders and deals through non-internet means, compared to just six dealers using the internet. This is because deals and orders over the internet take approximately three seconds to process, as opposed to around 30 seconds over the telephone.

There is a similar ratio of savings for the back-office. There is no need for inputting or trade-checking as the client’s transaction is automatically calculated and reported through the back-office and accounting packages.

As there is no break in the deal-reporting process, there should be no margin for error between a deal executed with a dealer and what the client sees on their statement. Therefore the number of errors is reduced.

The efficiencies outlined above have been achieved through the development of technology and the willingness of innovative companies to put the technology to the test.

There is now software on the market that is secure and allows the real-time provision of key services. Pricing by the client, order routing, execution and confirmation, as well as a range of applications including position keeping, profit and loss, statements, netting, price calculators and margin systems are all available.

Book management, order-type management, limits, alerts, auto-execution, auto-matching, auto-liquidations, structured trades and risk, credit and back-office management are all there too.

The foreign exchange industry has still not fully realized the advantages of the internet in the same way as the share-trading companies. In some ways forex is more suitable to internet dealing than equities. Don’t be late – it could cost you billions of dollars.