FX trading online: are banks trading blind?

The past five years have seen a tremendous increase in the proportion of FX traded online, with some banks now looking to do up to 40--60% of client business via e-channels. While online trading has created many efficiencies, it has also brought side effects that require sales teams and traders to modify their working practices.

Traditionally, with business coming in via voice channels, traders and salespeople were aware of each deal being made, as it was made. This gave traders an excellent idea of individual client requirements, and equally importantly, of the market’s overall conditions. With an ever-increasing flow being auto-traded, a trader does not see a deal until it hits his book and salespeople have to look for information on their clients’ trading activities, rather than knowing what trades have and have not been done.

The ‘disintermediation’ from client actions has a number of consequences: traders have less granular, or ‘trade-by-trade’ knowledge, making accurate pricing more difficult. Salespeople must work harder to understand their clients’ needs and can, through lack of client feedback, miss sales opportunities. Also, without appropriate and timely feedback, it is difficult for a bank to understand the impact of the pricing policies it implements.

To give a practical example, a bank is receiving a high volume of requests for quotes while only trading on a few of these. Auto-trading has denied the intimacy of the traditional voice channel; where normally the bank might respond with a rapid readjustment of its prices or a specific client’s spread, it is often left to reading the statistics a month later through an ECN report. Without the proper sense of client activity, a bank is effectively ‘trading blind’.

Clearly, banks need to be taking action to understand and measure the flows of business. And, with the number of electronic channels through which business reaches banks likely to increase, developing a means of getting high-quality comprehensive information becomes imperative for short-term decision support and longer-term hedging strategies.

Management information systems vary from simple, static reports and online queries through to highly complex tools such as event messages, dashboards and heatmaps to indicate areas of activity. However, for any management system to be effective, careful planning, prior to implementation, is absolutely essential.

With a number of banks implementing MIS systems in FX and other electronic markets, focus is shifting towards the further sophistication of such systems. Indeed, for many banks, a greater understanding of trading activity and market conditions is becoming an increasingly defensive move to protect their client bases. Also, it offers a great opportunity to increase hit ratios, provide more competitive trading and gain greater returns on the underlying system investment.