The suitability of the FX market to take advantage of the newer technologies offered by Java, HTML and other lite infrastructure is well known. The proliferation of the online trading platforms continues to grow as do the number of participants and the trade volumes. Rick Schumacher, director of new product development at Wall Street Systems examines the challenges faced by the market today and sets out some possible solutions for a robust infrastructure.

In order to describe the challenges, it is necessary to examine the pressures and requirements being placed on the FX market participants today. As ever, the market is used by those who are not only trading but also hedging their exposures created from other financial products including interest rate derivatives and fixed income securities among others. As we have seen already this year, there have been figures published stating that almost 40% of the FX transactions are being created by the Hedge and Fund Management community. The market is now a non-stop market that is open for business on a 24 hour a day basis. Further valuation and pricing challenges are emerging as differing technologies and the 24-hour nature of the market force inconsistent prices. Institutions are striving to find solutions to enable consistent performance management.

To compound these challenges the FX market is also growing at a very fast rate, and is already the largest 24X7 market in the world today. Volumes continually increase, while mergers and acquisitions also have an immediate impact on transaction volumes. Given that this market is also subject to the common drivers that are also effecting the financial markets vertically, one has to add into the mix the continued drive for IT cost management and the focus that the market has on the three pillars of risk management; market, credit and operational.

Meeting the real-time and performance challenge
So how are technology vendors and IT management continuing to meet the real-time and performance challenge? The answer to this question is to examine a few key areas. If these areas are appropriately addressed, they will have the most impact on improving the business. The first area to tackle is the decision around the timeliness of data and the true requirements of real-time. The timeliness of data is dependent upon many things: the type of data; the type of organization; and the purpose of the user.

For most corporate treasuries for example, the requirement for immediate real-time risk positions is not nearly as critical as it is for the proprietary trader in a financial institution. It is important to understand the requirements for each type of end user, and the trade-offs between up-to-date data and the potential cost of delivering that data. Different delivery mechanisms are required to support these varying client sectors. Some may desire Internet delivery on an HTML page, others may want a downloaded applet that provides more sophisticated functionality, and the most sophisticated users will desire either VPN or a direct line to ensure quick and secure connectivity. Ideally, the technology platform should recognize the underlying requirements of each user so that the appropriate timely information can be delivered in a cost efficient manner, and the underlying infrastructure can be leveraged to support all of these delivery mechanisms, without unnecessary duplication of functionality and data across systems.

The next major challenge is that of the disparity of data and the technologies employed to manage this flow. Institutions have a variety of methods to execute trades, including: portals, exchanges, single-bank web sites, voice brokers, and directly over the phone. Each of these requires its own sets of technologies, its own procedures, and its own trading language. The procedures become far more complex from a risk perspective when trying to manage global credit and market risk while trading on a plethora of disparate unintegrated platforms.

It is then critical in this case to have a technology infrastructure that allows you to seamlessly connect to these various trading platforms, particularly the electronic networks. Messaging standards, both from a language and a technology perspective, are also critical here, to ensure that trade data is accurately and consistently, described, regardless of the originating trading source. The industry has been moving towards adopting messaging standards such as FpML, TWIST, and there is now strong demand for FIX connectivity for Foreign Exchange (particularly amongst hedge fund managers who need to leverage their existing FIX capabilities within other asset classes). The FX market also has increasingly sophisticated settlement requirements focussing on netting capability specifically provided by CLS.

The final major obstacle to overcome is the scalability question. For the purposes of the FX market, scalability can be defined as having three stages: transaction throughput, mathematical complexity, and insourcing.

Technology infrastructure
Transactions are on the increase and this can present problems for institutions if the underlying technology isnt ready to accommodate these additional volumes while still providing sub-second processing response to on-line users. From the complexity standpoint, FX derivative products, particularly in the OTC currency options area, have become increasingly multifaceted.

A book containing varying derivative products will require sophisticated mathematical computations in order to properly value and manage the risk of the book. It is critical for the organization to provide a technology infrastructure that can quickly and accurately manage these instruments. Insourcing is a recent trend that can be defined as the creation of an expanded range of client services, including operational insourcing, regulatory services, and prime brokerage.

So what sort of solutions exist that meet these individual challenges? Clearly there are several paths available both from the vendor community as well as in-house IT resources. Examples of in-house IT projects could be bespoke programs to run a common pricing engine for even distribution of online prices across the multiple portals and channels that exist.

Wall Street Systems is finding a growing demand for its enterprise-wide trade processing and risk management engine that can provide support for real time straight through processing. The advantages of this style of infrastructure is that it is tried and tested while releasing valuable in-house resources to focus on specific areas that create the most value for the client.

Conclusion
One final point to consider is the fact that it is becoming increasingly important to view FX risk alongside other market risks (such as interest rate risk, duration risk, credit risk). This becomes difficult to do in real-time if a variety of systems have been deployed in an organization to support different asset classes.

Typically an enterprise-wide system that can support all financial instruments, using consistent processing rules and mathematical treatments, can deliver risk metrics to the end user on a timely basis.

There are a number of areas that need to be addressed by any organization that is supporting an increasingly demanding and sophisticated client base. In order to provide consistent, correct, and accurate solutions in a global, high-volume transactional market like Foreign Exchange, it is now imperative that a robust, consistent, centralized, real time global technology infrastructure is put in place so that these risks can be managed.