Banks, funds, corporations and private investors receive FX Market Data and Technical Analysis services via a variety of technologies. Paddy Osborn analyses the pros and cons of service distribution and examines developments that will shape the future delivery of market data and technical analysis.

With the technology at their disposal, banks should not lose sight of their ultimate goal; enhancing shareholder value. The FX revenue stream may be split into two broad categories; proprietary (risk-taking) trading, which involves significant p&l swings, or servicing a Client Franchise, which is relatively risk free and provides stable if not always greater - revenues. Most banks combine these two areas, with the Var element changeable and usually dependent on the quality of earnings from franchise.

There are three ways in which banks try to differentiate themselves to attract and retain customer business:

1. Price
Given the power of modern dealing technology, vanilla FX pricing has become commoditised and banks struggle to differentiate themselves on price alone.

2.Relationships
The continual movement of FX sales staff between competitor banks is testament to the value that these institutions place on client relationships. Strong dealer/client relationships can be transferred quite quickly between banks, which effectively facilitates direct client acquisition by competitors.

3. Added Value Services
Provision of added value services remains the key to securing and retaining new FX business. Since the trading styles - and hence requirements - of Hedge Funds, Real Money Managers, CTA's, Corporates and Central Banks are so diverse, the challenge for banks is to remain relevant to clients in each sector without losing control of their own expenses.

Fixed comms lines versus Internet
Historically, professional traders have relied on desktop applications for market data information and analytics, with real-time data feeds delivered via dedicated comms lines. Most banks re-distribute these real time feeds internally via LAN or WAN from their major centres to other branches, avoiding duplication of hardware and saving costs on external data delivery.

Major data providers e.g. Bloomberg - have built dedicated global networks to deliver their products and data direct to customers. Radianz and Savvis Virtual Private Networks (VPNs) resulted from the demand for high speed, efficient and secure data connections between banks, brokers, exchanges and buy-side institutions.

The emergence of the Internet as a viable alternative to fixed comms lines has initiated a revolution in the market data space. Niche vendors began delivering data via Internet as

...browser based products are now getting closer to offering comparable levels of functionality to desktop products.

early as the mid 1990s, reducing their data transmission costs while increasing their potential audience by removing geographical boundaries. The major market data providers were slower to adopt Internet delivery due to their reliance on and investment in existing infrastructure.

Desktop Applications versus Browser-Based Solutions
Today, most dealing rooms are equipped with desktop applications, installed on each users PC. While desktop solutions offer robust, sophisticated and established functionality, there are some negative issues around portability, software packaging (for both new installations and software upgrades) and the high level of in-house support required.

However, browser based products are now getting closer to offering comparable levels of functionality to desktop products. Internet delivered, browser based GUIs require no software packaging, no local installation, and negligible local support. Upgrades can be loaded quickly and most applications allow user access from any PC with an Internet connection.

The assumption that the cost of web based delivery is less than the cost of equivalent desktop services is also being re-evaluated, since users recognise the significant data, infrastructure and support costs which still apply.

Following the development of web based FX liquidity provision by companies such as IFX, FXCM and larger corporate players such as FXall and Currenex, banks have introduced their own on-line FX trading platforms to complete the current day landscape. Banks are still increasing their e-ratios, with a significant majority of FX trades being executed electronically at many institutions.

Banks Becoming Vendors
Amid the battle to provide added value services, banks continue to focus on their own technology and data. Some banks are themselves becoming providers of market data and analytics services to the buy side, moving into areas traditionally dominated by vendors such as Reuters and Bloomberg. However, banks are not only entering this space to enhance information provision to their customers, but increasingly to service their internal dealers as well.

Top tier banks already have on-line FX trading platforms and most provide liquidity to one or more multi-bank FX portals; the race is now on to attract more customers by offering more sophisticated functionality and information. This includes news, advanced charting, technical and fundamental research, options pricing and more, all packaged within a flexible, easy-to-use platform. They want to keep their customers from going elsewhere by providing every service that their clients require.

Now, banks may build in-house systems themselves or buy technology from external technology providers. While banks control the development of their core platforms, they tend to buy in specialist applications such as charting, options pricing, etc. There are a number of reasons for this:

cost of in-house development,
availability of internal IT resources and specialised development expertise,
cost of on-going support and maintenance, and
the need for speedy time to market.

Most banks therefore choose to integrate specialist third party applications within their core in-house trading platforms.

From a market data vendors perspective, it is clear that this aggressive move from the banks may challenge their dominant share of the desktop market. However, market data providers are evolving to offer customers more flexible solutions and are working more closely with banks to help them deliver the information that their customers require.
Retail Market
Another sign of how technology is driving markets is the news that major global banks are launching margin FX trading services to cater for the retail market. This sector has always been beneath the radar of global players, but tighter margins and fierce competition for traditional custom from Funds, CTA's, Corporates and Central Banks is driving the banks down the value chain in search for more profitable business.

The reason that they can to do this now is technology. Sophisticated, scaleable solutions are now available and affordable, so customers that previously didnt justify the cost of servicing are now profitable areas for the banks.

The Future
Looking ahead, I expect to see further dramatic progress in this space. On your PC, most applications will be browser based. Algorithmic trading will be widespread, squeezing arbitrage opportunities and further tightening FX spreads. Volumes in emerging markets will increase as banks and investors seek out better returns. Two-way streaming, tradable FX options pricing will be available on-line for all tenors, with auto quoting on trades of $100 million and more. FX Sales Dealer