In the late nineties, at height of the dot.com boom, banks rushed forward to deliver online currency dealing services to their clients. Applets, websites and portals flourished and having an online presence was considered to be essential. New age terms time to market and first mover advantage became all important and the new eCommerce managers were given sweeping powers and budgets to implement their systems. Within months dozens of new FX Trading systems were launched.

However, when the bank sales representatives demonstrated their new online capability to their clients, more often than not they found that their competitors were already offering online FX trading capabilities. Adding insult to injury, these competitive sites often looked very similar to their own offering, identical, in fact. Sure, the bank logo was different so too was the colour scheme, but the only differentiating factor for the client was the spread of the price on the screen.

Why did this occur and did it matter? Although there were differences across the various FX trading sites, by and large the trading functionality on offer was pretty similar, catering for trading of spot and forwards, sometimes deposits, with research only a click away.

As the functionality required for these sites was so similar, one or two autodealing software vendors flourished selling and re-selling their software, left, right and centre. This reliance on a few vendors solutions with very little tailoring left many banks with near identical offerings.

Currency options by their complex nature offer far more possibilities to differentiate execution services from competitor offerings The net result was that the technology spend had added little or no competitive edge or point of differentiation so the return on the investment for many banks was small or even negative. The problem was that banks had to offer online execution as a service to their customers and the simplicity of spot and forward meant that there was unlikely to be much scope for differentiation from competitors anyway. Now that the focus is moving to online FX options trading, things are markedly different.

Dare to be different

Currency options by their complex nature offer far more possibilities to differentiate execution services from competitor offerings. Witness some of the new and upcoming FX option sites. These tend to be far more customised than the straight forward off the shelf, third party software solutions in spot FX. Learning from the lessons of execution services in vanilla currency products, these banks preferred to create and hold on to their own competitive edge by creating more distinct, unique offerings.

Why is it that FX options offer the ability to differentiate? The variations in product that a client will trade in are broader. Not only is the product defined by currency pair and tenor as in spot and forward, but strike prices, option type, strategy, cuts, greeks, premiums, etc, also come into play. This has tremendous opportunities to create diverse data display as well as offering other front-end features to users. Business and eCommerce managers can tailor their solutions according to their firms relative strengths and advantages, something that spot FX offered little scope for.

Business managers are faced with a problem though. While product complexity makes the front-end more unique, the integration to the back office systems and processes becomes more of a challenge. Why? Primarily because every aspect, from data collection to integration requires more attention, with a myriad of questions you need to answer. How will you create the price that you will quote to the client? In spot, you can take in a vendor based feed, automatically add a client specific spread and you are pretty much done. For FX options, for starters you need a pricing server using a multitude of inputs. This, by definition will require tailoring to a banks environment. For example, what maths models will you use for your dealing site? There are variations in models, especially for the more exotic currency options. Which interpolation method will you use to generate your volatility smiles? Where will you source the underlying market data required to drive the models? Often the data will not be available from third parties meaning you will have to collect it internally and feed it into your pricing engine. What are your counterparty credit checking procedures for options? Can your system respond to credit requests in real time for options related queries? Trade processing is more complex as well due to the variety of strategies, so ensuring that the positions get recorded in your internal systems correctly requires tight integration.

The bank also needs to ensure that your trading system is secure, reliable and scalable. Everyone who has worked on these types of systems will tell you that building a first rate and reliable online trading environment has its challenges. Putting together a website is one thing. Building a mission critical trading system, which can incur huge losses either in monetary terms but certainly in reputation if the trade goes wrong, is something different altogether.

Faced with such a complex task and competitive pressure to deliver something quickly, business managers are faced with a difficult decision. Clearly, lessons learnt in spot means that they must grasp the opportunities offered by currency options to deliver unique and differentiating functionality. This calls for custom coding, which is both expensive and time consuming. Yet to stay competitive banks that have not done so already, must deliver a first rate service quickly at an affordable cost. This calls for buying a vendor based solution.

Prt porter meets Haute couture

Such an aspiration gladly does have a solution. Namely one that combines the expertise of a software vendor that can implement and integrate key components quickly, while allowing the bank to develop and embed those items that reflect the banks own unique knowledge and understanding of their clients requirements.

When GFI was faced with similar issues in delivering trading platforms in the inter-dealer market, we learnt that where the functionality is generic there is little value in replicating it. GFI now has a mix of internal and external systems that work together to offer uniqueness where it matters, and speed of implementation where it comes off the shelf. This philosophy is carried over in our work with clients when they ask us to look at implementing GFIs FENICS FX technology into their eCommerce environments.

In such FENICS FX eCommerce solutions GFI combines its own proven trading and derivative pricing solutions, such as order routing, messaging, central pricing servers, etc to create the backbone services. Then it leverages its experience in building and using APIs (application programming interfaces) to build links with banks internal systems, models and data sources.

Clients can then focus on or at least get heavily involved in delivering the unique elements of the solution themselves, creating a user front end or other functions that make their site different from their competitors, leaving a company such as GFI to integrate it with the banks back office and risk management systems.

Building an FX option trading capability involves far, far more than attaching a logo to a website or software applet and those that say otherwise would be underestimating the task in front of them. Combining the core technologies of a customisable white-labelling solution with the experience and specific functionality requirements of the bank must provide the optimum solution for building a viable FX online execution service.