For years, banks and other financial institutions have worked, to varying degrees, on developing electronic foreign exchange platforms. Some of these efforts have only focused on internal trades (i.e. between branches). Others have rolled out platforms to their clients, largely as a means of facilitating smaller transactions. The advantages of these systems were numerous: ease of use; speed; and straight-through processing.

The differences between the various bank portals are what defined the competitive landscape. Pricing (the spread quoted) was always an issue, but with the introduction of streaming prices clients feel more in control of their trading. The emergence of the multi-bank FX trading platforms raised client control to a whole new level. Clients were now able to simultaneously bid out their business to a number of competing counterparties - even counterparties with whom they did not otherwise have any relationship. Price discovery and access to market liquidity have never been better. However, the situation is far from utopian and we still have a long way to go.

There are a number of factors affecting the up-take of electronic foreign exchange trading. Broadly speaking, the markets reluctance (or resistance) with respect to e-FX come down to two areas of concern: ease of use; and, liquidity. In speaking with our clients and prospects, it seems that most are taking a wait and see attitude. They want to know there is liquidity on the systems before they commit. Of course, this is a chicken vs. egg scenario. Liquidity will come as more users use the platforms, but users wont join until theres liquidity. Portal viability is another contributing factor supporting the wait and see approach. For instance, what will happen as a result of the widely rumored merger of FXall and Atriax? In this context, ease of use, especially in terms of significantly enhanced trading processes and efficiencies, may be the principle driver for client traction. One of the primary trading efficiencies that the e-FX portals offer is the multiple quote functionality. While this offers clients a significant advantage in terms of price discovery, the increase in potential counterparties creates an increase in back-office work. This can be a substantial drawback. One way users have worked around this issue is to target or limit the number of counterparties a deal is routed to. This certainly reduces the back-office burden; however, limiting counterparties also minimizes the price discovery opportunities.

For this reason, ABN AMRO has been an early proponent of adding FX Prime Brokerage as a product enhancement to each of the platforms. We believe this is the only way that users will be able to realize the full potential value of the e-FX platforms. Although most, if not all, of the e-FX platforms see the applicability of FX Prime Brokerage to their services, not everyone shares our opinion of its criticality to their future success. We hope, eventually, to link our FX Prime Brokerage product to all of the platforms that will offer the additional service to their clients. Similarly, we anticipate that the platforms will be in a position to put banks that have not provided FX Prime Brokerage services to their clients in the past into hub positions. Common technology and trading processes will level the playing field among hub banks and lower the barriers to entry for new banks.

The future, however, is a fully integrated solution connecting clients, platforms and banks. Users will be able to connect their front-end systems to feed their trades / orders directly into the platforms. Executing counterparty banks will provide pricing (either automatically or manually) and then give-up the deal to the clients hub (prime broker) bank. The hub bank will clear the clients trade(s), process the settlement and electronically route the confirmation into the clients back office system. For this reason, we have joined together with our Strategic Alliances group to arrive at an end-to-end FX solution that will fully automate our clients foreign exchange process while giving him maximum flexibility and liquidity. Clients will retain control of their trading but completely outsource their back-office and processing functions. Platforms that can provide the client connection and the give-up functionality, as well as banks that can electronically upload platform trades into their settlement systems will determine the competitive landscape. FX Prime Brokerage is commonly understood and widely used by the hedge fund and CTA community - those who are actively trading currencies as an asset class. However, the product is still in its infancy, in terms of applicability, with respect to the corporate and institutional investor markets. The product is still perceived as just being something the leveraged funds need to gain access to FX markets. On the other hand, the single back-office, administrative efficiencies and settlement cost savings achieved by our traditional users should be equally compelling to corporate and institutional clients as well. Perhaps FX Prime Brokerage linked through an e-FX platform is where it will all start.