Ian, you recently remarked that foreign
exchange remains a relationship based service industry. Do you
think the arrival of more aggressive trading styles and black-box
systems might ultimately change that widely held opinion?
With Ian O'Flaherty, Managing Director, Global Head of e-Commerce,
Foreign Exchange, Deutsche Bank.
Ian O'FlahertyManaging Director, Global Head of e-Commerce, Foreign Exchange,
I think it may change the landscape a little, but I still believe
that a large proportion of our clients would like to retain a
strong relationship with DB. Some of our clients only demand direct
access to the markets through Prime Brokerage. Some demand
liquidity, some demand superior front-to-back services. Others
require all of the aforementioned. It is our challenge to
understand their needs and meet their requirements. I do not see
these dynamics changing in the near future. We connect to clients
and provide liquidity where the relationship is mutually
beneficial. The key is being able to perform all aspects well. We
have shown in the past that we are market leaders in provision of
liquidity, market access and front-to-bank services, we will always
endeavour to retain such high standards in the future.
The arrival of program trading operations
and prop shops in FX has presented banks with difficult issues
surrounding customers not delivering margin. Deutsche Bank is known
to be ahead of much of the industry in your Risk Management
techniques for dealing with these and discerning client from
counterparty. How important has it become for banks to know who
they are pricing to and down which channels?
Program trading and high frequency models have certainly presented
the banks with some issues. Taking time to understand the modus
operandi of these new players to the FX market is important, and
creating smart algorithms to risk manage is key in extracting
value, but again it needs to be beneficial for both parties. I
believe it is important for us to know who we are pricing because
we need to ensure we provide the correct level of liquidity, the
correct spreads and the correct level of pre and post trade service
that is prevalent for the relationship. If the client is anonymous
we cannot adjust the level of service accordingly. With regard to
the channels that we price through, the same principle holds.
Anonymous, multi bank portals will naturally receive different
liquidity and resources versus autobahnFX and our API. Any channel
that allows us to enhance our client relationship will receive
greater attention than those that do not.
The FX market continues to experience a
proliferation of trading venues and marketplaces. What impact do
you think this fragmentation may have on overall market liquidity
and what makes you optimistic for the future prospects of single
The term fragmentation of liquidity gives the impression of
inefficiency, but a concentration of liquidity is a double-edged
sword. Some would prefer that all liquidity was accessible in one
venue, an exchange. But, if FX moves towards being an exchange
traded product the nature of the client relationship would have to
change. The current model would be unsustainable. Most clients are
happy with the overall structure of the FX market, and I do not
believe the market place as a whole is ready or willing to embrace
such a fundamental change. On the other hand, fragmented liquidity
does cause other issues. Having many avenues and labyrinths of
liquidity does make the overall market look more liquid than it
really is, and is what I deem to be the oft mentioned liquidity
mirage. Market makers do not always see the end user, and the end
users quite often see the same liquidity but duplicated. The market
makers find it very difficult to control their liquidity across
venues, thus the client sees a liquidity mirage. This is why we put
most of our efforts towards our bi-lateral relationships,
autobahnFX , our API or any venue that enhances our client
relationships and allows us greater control of our liquidity, and
why two-way support pricing into anonymous portals and some
software applications is unsustainable long term.
The centrally-cleared FX trading
platform, FXMarketSpace, is launching in early 2007 and Deutsche
Bank has signed up to its Early Adopter Programme. What makes the
FXMarketSpace business model attractive from your point of
Deutsche Bank has only signed up to be a credit provider in the EAP
and not a liquidity provider. As Head of an e-FX business dedicated
to improving direct client relationships, I do not see the
FXMarketSpace as an attractive business model. That does not mean
it may not succeed.
Deutsche Bank has recently launched a new
version of your proprietary platform, autobahnFX. Can you tell us a
little about some of the enhancements you have made and important
new functionality added?
Some of our clients demand a premium cross product platform and
with this in mind we have combined many other products from our
autobahn platforms including Futures and Options, Interest rate
Swaps and Money Market Derivatives. We have added many new products
to our platform including, more Indices and Baskets, streaming
Asian and LATAM NDFs. We have increased the breadth of EM
currencies and our offering in Options has been enhanced with
greater liquidity being shown, more currencies, more exotics
structures and small ticket quotes available. We are also launching
EFP pricing for outrights and rolls that allows our clients to deal
on autobahnFX and give up to one of a number of exchanges. We have
also improved our post trade functionality and now clients can
allocate or split trades across accounts. We believe these
enhancements will help us to further entrench Deutsche Banks
relationship with its clients.
Your new Laddered Pricing solution seems
a particularly exciting and useful feature. How are clients
responding to it?
The response to Laddered Pricing from clients has been extremely
positive. They construct their ladders and trade via the rungs,
this allows them to pre select the amounts they want to deal,
removing the need to type in trade size , thus speeding up
execution client side.
Earlier this year Deutsche Bank announced
the launch of dbFX - an online margin foreign exchange service made
available primarily to an individual client base with customer
support in 9 languages. In what ways do you think the entry of a
mainstream bank to the online margin industry will benefit all
The market for online FX trading is growing significantly as all
clients demand streamlined access to capital market products. We
believe that the entry of a mainstream bank to the online margin
industry will benefit all participants by deepening the use of FX
as an asset class, and establishing best practice. We offer
individual investors the opportunity to deal with Deutsche Bank,
and place all deposits with Deutsche Bank.
Deutsche Bank has recently been doing a
great deal of work to enhance your electronic options capabilities,
including doubling the number of currency pairs priced on
autobahnFX and increasing the choice of pricing parameters. Do you
see your option trading offerings as being a major differentiator
between you and competitors?
Deutsche Bank now offers a comprehensive range of products within
its e-Options platform, which have been designed to meet the needs
of all types of user. Streaming 2-way prices enable clients to view
and trade the whole volatility surface at the click of a button.
For clients that want to trade specific vanilla options there is
the RFQ window that delivers 2-way tradable prices in a multitude
of strategies and price type (volatility, pips, premium).
Meanwhile, the Option Pricer is the ultimate product for
flexibility, providing clients with tradable prices for a full
range of exotic options and multi leg structures which can include
both vanillas and exotics.
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