We invite Nick Barker, FX eCommerce Programme Manager at UBS, Scott Freeman, Head of Electronic Trading Services, GFX at Bank of America, Bjorn Lundvall, Head of e-commerce at Handelsbanken Capital Markets and Rita Saverino, Director of FX e-commerce at Deutsche Bank to discuss the issues.

In what way do you think electronic trading has changed the way that banks now communicate with their clients?

Barker: Electronic trading has dramatically altered the way that clients communicate with the banks. It has made life easier for both the banks and the clients and the benefits of STP have been considerable. The ability to provide transparent, consistent, rapid and tight pricing has dramatically accelerated the adoption of eFX. It has made it quicker and more efficient for clients and banks to trade with each other. Electronic trading also means more time for banks and clients to discuss more complex issues/transactions.

Freeman: Electronic trading has improved the overall level of communication between banks and their clients. Clients have better access to analytics and research, and can more seamlessly translate that information to trading decisions. More efficient post deal processing, and the growth in Prime Brokerage, has enabled clients to increase productivity.

Lundvall: Electronic trading is taking away the manual intervention in plain-vanilla deal processing. This development has started to transform the role of the sales person from deal executioner to financial adviser. A deeper knowledge of the clients core business and of the structure of their balance-sheet is required in order to be able to present him/her with the proper business-proposals. Our customers require a broader competence from our sales-people. Good knowledge of the FX-market is simply not enough. Customers see FX-trading as an integrated part of their cash-management process. This means that the FX-sales person now also will have to know something about payment-solutions, cash-pooling, zero balancing etc. Sarbanes-Oxley Act and IAS has put working capital management very much in focus with our customers.

Saverino: The pace of change in the FX industry in the last 18 months has been glacial. It has affected all participants regardless whether they were prepared for it or not. The traditional manner in which we viewed client relationships, market liquidity, risk management and competitors has been challenged. Clearly the changes have given clients more choices in how they source liquidity and execute. Access to constant liquidity and transparency has enabled clients to transact more frequently on smaller amounts without having to call their bank. Electronic trading provides both the bank and the client the benefit of straight through processing. Less errors and better use of time allows the sales person and the client to focus on more value added services. Banks can now focus on creating structured products that enable clients to express their market views through different instruments. An example of a product that DB has created is the Principle Protected Note where performance is linked to specific currencies via that currency index product.

Late adopters of the e-channel may be avoiding costly development errors, but are they in danger of missing the boat and facing an uphill task in building client numbers?

Barker: Late adopters bringing out similar products to those already launched may find it difficult to gain footprint. Also being a late adopter doesnt necessarily avoid costly development errors. Those banks that launch different offerings that meet a currently unsatisfied client need will not have missed the boat, nor will those that are able to reach out to as yet untapped markets. Late adopters, however, can take advantage of the white labelled systems offered by the larger banks to catapult themselves into the e-world.

Freeman: Banks always face an uphill task building client numbers and continuing to service the needs of their clients. We expect the pace of change and innovation to increase, which will make it increasingly difficult for banks that do not continue to invest in e-trading capabilities.

Lundvall: Yes if they are not getting aboard now, or sometime in the near future. The risk of being late is of course that you will end up in a situation where you are trying to catch up all the time. In order for you to attract customers that are already in the eFX market you cant just present them with something that is just as good as the solution they already have. On the other hand, I think that there is still time. Many customers have not yet moved into the world of e-trading and a lot of the FX-business is done on a local level. But I think that banks that wait too long will stand the risk of loosing their core-clients FX-flows. The cost to buy into the market, if we are talking about system-investments, is lower today than a couple of years ago. There are hosted solutions that do not require big investments in hardware and infrastructure. But, the biggest obstacle for the late adopters to overcome will be the resistance within their own organisation. Experience tells us that the necessary change in mind-set might take longer to implement than the system itself.

Saverino: Does the first mover advantage theory apply in electronic FX? If there is such a thing it is short lived. Its no longer about being first to market with a sexy front end, as much as it is about delivering a functionally rich product with competitive pricing backed by scalable infrastructure and risk management tools. Its not just about being quick to market as much as it is about building an electronic business around sound processes. The e-channel is about technology and accurate pricing. Clients can not afford to jeopardise their ability to access the market by choosing the wrong electronic liquidity provider. When choosing their electronic provider, clients need to make sure that they chose a bank that is there for the long haul and can scale and grow with the market. They need to choose a bank who is thinking about all the parts of the execution chain.

Many banks are now reporting significantly increased e-ratios. Nevertheless, there are still clients who have not embraced online trading. Is this just a question of providers improving the eFX value proposition?

Barker: It is a mixture of providers improving their eFX offerings and clients becoming comfortable to trade electronically. Even with the best eFX offerings there will be clients who would prefer not to trade electronically for whatever reason and we are, of course, fully committed to serving those clients as well. Our e-ratio is over 75%, but has NOT impacted our traditional business which has continued to grow.

Freeman: We expect e-ratios to continue to increase. As we continue to innovate, an increasing number of clients will see sufficient value in e-trading to warrant an evolution in their current dealing processes. That being said, there will always be clients who do not see sufficient value to justify migrating their dealing to an electronic solution.

Lundvall: No, it is more the question of explaining the concept of eFX to these customers and convince them of the benefits that e-trading would give them. My experience is that this is hard work and that this should not be taken lightly. Just numbers and percentages alone will not convince them, you will have to be able to show