Trading Forex & Money Markets via the Internet.

Armin Dahl and Gerald Kutschke provide a summary of the results from the recent KPMG Consulting AG survey taken from amongst DAX-100 companies.

Results of a survey on the use of multi-bank market places by KPMG Consulting AG, Germany

Trading forex and money markets via the Internet multi-bank market places are the latest developments in the Foreign Exchange markets. Between 2000 and 2001, they represented a development away from the OTC driven market towards an electronic (internet) based market place. Main Currencies can be bought and sold and short term interest base instruments can be transacted in the market places.

The multi-bank market places offer

• a 24 hour market place for example through auto-pricing
• increased market and price transparencies
• flexible reporting tools to run performance statistics and other relevant research

The market places are currently working on initiatives to build standard interfaces to Corporate Treasury Systems. As up to now product offers are limited in comparison to single-banking platforms and OTC trading.

Industries by Sectors and Turnover

But the market place providers are working on an increased product offering. The admission process for a client to a market place starts with the identification and evaluation of a suitable trading platform through a requirement catalogue. Criteria to be evaluated are for example business, such as response time, technical requirements and legal aspects e.g. liability.

Aims of the study

The empirical survey conducted by KPMG Consulting AG last autumn, evaluated the extent of the current use of multi-bank market places by German corporate treasurers. It was our intention to develop a survey representing the client’s perception and identifying the adjustments and modifications still necessary to make internet trading even more attractive. These 33 corporations interviewed differentiated through their market capitalization, sector and revenue size:
But the market place providers are working on an increased product offering. The admission process for a client to a market place starts with the identification and evaluation of a suitable trading platform through a requirement catalogue. Criteria to be evaluated are for example business, such as response time, technical requirements and legal aspects e.g. liability.

Aims of the study

The empirical survey conducted by KPMG Consulting AG last autumn, evaluated the extent of the current use of multi-bank market places by German corporate treasurers. It was our intention to develop a survey representing the client’s perception and identifying the adjustments and modifications still necessary to make internet trading even more attractive. These 33 corporations interviewed differentiated through their market capitalization, sector and revenue size:

The survey focused mainly on companies which are listed in the Dax-100. Our sample included 12 Dax, 17 MDAX and 1 SMAX companies as well as 3 companies not listed on any exchange.

Results of the study in an overview

In general, a positive and open attitude prevails towards internet trading. 12% of the companies surveyed deal over multi-bank market places, in addition to the phone. 21% trade with single banks via Internet-based single bank connections. Still two thirds of the companies surveyed trade exclusively by phone; a third of them are analysing or already testing multi-bank market places and have decided to start on-line trading within the next 12 months. Only 17% had not yet addressed this issue at all.Who will trade online in the future?

The most common cited explanation for restraint manifested so far is the demand for “One-Stop-Shopping”. Treasurers demand to have all types of transactions and all trading partners represented on the same market place. (Indeed, Atriax’ demise has been seen as part of the predicted market consolidation, with liquidity providing banks moving to remaining platform). Furthermore, subjective reasons were also frequently given, e.g. “we run low transactions’ volume” or “I want to keep my relationship with my personal bank adviser”. Among the objective obstacles mentioned were limitations in the types of transactions offered as well as the priority given by the corporation to other projects and plans. Surprisingly few concerns were raised regarding data security on the internet; to a large extent, this seems to be taken for granted.

The treasurers questioned expected two substantial advantages from trading across multi-bank market places: more favourable quotations and process efficiency (straight through processing (STP)). Phone trading is time intensive and error prone as repeated registration of the transaction is unavoidable. STP can improve this by directing committed transactions over interfaces from the internet application directly into the treasury management system for the operational treasury workflow and then into the accounting system. Thus, a single deal capture will be sufficient for the entire process.

Primarily companies which have benefited until now from quotes close to the inter-bank rates due to their outstanding market position, are going for cost savings through process optimisation. All other companies expect more favourable quotes due to direct competition between the banks on a market place. Additionally it is expected that banks pass on at least part of their internal cost reductions enabled by auto-pricing routines reducing sales personnel.

Further benefits are expected from the use of the internet application of a multi-bank market place to technically integrate intra-company transactions between subsidiaries and treasury center. Using the “Internal Model” the treasury center is the only external contractor. Internal orders from subsidiaries were routed via the market place application to the treasury center then internally netted and traded over the market place. The “External Model”, the application enables selected subsidiaries to deal transactions externally over a market place – within a well-defined set of restrictions and on condition of complete exposure transparency to the treasury center.

Outlook

In the future, market places operators must place special emphasis on pro-actively communicating benefits, and to implementing the unique standard interface to the leading treasury management systems. Further aspects such as the enhancement of the types of transaction available, the assignment of a neutral third party to certify the technical security, and the simplicity of “buy-side contracts”, will be keys to successful marketing towards corporate treasurers.

For the banks, it is of primary importance to continue providing their clients with customised advisory services. The rise of internet-based multi-bank market places is not expected to completely replace phone trading. But it will be of decisive importance in creating an environment where all participants can benefit from this new technology and customised services.