THE E-DIMENSION
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Banks have been using bespoke electronic networks for many years
for forex trading between themselves, which made them slower to
adopt the Internet than other financial markets, such as stocks and
bonds. Having their own network kept up their margins; corporate
customers would typically telephone their bank to ask for an exchange
rate quotation and there were limits to how far companies could
compare rates between different banks. Retail customers are even
further removed from the market, paying as much as 5% to purchase
small amounts of foreign currencies from banks and money changers,
with hotels often charging even higher rates.
Now the foreign exchange market is moving to the Internet. Major
US and European banks have formed consortiums to offer e-forex
services to companies. Chase, Citibank and Deutsche Bank (who
together control 28% of the global forex market) have partnered with
Reuters, the information services provider, to form Atriax. Another 70
second-tier banks have joined them. Atriax competes with FXalliance,
a consortium of 13 other major international banks that controls about
31% of the market, including Credit Suisse First Boston, Goldman, Sachs
Group, HSBC Holdings, JP Morgan, Morgan Stanley Dean Witter, and
UBS Warburg.
Philip Weisberg, of FXall, says that ``the liquidity and market lead-
ership that will be provided by FXall's member banks provide clients
with greater price transparency, tighter pricing, and quicker order
execution than is currently available offline.''
The new trading platforms bring this antiquated market into the
modern era. Atriax's boss Dan Morehead said: ``The [forex] industry is
fairly antiquated. People still make phone calls, scurrying from one bank
to another to get prices. The industry does not even have a centralized
marketplace, let alone an electronic one.'' Celent, a banking consulting
firm, predicts that by 2004 at least 50% of all forex trading will be over
the Internet.
Widespread job losses have already occurred as telephone-based
``barrow boy'' forex traders find that their limited skills are no longer
required. Much online trading is automated, meaning the demise of the
majority of the back-office accounting staff as well.
Margins are likely to continue shrink as the disintermediation
process accelerates. Independently owned multi-bank sites, such as
