After the Gold Rush, Let the Digging Begin
In the technology frenzy of the late 1990s, financial institutions of all sizes raced to stake their claim on whatever they could grab of the web. Some of the hastily fenced-off acres of Internet were fertile with business benefits. Others were commercially desolate, but prized nonetheless by techies looking to smarten up their resumes and boards seeking to impress their shareholders.
One of the hottest areas of development involved the use of the Internet to deliver real-time data and trade messages between the buy side and the sell side. This held out the promise of providing a high-value, low-cost alternative to the traditional private networks and proprietary applications used for this kind of information.
The closing bell for this feverish activity was clearly heard in the market crash of 2000, and it came to a final, shuddering halt on September 11, 2001. Suddenly, cost cutting was the only game in town. Eventually, as 2003 came and went and the markets started to recover, CTOs slowly began to regain their confidence.
One by one, they rode out to visit the windblown portals and dusty websites over which their tattered logos still flew. There, on the ground, some of them spied shiny yellow nuggets.
And so, after the gold rush, digging in earnest has begun. Foreign exchange trading is the world’s oldest, largest, most international and most liquid financial market. With daily volumes well in excess of $1 trillion, it dwarfs all the other capital markets put together. The FX markets are also the most enthusiastic users of web-based trading. There is probably no major FX dealer today that does not offer some form of web-based access to its services. The earlier offerings in this area were simple request for quotation (RFQ) systems, which returned a single quote for a proposed trade, with a short time interval of validity. But the movement to streaming quotes has gained momentum, initially as streaming RFQs, then as true streaming executable prices.
The benefits of web delivery for the FX market are huge, in terms of cost savings for the dealer and convenience for the client.
Many of the advantages of web trading that apply to FX also apply in the fixed income markets – with one proviso. For the more liquid fixed income securities, any would-be trader is almost certain to want to see prices from multiple dealers. Therefore, firms who specialise in these areas of bond trading tend to see their primary route to market on one of the multi-dealer platforms – all of which are web-based apart from Bloomberg. Their trades will end up on the web anyway, but they do not put them there directly.
For dealers in more esoteric fixed income securities, however, the web represents an attractive and popular way of capturing deal-flow cheaply and efficiently, in a way that appeals to the buy-side.
The equity markets present yet another set of considerations. The primary mode of sell-side/buy-side connectivity for equity trading is via a FIX connection to the buy-side firm’s Order Management System (OMS). This allows the buy-side firm to communicate with multiple brokers, and makes position keeping, risk management and post-trade processing easier.
But FIX-connected OMSs are typically limited in what they provide in terms of visibility and control over the progress of an order, decision support, analytics, rule-based trading, and so on. Brokers are beginning to place more emphasis on providing sophisticated web-delivered front ends that can provide added value to clients (and in the process, capture more orders). Though still not widespread in the industry, these web-based equity-trading applications are the most sophisticated of all the web-based financial tools currently being offered.
Finally, brokers have long delivered research to their clients as an incentive to do business. While there is still quite a lot of paper flying around, there has been a large-scale migration of research distribution to the web, since for most brokers (and most clients) this represents a cheaper, quicker and more convenient approach.
In the process, it has become increasingly common to supplement the research with additional pre-trade decision support information, such as trade commentary, technical analysis, fundamental data, news and prices. All this adds to the quality of the service being provided, and is generally grouped together under the heading of ‘institutional portal’.
This article originally appeared in the April issue of Transaction Networks & Technologies magazine