Executable Streaming Rates: Real-time Challenge, Real-time Opportunities

Corporate foreign exchange clients are entering a new trading environment. Executable streaming rates (ESR) offer end-users a single screen from which to select a range of continuously updating prices specifically-configured to that corporation’s needs, all of which can be traded with a single click of the mouse. As a result, a transaction can be completed in milli-seconds compared to the traditional RFQ (Request for Quote) model.

Fortunately for their customers, it is the banks who are shouldering the technical challenge of providing their clients with the technology to trade ESRs. Banks are also having to ensure that their investment in ESR tools not only lead to faster transaction times and higher volumes, but also increase revenues in order to offset that investment. Further, they need to put controls in place to protect the bank’s positions from unexpected exposures in markets set to become more volatile.

Configuring a ‘Bank Rate’

The first part of this challenge is for the bank to distribute prices in real-time which also can be altered to reflect the bank’s own position in the market on a real-time basis. Thus the safe and profitable management of ESRs is becoming a key competitive requirement as the demand grows to perform this increasingly important task. The new generation of price management tools make it possible to provide up to 100,000 different clients with ESRs which have been tailored to their needs, and to meet the needs of the marketmaking bank.

One solution to the ESR conundrum enables the trading desk to tailor the banks’ own underlying rate by combining and configuring raw data feeds. This ‘bank rate’ is distributed to the bank’s multiple dealing channels after it has been further manipulated to reflect the bank’s own market position, external trading conditions, e.g. volatility warnings and the bank’s required spread.

The impact of this on the trading desk is that traders can have complete confidence that the prices they are providing are accurate. In particularly choppy market conditions, the bank can retain an overview of its position and promote its trading strategy. Traders become more competitive in fast moving markets because the speed with which they are able to react to conditions is vastly improved.

Further, with the new technical tools available to the market, banks are protected from arbitrageurs who are on the look out for opportunities created by the bank’s inability to amend its prices quickly enough. A ‘hit protect’ function also prevents the bank from being damaged by ‘machine gunning’ or repeated dealing by the same or multiple customers. These solutions offers the flexibility to identify at what stage of the deal to carry out credit checks, either using a direct connection to the banks credit system or by credit carve out. All these functions ensure the bank has the control it needs, without affecting the speed of execution.

Increased Risk

Wider connectivity combined with instantaneous response times have however led to increased risk for individual trading desks, as highlighted by the Bank of England last year. The worry is that multiple markets create the possibility of a high number of end-users accessing the same price at the same time creating high potential losses for the market making bank (see Example)

Losses as illustrated in this example, can be avoided by the built-in safeguards offered by the new generation of ESR trading applications which take into account the growth in electronic trading, the massive scalability of the latest generation of e-commerce systems and the increased speed of pricing and execution which otherwise would hamper the banks ability to respond to market fluctuations.

This massively scalable instant-response trading environment offers significant benefits for corporate clients. Technical solutions, as well as the multitude of new trading channels – including proprietary platforms, multi-bank platforms and ECNs – enhance banks’ ability to distribute on-market configurable prices to their clients wherever and whenever they wish to access the market.

These solutions now exist, however a number of banks have still to realise the true impact that the replication of trading channels and the introduction of executable streaming prices across these platforms will have on the efficiency on the dealing room to respond to the bank’s needs and their customer’s demands. And it is this, the demand from corporate clients, which will ultimately determine the speed with which the opportunities and dangers of this new trading environment are managed and controlled by their banking partners.