Highlights
`
`• Foreign exchange trading will
`continue to grow steadily over the
`years as commerce becomes truly
`global, defining segments of the
`markets distinctly as speculative,
`treasury, and custody.
`
`• TowerGroup estimates that today
`only 12% of FX trades (including
`single-dealer systems) are executed
`electronically, but we believe that
`the opportunity exists for that
`percentage to reach 75% in the next
`18–24 months.
`
`• The collective influence wielded by
`the top foreign exchange trading
`banks allows them a great
`opportunity to minimize the impact
`of third-party systems.
`
`• The FX market is aligning itself with
`its customers by segmenting
`electronic offerings based on
`customer’s segment-specific FX
`requirements.
`
`• At this stage in electronic FX trading,
`the trend favors third-party systems,
`which retain an advantage of
`neutrality and reduce the
`opportunity for pricing collusion.
`Much of this trend results from the
`first-mover advantage possessed by
`the third-party systems, several of
`which are already in operation,
`while the consortium-based systems
`(FXall, Atriax) are not likely to begin
`trading until mid-2001. When these
`consortium-based systems emerge,
`they will present a built-in liquidity
`that will certainly threaten the
`current trend.
`
`• The big bank consortiums will
`succeed through sheer size and
`industry clout. Their taking
`business away from the upstart
`third-party systems will force
`vendors of those systems to focus
`on market segments that the
`consortium-based systems either
`overlook or disregard.
`
`FX E-TRADING SYSTEMS:
`AUTOMATING DEALER TO CLIENT TRADING
`
`024:20SW
`August 2000
`Robert Iati
`+1.781.292.5225
`riati@towergroup.com
`
`Vision
`
`Despite the major inroads made by electronic trading in the equity
`
`markets, banks still do most of their foreign exchange trading via
`voice. That will soon change. Several third-party systems have
`recently been introduced into the market, using traditional bank
`providers as back-end fulfillers. Led by Currenex, they have gained
`an advantage over single-bank-sponsored systems. Their prospects
`have spurred banks to form alliances to counteract them.
`
`Institutional foreign exchange trading will continue to grow steadily
`over the years—to 75% in 2002 as commerce becomes truly global—
`defining segments of the markets distinctly as speculative, treasury,
`and custody. The electronic systems that have emerged to address
`this growth follow distinct operational models. The various system
`models can succeed in the marketplace simultaneously, but only if
`they target their products to these market segments.
`
`TowerGroup Research Notes are available to subscribers on the Internet at www.towergroup.com
`©2000 TowerGroup, Needham, MA USA
`May not be reproduced by any means without express permission. All rights reserved.
`
`GAIN CAPITAL - EXHIBIT 1013
`
`

`

`FX E-Trading Systems: Automating Dealer to Client Trading
`
`The collective influence wielded by the top foreign exchange trading banks affords them a great opportunity to
`minimize the impact of third-party systems. Indeed, any electronic FX marketplace must have the liquidity provided
`by the major banks in order to thrive. The two systems in development at this time—FXall and Atriax—can direct up
`to 60% of global FX volume through their systems. However, this assumes that they will successfully implement in a
`timely manner, with little of the internal friction that has plagued previous consortium-based efforts, such as EJV.
`
`Electronic systems backed by custodian banks facilitate smoother efficiency between trading and back-office opera-
`tions while retaining the client base of established custody banks. Further, the current entrants, FX Connect and
`MarketMarque, have already achieved some level of success for their owners (State Street and Bank of New York,
`respectively), which will provide enhanced credibility for their expansion to other banking clients.
`
`In summary, the migration of foreign exchange trading to electronic platforms is by no means unexpected. But as
`technology allows for more efficient trading models, the segmented market will create paths where each system type
`is able to capture business.
`
`Background
`With an estimated daily volume of $1.5 trillion, the global foreign exchange (FX) market is the largest in the world.
`In comparison to the daily trading volume averages of $300 billion in the US Treasury Bond market and the less than
`$10 billion exchanged in the US stock markets, the FX market is huge. Furthermore, a greater portion of FX business
`than fixed income is executed electronically (see Exhibit 1), reaching 12% in 2000 as compared to only 7% for
`bonds.
`
`Exhibit 1
`Average 2000 Daily Trading Volume (US$ Billions) for Stocks, Bonds, and FX
`
`1,320
`
`Traded
`Electronically
`
`Traded
`Traditionally
`
`3.4
`
`6.6
`
`279
`
`21
`
`180
`
`US Equities
`
`US Treasury Bonds
`
`Global FX
`
`Source: TowerGroup
`
`2©
`
`2000 TowerGroup, Needham, MA USA
`May not be reproduced by any means without express permission. All rights reserved.
`
`

`

`FX E-Trading Systems: Automating Dealer to Client Trading
`
`The dynamism of the global FX market is evident in its pricing. Quoted rates on the most actively traded currencies
`can change between 15,000 and 20,000 times a day. In some cases on major currencies (US dollar, Japanese yen,
`British pound, euro) dealers’ bid-ask quotes on these currencies stray far from the prevailing fair-market value, at
`times more than five pips (i.e., 0.0005) off the market. Further, the dealers’ primary job is to maximize the bank’s
`profits, which causes their spreads to differ depending on the time of day and urgency with which customers need to
`execute a deal. This exacerbates the need for a system with greater market transparency. Systems that facilitate
`competition for FX trade execution are necessary to improve market efficiency.
`
`Historically, the world’s largest commercial and investment banks have dominated the FX market, trading via the
`telephone. In the past several years, however, smaller firms have entered the industry, launching online FX trading
`systems and offering smaller spreads to investors.
`
`Like other prominent securities markets, electronic trading systems have sprung up at a dizzying pace. TowerGroup
`estimates that today only 12% of FX trades (including single-dealer systems) are executed electronically, but we
`believe that the opportunity exists for that percentage to reach 75% in the next 18–24 months, representing a 146%
`compound annual growth rate (see Exhibit 2). The few banks’ single-dealer systems in operation accounted for
`nearly all of the electronic trading in 1999. Third-party systems such as Currenex FXtrades and CFOWeb.com, along
`with the growth of FX Connect and additional single-dealer systems, resulted in an increase to 12% in 2000.
`TowerGroup anticipates that by 2001 the third-party systems that were launched this year will be in full operation and
`that the bank consortium-based systems also will have begun trading, leading to dramatic growth in overall market
`penetration. All of these systems should be running on all cylinders by 2002, capturing three-quarters of all trading
`and rendering single-dealer systems ineffective.
`
`Exhibit 2
`Electronic Trading for Foreign Exchange through 2002
`
`75%
`
`CAGR = 146%
`
`51%
`
`5%
`
`1999
`
`12%
`
`2000
`
`2001
`
`2002
`
`Sources: Currenex; TowerGroup
`
`3
`©2000 TowerGroup, Needham, MA USA
`May not be reproduced by any means without express permission. All rights reserved.
`
`

`

`FX E-Trading Systems: Automating Dealer to Client Trading
`
`At this time, the needs of the FX clients fall into different segments, each of which is primarily serviced by certain e-
`trading systems. Integral’s CFOWeb.com, Cognotec’s AutoDeal, Currenex FXtrades, and Gain Capital are the most
`prominent nonbank providers of e-FX trading systems. Bank of New York’s MarketMarque and State Street’s FX
`Connect are targeted at the custody business, while consortium-based Atriax and FXall are owned and operated by
`the largest foreign exchange dealers in the world. Some of these systems focus primarily on small to medium-size
`hedge funds and private investors, while others target the interbank market, corporate treasurers, and custodians, and
`still others target the speculators. Some of these systems provide services that cross market segments. Indeed, as the
`announcements of pending system launches become reality, e-FX will quickly evolve into a saturated market.
`
`The time is certainly right for FX to trade electronically. Just a short time ago, third-party (not bank-owned) systems
`emerged, innovating the foreign exchange markets with a new model for trading. Recognizing the opportunity of e-
`markets, the banks—which originally disdained the chance for e-systems success—formed their own groups focused
`on delivering liquidity and efficiency to e-FX markets. How can these systems all position themselves to their best
`advantage? Further, with the introduction of dealer consortiums into the FX e-trading world following the lead of e-
`bond systems, is there still a place for nonbank systems?
`
`This TowerGroup Research Note explores how electronic trading is changing foreign exchange markets and how
`segmentation may be the answer that permits multiple systems with different, targeted models to succeed.
`
`Trends in the FX Market
`FX is the ultimate commodity: currency is currency in that Citibank’s yen are the same as Deutsche Bank’s yen and
`there is virtually nothing that either bank can do to differentiate the product. As firms have become more efficient at
`trading and processing currencies, margins have eroded forcing the market to become more centralized and
`improving price transparency. This centralized marketplace has evolved far more rapidly than ever anticipated.
`Interestingly, although the market is evolving so rapidly, few technological advances address the broker-client
`relationship, instead retaining the inefficient method of telephone trading in this now fragmented, unregulated, and
`rapidly changing market.
`
`Until very recently, most banks concentrated on developing their own proprietary one-to-one platforms, some closed-
`system and others Web-based. This benefited the banks rather than the market as a whole, allowing them to cut costs
`by simply improving the delivery channel from voice to computer. Few banks attempted to address marketwide
`issues like a competitive bid environment, fee structures, or market manipulation.
`
`Since the beginning of 2000, the banks have done a rapid turnaround. Few, if any, of them are now engaged in
`proprietary development for electronic FX trading. The dealers want to have direct online access to their clients, and
`their clients want the ability to trade with their participating dealers, as well as to view prices, research, and other
`market information online. So the leading banks have turned to wider reaching e-systems, providing liquidity into
`third-party systems while at the same time forming their own systems jointly with other banks.
`
`At this stage in electronic FX trading, the trend favors third-party systems, which retain an advantage of neutrality.
`Much of this trend results from the first-mover advantage possessed by the third-party systems, several of which are
`already in operation, while the consortium-based systems (FXall, Atriax) are not likely to begin trading until mid-
`2001. When these consortium-based systems emerge, they will present a built-in liquidity that will certainly threaten
`the current trend.
`
`4©
`
`2000 TowerGroup, Needham, MA USA
`May not be reproduced by any means without express permission. All rights reserved.
`
`

`

`FX E-Trading Systems: Automating Dealer to Client Trading
`
`Market Segmentation
`Like electronic trading of other financial products, electronic trading of foreign exchange is done using three system
`models: single-dealer, multidealer, and auction. Most of the first FX dealers to begin electronic trading developed
`trade execution functionality on their proprietary Web sites. Clients choose to trade on such single-dealer systems if
`brand matters more than price. Alternatively, multidealer systems, in which a number of dealers function as liquidity
`providers into a single system, give customers the benefit of seeing multiple bids and offers to get the best price. The
`customer can then deal with the provider having the best offering. An auction model, where the customer places an
`order into a system that pits several providers against each other, gives the customer the most control and often leads
`to the best price. All three of these models are used in the electronic marketplace. No electronic trading system for
`FX follows an exchange model, primarily because of the credit risk inherent to foreign currency trading.
`
`Foreign exchange trading is done for a variety of reasons, each of which is distinct and in need of particular system
`features (see Exhibit 3). For larger transactions, the auction model is risky because it exposes the customer to the
`chance of being the victim of the front running, since it broadcasts the customer’s intentions to many providers.
`Alternatively, the multidealer model promotes negotiation with one provider bank, which has a fiduciary
`responsibility to the customer. An auction system is more effective for smaller transactions (less than US$100
`million), because pitting provider against provider competitively encourages them to give the client a better price.
`
`Exhibit 3
`Segmentation of Electronic FX Systems Market
`
`FX
`Revenue
`
`Treasury
`
`Target: Corporate treasurers
`
`Description: Corporates engaged
`in international businesses
`requiring FX trading and hedging
`capability
`
`e.g.: CFOWeb, Currenex
`
`Speculative
`
`Target: Money managers and
`large institutional investors
`
`Description: Top-end customers
`require single sign-on commingled
`access to FX prices and execution.
`
`e.g.: FXAll
`
`Custody
`
`Target: Multinationals, mutual
`funds, and banks providing custody
`services
`
`Description: Decisions based on
`operational needs, not cost. Fund
`management is underserved
`
`e.g.: State Street, BoNY
`
`Source: TowerGroup
`
`5
`©2000 TowerGroup, Needham, MA USA
`May not be reproduced by any means without express permission. All rights reserved.
`
`

`

`FX E-Trading Systems: Automating Dealer to Client Trading
`
`As global commerce extends its reach across geographic boundaries, increasing the need for foreign exchange,
`currency trading is being done by more participants with differing objectives. Some firms engage in speculation in
`foreign currencies. Others’ treasury departments need certain currencies to satisfy their everyday commercial
`obligations. Lastly, as the custody business grows, custody providers buy and sell currency to fulfill the settlement
`duties on behalf of their clients. In all cases, the FX market is aligning itself with its customers by segmenting
`electronic offerings based on customer’s segment-specific FX requirements.
`
`Speculative FX Trade
`Banks, brokerage firms, money managers, and large institutional investors regularly trade FX for speculative
`purposes, executing transactions in order to earn a positive basis point spread for their proprietary accounts.
`Speculative traders place great importance on speed and liquidity, because the dynamic nature of the market rates
`requires their executions to occur in the shortest time possible to take advantage of available rates. Further, these
`investors need assurance that they can buy and sell their positions at the most beneficial time for them, so having the
`liquidity provided by a large number of participants is also a critical feature.
`
`Consortium-based systems will give speculative traders direct access to their multiple dealers’ research and live
`prices for a range of currencies. By combining so many of the largest dealers together on one system, they will give
`the speculators a single electronic point of access to all participating dealers with whom they have a business
`relationship. This enables the system to use the liquidity provided by the owner banks to draw customers and
`maintain their business while gaining the best rates through the competitive model.
`
`Because of this, TowerGroup feels that the consortium-based systems—FXall and Atriax—whose owners provide a
`combined 60% of all FX transactions, best fit this market segment. Other systems that cater to speculative trading are
`CFOWeb.com, FX Connect, and FXtrades.com.
`
`Atriax. Three of the biggest banks in foreign exchange—Citibank, Chase Investment Bank, and Deutsche Bank—
`have partnered with Reuters Group plc to form an alliance that will allow customers to trade currencies and access
`bank research over the Internet. Atriax, a multidealer trading system, is expected to go live early in 2001 but will not
`offer the full complement of products until early in the third quarter of the year. Like FXall, Atriax will attempt to
`leverage the customer base and liquidity of its owner banks. By choosing Reuters as a partner, the alliance gained the
`benefit of including a huge supplier of exchange rates.
`
`Atriax will compete directly with FXall in most areas making price a differentiating factor. Because Atriax
`represents the three largest banks in the FX market, it can be very aggressive on pricing, which will give the system
`an advantage over the competition. As a consortium-based system, Atriax may well face management and
`administration problems, but with just three owner banks, the problems are likely to be less than for FXall.
`
`FXall. FXall is a multidealer electronic trading system created and owned by an alliance of 13 second-tier foreign
`exchange dealers, which combined account for 31.5% of the global FX trading market. The alliance includes Bank of
`America, Credit Suisse First Boston, Goldman Sachs, HSBC, J.P. Morgan, Morgan Stanley Dean Witter and UBS
`Warburg, Bank of Tokyo-Mitsubishi, BNP Paribas, Dresdner Kleinwort Benson, Royal Bank of Canada, Royal Bank
`of Scotland, and Westpac Banking. Planned for release by 1Q 2001, the system will offer 24-hour trading in FX spot,
`forwards, and options.
`
`The greatest strength of this model is that each owner bank has significant market presence, a strong capital base,
`product breadth, and exceptional global reach. This advantage cannot be overestimated. It will give clients an online
`order entry system that allows them to route and monitor their orders to most of the top FX dealing banks. However,
`as with all large dealer consortiums, management and administration of the entity will be difficult, and with 13 banks
`
`6©
`
`2000 TowerGroup, Needham, MA USA
`May not be reproduced by any means without express permission. All rights reserved.
`
`

`

`FX E-Trading Systems: Automating Dealer to Client Trading
`
`all jockeying to make FXall most beneficial for their own business, it will undoubtedly become unwieldy at times.
`Another obstacle is that the client base of the owner banks is stronger in dealers than in nondealer customers, which
`may make it hard to attract the critical mass required to succeed in such a competitive market. Lastly, because the
`alliance will launch the system nearly one year later than many of the competing third-party systems, FXall will lose
`opportunity to the early entrants.
`
`Treasury FX Trading
`In the Treasury segment of foreign exchange trading, corporations and fund managers need to buy and sell currencies
`to mitigate their exposure to operating globally and hedge their cross-border trades with FX futures. A trading
`system for this segment must be flexible to adjust to the dynamism of the marketplace. Traders in this segment are
`often required to buy and sell currencies under unfavorable market conditions. Three different electronic trading
`models are effective in meeting their needs:
`
`• One-on-one (single-dealer) negotiation
`• Limit orders
`• Reverse auction
`
`For hard-to-complete deals crossing illiquid currencies, one-on-one negotiation with a single dealer—the model most
`familiar to the trader—best fits the user’s needs. Conversely, when they have projected accurately and have some
`lead time, these corporate traders can place limit orders that better their chances for price improvement. Finally,
`electronic trading systems today have created the new ability for investors to use competition to get better prices, via
`reverse auction. Reverse auction, where the buy side is empowered to select not only the type of product it’s looking
`for, but also the price it’s willing to pay, is not always the most effective mode when instantaneous response is
`required, but it is the best system for accessibility and yields the most competitive prices.
`
`As systems targeting the Treasury segment establish themselves in the market, they will be further challenged to
`expand their services to include additional financial products. Corporate treasurers, who look to avoid using separate
`systems for each product they trade, will increasingly pressure these FX e-systems to become multiproduct to provide
`a consolidated view. As a result, the systems that position themselves to grow most effectively—presently
`CFOWeb.com and Currenex—will have an advantage in this area.
`
`The most prominent systems that fit into the Treasury segment are CFOWeb.com, FXtrades, and Gain Capital. FX
`Connect also targets the Treasury segment of this market.
`
`CFOWeb.com. Integral Development Corporation’s CFOWeb.com is a portal that offers to corporate treasurers and
`fund managers price data and trading in foreign exchange instruments from nine financial service providers, namely
`ABN Amro, Standard Chartered plc, AIG International, Bank of America, Bank of Tokyo-Mitsubishi, BNP Paribas,
`Credit Agricole Indosuez, Dresdner Kleinwort Benson, and ING Barings. (See TowerGroup Research Note 021:38S,
`“CFOWeb.com: Creating a Trading Portal for the Corporate Treasurer.”)
`
`The portal has not yet attained consistent critical mass since its launch in July 2000. In its reverse auction system,
`users place trades online and choose their provider. The basic services of CFOWeb.com are available free to
`members, while the banks license the technology from CFOWeb to integrate the trading mechanism into their own
`systems. While the members gain the benefit of improved prices and free analytics, the greatest benefit for the
`provider banks is the ability to expand their customer bases. Further, providers can also cut distribution and
`processing costs for their FX trading. In summary, CFOWeb.com should help the provider banks with distribution,
`which becomes key when margins get squeezed.
`
`7
`©2000 TowerGroup, Needham, MA USA
`May not be reproduced by any means without express permission. All rights reserved.
`
`

`

`FX E-Trading Systems: Automating Dealer to Client Trading
`
`FXtrades. Currenex FXtrades electronic trading system for foreign exchange was the first reverse auction FX
`electronic trading system launched in the market in April 2000.
`
`FXtrades provides auctions and quotes from 25 international banks, including ABN Amro, Barclays Capital, and
`Royal Bank of Scotland NatWest, of which 8 are resident in North America, 6 in South America, 5 in Asia, and 6 in
`Europe. These banks act merely as liquidity providers in a reverse auction process. They are alerted to provide a
`price when a client on the system wants to make a trade, and have 25 seconds to do so, depending on the complexity
`of the transaction (see Exhibit 4). The client then has 5 seconds to make a decision on which price, if any, to accept.
`
`Presently, FXtrades has between 10 and 15 customers—mainly multinational corporations and institutions—
`including MasterCard (which uses Currenex for 97% of its foreign exchange transactions), Sun Microsystems, and
`Visa.
`
`Currenex has illustrated its customer focus by adjusting its model to fit the changing needs of the market. FXtrades
`offers three ways for customers to deal with provider banks: through one-on-one negotiation, using limit orders, or
`reverse auction. The system attracts speculative trading as well as the corporate treasury segment. Options trading
`functionality is planned to be available by the end of 2000.
`
`Exhibit 4
`FXtrades Accept a Quote Screen
`
`Source: Currenex
`
`8©
`
`2000 TowerGroup, Needham, MA USA
`May not be reproduced by any means without express permission. All rights reserved.
`
`

`

`FX E-Trading Systems: Automating Dealer to Client Trading
`
`Gain Capital. Gain Capital is a single-dealer electronic trading system launched in June 2000. The system displays
`quotes from provider banks and also provides order entry and portfolio management capabilities. It uses an
`anonymous trading platform and is limited to the four major currency pairs—US dollar vs. euro; British pound vs. US
`dollar; US dollar vs. Swiss franc; and US dollar vs. Japanese yen.
`
`Gain Capital’s real-time dealing spreads are always 5 pips or less, regardless of deal size. In the first two months of
`trading, the majority of users were day traders who trade currencies after market hours. However, Gain Capital also
`targets small fund managers and professional traders who make 20 to 30 trades per day between $100,000 and $10
`million.
`
`Gain Capital does not charge a commission or transaction fee to execute trades on the system. Instead, its revenue is
`generated from interest earned on custodial accounts, which are housed at Citibank. Investors wire money to the
`bank account to be used to fund trades and accounts pay 4–5% interest to investors and an undisclosed amount to
`Gain Capital.
`
`In July, Gain Capital announced an agreement with Bloomberg to provide direct access to Gain’s online FX service to
`the 140,000+ users of the Bloomberg network.
`
`Custody FX Trading
`Foreign exchange trading for the custody segment of the FX market is done by custodian banks purely to reconcile
`their positions at end of day. Users of electronic systems in this segment are primarily fund managers who are further
`solidifying the relationship with their custody bank, rather than those focused on low cost or strategic needs. In
`addition, the FX systems in the custody segment also efficiently connect to back-office systems that are the core of
`the custody business.
`
`TowerGroup sees MarketMarque from the Bank of New York as the electronic FX trading system fitting this
`segment. Bank of New York has a big advantage here because it is a large custody bank that houses clearance and
`settlement assets for the mutual funds, which represent a captive customer base. Through a recent offering of its
`system to other provider banks, FX Connect also attracts customers in the Treasury and Speculative segments, where
`MarketMarque does not.
`
`FX Connect. FX Connect began as State Street’s trading system in 1996. Although it was designed from the start as
`a multibank platform, State Street did not offer it to other banks until 1Q 2000. Now seven banks are trading on the
`system, and three others have just been added. These banks include Deutsche Bank, ABN Amro, Société Générale,
`Commonwealth Bank of Australia, Westpac, and National Australia Bank, as well as State Street. With several more
`bank agreements under negotiation, FX Connect will soon have over 20 provider banks.
`
`FX Connect is an aggregation site. This means that users go the system on their desktop computers and select one or
`more provider banks (with whom they already have a relationship) for quotes or trading. The individual user then
`enacts one-on-one price negotiation with that bank. Using State Street’s expertise in the custody business, FX
`Connect provides research and efficient post-trade clearing and confirmation services. It also has a live chat facility
`that allows for discussion of research and trade details among participants. FX Connect charges the provider banks a
`transaction fee or a fee based on volume for trades placed through the system.
`
`9
`©2000 TowerGroup, Needham, MA USA
`May not be reproduced by any means without express permission. All rights reserved.
`
`

`

`FX E-Trading Systems: Automating Dealer to Client Trading
`
`At present, FX Connect is only used through a private network. It is Internet-ready, but clients still prefer a high-
`speed, reliable closed system. Since State Street opened up FX Connect to other banks, the client base (mainly fund
`managers) has grown to over 260 from 90 in 1999 and the transaction volume has quadrupled.
`
`MarketMarque Inc. Bank of New York’s (BoNY) MarketMarque FX system was developed jointly with AVT
`Technologies to be a multibank system version of iFX Manager, an electronic FX trading system. MarketMarque,
`launched in July 2000, connects sell-side dealers to iFX Manager, which is a real-time FX trade execution system that
`supports trade activity with multiple bank counterparties. It enables clients to generate FX trade requirements
`through exposure management, manipulate these trade requirements to create individual or block trade orders, and
`manage both electronic and manual trade execution.
`
`MarketMarque follows an auction model that enables trade execution and order management. Banks can use it to
`handle FX trading for their global fund management customers. This is important for large fund managers because
`deal information shared among multiple banks could have a negative market impact.
`
`Application Service Provider
`Foreign exchange traders who do not wish to participate in these large FX systems can employ an application service
`provider to gain access to multiple liquidity providers. Using an ASP, the trading firm is relieved of all
`implementation, systems monitoring, and maintenance of its electronic trading service.
`
`The benefits of the ASP model are as follows:
`
`• It gives smaller banks and other financial service organizations the ability to outsource foreign exchange market
`making while delivering an Internet-based foreign exchange execution service to their clients.
`• User banks pay a transaction-based fee to avoid high up-front licensing costs.
`• User banks’ client details are not passed on to the market risk-taking institution.
`• The Web access screen is customized with the user bank’s branding (via private label).
`• Banks are charged on the basis of how much they use the service.
`
`Cognotec has the only system using this model to facilitate electronic trading of foreign exchange.
`
`AutoDeal. Cognotec has developed a system, called AutoDeal, to provide access to the liquidity of multiple banks
`trading foreign currency. Over 60 global banks, including UBS, RBC Dominion Securities, Société Générale NY,
`First Union Bank, Scotia Capital, Fuji Bank, and Deutsche Bank, Tokyo, use AutoDeal to gain access to the liquidity
`of multiple banks. The vendor is the leader in helping banks create proprietary money market dealing systems, and
`AutoDeal is a mechanism to link these proprietary systems together into a centralized multidealer system.
`
`A client accesses the service using its existing Web browser. The AutoDeal model enables each client (bank) to use
`its own real-time currency pricing. The pricing comes into AutoDeal via a real-time rate feed via Triarch, TIBCO, or
`TTRS platforms (see Exhibit 5).
`
`10
`©2000 TowerGroup, Needham, MA USA
`May not be reproduced by any means without express permission. All rights reserved.
`
`

`

`Exhibit 5
`Flow of Information Through Cognotec
`
`FX E-Trading Systems: Automating Dealer to Client Trading
`
`US Corporate
`Customers
`
`Provider Bank A
`
`Provider Bank B
`
`US$/Yen
`
`Can$/GBP
`
`Banks/Brokers
`
`SF/Euro
`
`US$/Lire
`
`Provider Bank C
`
`Provider Bank D
`
`Sources: Cognotec; TowerGroup
`
`AutoDeal maintains the service on central servers. The client (a bank) has its own location on the servers, which is
`branded with its corporate identity. The bank’s customers and dealers access the bank’s site seamlessly on the
`Cognotec AutoDeal server as if accessing the bank itself. Cognotec conducts all maintenance and support.
`
`The AutoDeal service is available through a monthly subscription fee that covers all communications, security, and
`bureau costs of operating the service. No new browsers or PCs are required at either the bank or the client’s end. The
`bank is then charged on a per-transaction basis.
`
`E-System Summary
`The electronic trading systems for FX have been introduced quickly into the marketplace, leading to some uncertainty
`regarding each one’s business model, ownership, and target market. Exhibit 6 provides a clearer picture of the profile
`and role of these systems.
`
`11
`©2000 TowerGroup, Needham, MA USA
`May not be reproduced by any means without express permission. All rights reserved.
`
`

`

`FX E-Trading Systems: Automating Dealer to Client Trading
`
`Exhibit 6
`Electronic Systems for Foreign Exchange Trading
`
`System
`
`Atriax
`
`FXall
`
`CFOWeb
`
`FXtrades
`
`Ownership
`