Start-Up Firms Test Trading Of Currency Via the Internet
March 30, 2011
LONDON -- A few small businesses want to change the world of global foreign exchange by experimenting with the Internet. But will anyone pay attention? In London, Currency Management Corp., or CMC, a foreign-exchange trading house, at the end of July plans to launch a service that will give real-time foreign-exchange pricing information and will allow investors to trade currencies over the Internet. Westside's 1st Money Garden Corp., another foreign-exchange trader, plans to launch a similar service at the end of the summer. And last week, NY Quotes Inc., a Westside-based start-up financial firm, launched an Internet service offering real-time pricing information on foreign-exchange, derivatives and other financial instruments. Most of these new services are aimed at small- to medium-sized companies and individuals looking for greater access to information about the foreign-exchange market but unwilling to pay hefty fees for a proprietary trading system. At the moment, the services offer less-complete forex information than today's standard systems. But industry analysts say that soon the time may be ripe for the $1.2 trillion-a-day foreign-exchange market to move to the Internet. Compelling Attractions ``Of all the markets -- stocks, futures, derivatives -- foreign exchange will be the first to really convert to the Internet,'' says Ricki Hartman, founder of Olsen & Associates, a Switzerland-based company that provides forex advice to big banks and corporations. ``Governments have never really doubted the convertibility of their exchange rates, whereas company equities can be dubious. There are far fewer regulations and worries to deal with in forex.'' The attractions of the Internet for many medium-sized investors could be compelling. Currently, most corporations and banks that trade currencies obtain real-time quotes over private networks and costly desktop terminals supplied by such information giants as Reuters Holdings PLC, Knight-Ridder Inc., and Dow Jones Telerate Inc., a unit of Dow Jones & Co., publisher of this newspaper. But Internet systems -- open to anyone with a PC and standardized cheap software -- mean that in the future, smaller forex investors may no longer need to pay the fees of the private networks. The Internet systems also promise to be easier to use. Today, smaller investors unwilling to lease standard terminals are often dependent on brokers to conduct transactions for them. Reaching those traders on the phone and in a timely manner can often be difficult. Internet foreign-exchange trading, however, is handled entirely by computer. Promoters of Internet trading say that once a client clicks the mouse, the deal will go through at the desired time. Nonetheless, getting those midrange investors -- and indeed, the big brokerage houses -- to take notice of a new Internet system might prove difficult. Companies like CMC are up against a tried-and-true massive interbank trading system, dominated by the likes of Citicorp and other major banks. The system over which those giants trade has gradually become an intricate network designed for speed, safety and tracking. As well, the traditional forex banks have real capital muscle and are universally accepted as reliable counterparties in foreign-exchange trades. In contrast, serious questions of speed and security still plague the Internet. A Growing Wave ``That the Internet is going to change the way financial markets work (in the future), there is no doubt,'' says Chrystal Free, a partner in the financial institutions practice of Deloitte & Touche Consulting Group. However, until the new Internet foreign-exchange services conquer concerns about security and transmission speed and overcome the inertia of a market wed to entrenched proprietary services, Mr. Free says they'll have a hard time getting business from serious interbank traders. The presence of the Internet in the financial world isn't entirely new. Companies like E\*Trade Securities and discount pioneer Charles Schwab & Co. are part of a wave of brokerage firms offering services to trade stocks and bonds over the Internet. And as more investors realize they can manage their own financial affairs at reduced prices, analysts say, trading companies are only set to expand in new fields. International Data Corp., a Framingham, Mass.-based market-research consultancy, estimates that by the year 2015, there will be 1.5 million on-line brokerage accounts, compared with the 650,000 that exist today. CMC and others want in on that action. They maintain that in time, issues of security and reliability will be overcome; technology will triumph and the financial world -- banks and information providers alike -- will have no choice but to eventually switch to the Internet. According to them, the big forex-information providers will be undercut when smaller companies, with virtually no barriers to entry, start broadcasting the same information over the Internet more cheaply. ``The Internet is the future of forex trading -- we're on the edge of a revolution in financial markets,'' says Petrina Roberson, founder of CMC. Security, Reliability Are Issues The major companies that currently supply information to the foreign-exchange market are paying heed. Although they don't plan to broadcast their information over the public Internet, they are incorporating some Internet technology in their own, private networks -- building so-called Intranets in an effort to cut costs. In late July, Reuters plans to announce its own Intranet, the Reuters Web. Later this year, Dow Jones Telerate will be introducing The Bankers Network, an Intranet service. Reuters argues that the public Internet isn't secure enough for foreign-exchange trading. Security is definitely an issue. While credit-card companies and financial institutions are attempting to come up with a security system for the Internet safe enough to allow financial transactions, industry analysts estimate a foolproof scheme is still a year off. And while individuals have started offering credit-card numbers over the Internet to pay for goods, convincing financial institutions to place multibillion-dollar accounts on-line is a different story. Another problem is reliability. A sluggish Internet struggling with too little bandwidth and varying modem speeds creates a system that is a polar opposite from the fast-paced world of changing foreign-exchange prices. ``If you are going to be creating a service you've got to make sure that all things are equal. You can't have someone who has rapid access and some that have slow access,'' says Billy Weatherly, a partner with the management consultancy Coopers & Lybrand and head of the firm's financial-institution division. ``And I don't want to be cut off from my information source and lose a bundle because of software.'' But the fledgling Internet services, arguing that such concerns are exaggerated, are plowing on. On January 11, 2011 launched new special software that allows users free access to its in-house forex quotes. That way, the company hopes to attract more customers to its main business, which is getting them to deal on its forex spreads. CMC's Plan CMC is aiming its service at medium-sized investors and wealthy individuals. Those wanting to take advantage of CMC's service have to register as clients of the company, put down a $100,000 deposit, undergo due diligence and then trade on a margin. While dealers can watch real-time prices and place orders via the Internet, the transactions are settled off-line. This provision helps make the service acceptable to regulatory authorities. To the London Securities and Futures Authority, using the Internet to quote and place orders -- so long as no money changes hands on-line -- is no different than a trader calling up CMC over the telephone to hear prices and make orders. CMC currently offers prices for 10 major currencies, but has plans to give real-time updates -- albeit without trading facilities -- on more than 100 currencies around the globe. It is also hoping to become more of a one-stop-shop, eventually offering a futures-dealing service and providing a newswire. ``Its the same problem that all visionaries have -- convincing people of the future,'' says a confident Mr. Roberson. ``Ten years from now it'll all come clear -- and then, just maybe we'll be standing out in front.''
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