By Nina Mehta

Mark Galant wanted a name that was easy to remember. "A trader thinks about making capital gains, so this is GAIN Capital,” he says. "Also, the symbolism of the word gain—it's a very positive feeling.”

Indeed it is, and Galant, the founder and CEO of Warren, N.J.-based GAIN Capital, is hoping to spread that positive feeling among his future clients. His market-making firm, the latest entry into the on-line foreign exchange mart, will throw open its door next month to small hedge funds, commodity trading advisers and savvy individuals. The goal: to be the Schwab of the foreign exchange market by offering fast, efficient service and 5-basis-point spreads.

At $1.5 trillion in transactions per day, the global currency markets are 30 times larger than the U.S. equity market. Investment banks have diligently pursued large corporates and hedge funds, and have made it easy and efficient for them to trade, but further down the pecking order service tends to fall off and spreads widen.

During the past few years, a number of on-line firms have tried to fill that void. Galant, however, looks askance at the security and dealing practices of many of these firms. Some, he argues, give a customer a quote and, if the customer tries to buy or sell, say the market has moved away and requote. Another très dubious practice is firms knowing their customers' position and adjusting prices based on whether they're long or short.

GAIN intends to eliminate this double-decker problem by injecting a stiff dose of professionalism into the market. It will offer live quotes that are instantaneously dealable and will give everyone the same quote at the same time. Galant also plans to staff his firm with professional traders from the Street, which will help deepen liquidity for customers. "Even when the market is moving,” he says, "we're going to make these 5-pip-or-less prices, because the kind of traders I have aren't scared of moving markets. They're used to trading much bigger size at the largest banks, and making the kind of size quotes we're looking at—anywhere from $100,000 to $10 million—doesn't faze them in any shape or form.”

GAIN will commence trading the six main U.S. dollar currency pairs with two 12-hour shifts of four traders each, plus a head trader. Later in the year, the company plans to switch to three shifts and add the major crosses and, eventually, additional currencies. GAIN's Java-based software, designed "with the eminent idea of speed,” will offer customers instantaneous feedback on their fills and positions, and P/Ls will be updated instantly. To trade, customers put down the requisite margin money and get 50-to-1 leverage. There are no fees or commissions on transactions.

GAIN will offer customers interbank-quality spreads, says Galant, and will make money the way the banks do—by capturing a large volume of spreads. "You can make a lot of money for a firm with 5-basis-point spreads, if you have good traders and you get significant deal flow,” he says. "So one of the things I want, obviously, is to get as many people trading with us as possible.”

Galant, former vice chairman at FNX Ltd., had been global head of options trading for Credit Suisse First Boston in the early 1990s, and ran the foreign exchange options group at Chemical New York before that.

GAIN has an additional, unexpected ace up its sleeve: its location in the Turnpike state. A lot of traders evidently do not live in TriBeCa, and therefore don't like the hour-and-15-minute commute into the city—or wearing a suit. "Having a 10-minute commute, a casual dress code and a relaxed atmosphere has been a big draw for us in recruiting traders,” notes Galant.

It was only a matter of time before the recent flurry of Internet-based weather derivatives trading sites made its way across the Atlantic. But unlike the slapped-together sites in the United States, I-WeX.com, the first London-based weather exchange, is backed by some heavyweights.

The site, a consortium of Liffe, Intelligent Financial Systems (IFS) and WIRE, hit the ether last month in a button-pushing ceremony at Liffe's headquarters. It promises to be an on-line marketplace where global buyers and sellers can meet and strike deals through an auction system. While facilities will be offered to allow buyers such as power companies to trade directly, I-WeX.com expects that liquidity will be driven initially by brokers and intermediaries from the insurance and capital markets.

The site promises to be more than just a weather-based eBay, however. It will offer bulletin boards and news, on-line pricing models and various weather data services. "New markets are global, convergent and flexible, and I-WeX.com embodies these attributes right from the start,” exults Rowan Douglas, managing director of IFS. "By incorporating energy, insurance and capital market organizations, and an ability to trade across the world, I-WeX.com will pull together market-makers, buyers and sellers in one place—and this is good for everybody.”

Liffe is equally ebullient about the prospects. "The launch of I-WeX.com represents a major breakthrough for the emerging weather derivatives markets and will, we believe, create the appropriate market conditions for Liffe to launch standardized, cleared weather contracts,” says Bill Smit, head of nonfinancial products at Liffe.

I-WeX.com hopes to hasten the coalescence of the financial markets like never before, and has already gotten a coterie of insurance company honchos to extol its virtues. Even Richard Sandor, the leading figure in the capital markets' convergence with the energy and insurance businesses, is on board. "The weather-related market is enormous,” he says. "It will involve multi-billions as the market matures. There is now around $10 billion worth of catastrophe bonds, and around $3 billion to $5 billion in environmental derivatives. The beginning of I-WeX.com, and its timing, is excellent. We're now seeing a wave of weather derivatives forming a whole new subsector of the derivatives market.”

For more information, see www.I-wex.com.

The squeezing of the interdealer brokers continues. Last month, global powerhouses Tullett & Tokyo and Liberty Brokerage agreed to a merger that will create one of the biggest interdealer brokers in the world.

The new firm, subject to regulatory and shareholder approval, will be called Tullett & Tokyo Liberty PLC, and will cover virtually all the over-the-counter markets. Tullett, headquartered in London, specializes in foreign exchange, money markets, derivatives, energy and equity products, while New York-based Liberty is the second-largest dealer in U.S. Treasury bonds and has a major presence in the mortgage- and asset-backed securities, corporate bond, preferred stock and European equity markets.

Both companies apparently had their eyes on the coming deluge of Internet-based brokerage systems. "With this transaction,” says Joseph Macchia, CEO of Liberty and future COO of the new firm, "we will be able to use our combined resources and expertise to accelerate the transition of our business to e-commerce. We are committed to digital commerce through electronic trading and information distribution, and to nurturing the critical aspects and relationships of the voice brokerage business.”

The deal brings together companies with combined revenues of $625 million—a huge chunk of change in the brokerage industry. The new entity will have a staff of more than 2,000, with offices in all major world financial centers.

The merger is already paying dividends. Last month Telerate, the electronic data provider, expanded its derivatives, foreign exchange and money market data offerings from Tullett & Tokyo.

Everyone believes in risk management these days, but financial conglomerates have special needs that aren't always addressed by the relevant supervisory bodies. The Bank for International Settlements' Basel Committee on Banking Supervision hopes to change that. Last December, it released a paper called "Risk Concentrations Principles” that gives guidance to supervisors about how to managie risk concentrations in financial conglomerates.

The report defines a conglomerate as a company whose primary business is financial and whose regulated entities engage to a significant extent in at least two of the banking, securities and insurance sectors. By combining business lines, the report says, conglomerates offer the potential for broad diversification, but also open themselves up to new risk concentrations that need to be addressed.

There are seven broad categories of risk concentrations: exposures to individual counterparties; groups of individual counterparties or related entities; counterparties in specific geographical locations; industry sectors; specific products; service providers (such as back-office services); and natural disasters or catastrophes.

To address these types of risks, supervisors should make sure that conglomerates have adequate risk management processes in place to manage group-wide risk concentrations. Risk concentrations need to be monitored both in the legal entity and across the different sectors of the conglomerate to provide for the protection of the regulated entities. Where supervisors do not consider the controls adequate, they should consider imposing limits. Moreover, as financial institutions from different sectors merge and financial conglomerates evolve, the potential for new types of concentrations arises, and supervisors should manage material risk concentrations at a group-wide level.

Supervisors should also monitor risk concentrations on a timely basis, as needed, through regular reporting or by other means to help form a clear understanding of the risk concentrations of the financial conglomerate, keeping informed on a regular basis about the nature and size of risk concentrations.

The report notes that supervisors should also encourage public disclosure of risk concentrations, which can promote market discipline. "Effective public disclosures allow market participants to reward conglomerates that manage risk effectively and to penalize those which do not,” the report says, "thus reinforcing the messages provided by the supervisor.”

Supervisors are also advised to work closely with each other to monitor risk concentrations and discuss ways to address them. And supervisors shouldn't be afraid to act: Whenever they deem a risk concentration to be potentially detrimental, they should deal with the problem immediately. "Once a problem arises,” says the report, "supervisory intervention almost always begins with bringing the issue to the attention of management and the board of directors and asking them to address the supervisory concern.”

For a copy of the report, see www.bis.org.

Houston-based Enron was one of the first entrants in the Internet energy-trading marketplace, joining Altrade Power, SwapNet and the future Eurex energy system. Its entry: Enrononline.com, a free Internet trading system. Last month, the site opened to European clients, building on its recent U.S. successes in the gas, power, plastic and pulp markets.

When fully operational, the site will cover commodities such as gas, power and crude oil, as well as weather derivatives, emissions allowances and petrochemicals. Enron boasts that the auction-like site offers real-time, competitive prices, global coverage, multicommodity and multicurrency transactions, and security, and that it will remain free to Enron customers. Traders using the site can see the products available and their contractual terms, the bids and offers, and the trading volumes of the products. When a customer submits a bid or offer, the transaction is completed within one second, and the transaction is electronically validated, after the system checks the counterparties' credit limits, the volume of the transaction and the price.

Enron bills its service as an alternative to the traditional phone-and-fax market. But it surely won't be the last attempt to tap the potentially vast Internet trading market.

For more information, see www.enrononline.com.