The problem is, building a soup-to-nuts electronic trading system from scratch isn't easy—or cheap.
That's where application service provider Cognotec comes in. For a fee, based on the size of the job and other factors, the Dublin-based company will provide you with a plug-and-play Internet-based foreign exchange trading service.
Cognotec's solution addresses some pretty big problems in the dealing world. When a client calls the corporate sales desk of a major dealer to trade, the dealer quickly calls a buddy in the interbank market for a price. Depending on the complexity of the trade, that pricing process could take up to a minute. The dealer then relays the price to the corporate, who either takes the deal or doesn't. If he does, the deal goes for the quoted price. But when the dealer goes back to the interbank market to square out the position, he could find that the market has moved—and not in his favor. That's called slippage, and it can be costly.
Even more expensive is a voice-dealing infrastructure. "Because you have a lot of technology and a lot of traders, whether they be in corporate sales or in interbank dealing, the cost of the deal ticket is pretty high,” says John Beckert, president of Cognotec Americas. Moreover, voice dealing severely limits trading volumes. "Humans only have two ears and one mouth, so there's only so much volume they can push through.” As a result, a dealer who can process only, say, 20 trades an hour at peak speed is clearly an expensive human resource in this age of electronic trading. "That's why the interbank market typically won't get involved with trades under a million dollars,” says Beckert. "They don't have the time and it's just not financially efficient.”
On top of the inefficiency, there's the costs of trade administration—everything from front-office execution to middle-office risk management and back-office clearing. Those functions require a tremendous amount of expensive technology—and staff.
But is building or buying an electronic-trading system any cheaper? Cognotec says yes. The 11-year-old company has always specialized in providing electronic dealing solutions to global banks, but its latest offerings, AutoDeal LITE and AutoDeal DIRECT, are by far its most advanced to date. Cognotec has sold either the AutoDeal LITE or AutoDeal DIRECT service to more than 90 financial institutions, including Brown Brothers Harriman, Bear Stearns, Commonwealth Bank, First Union, Mizuho, RBC Dominion Securities, Scotia Capital and Westdeutsche Landesbank.
So what, exactly, is it? At the heart of the AutoDeal LITE service is a sophisticated electronic rates engine, which can support a choice of different electronic foreign exchange and money-market trading channels. The main component of AutoDeal LITE is an electronic foreign exchange and money-market trading service for banks, which can then brand it themselves and roll it out to their own end-user customers. The service is delivered over the Internet, and allows banks to offer client-specific automated pricing and credit checking, and a scaled-down version of straight-through processing. Other channels include bank internal automation.
| "Humans only have two ears and one mouth, so there's only so much volume they can push through.” |
AutoDeal DIRECT is similar to AutoDeal LITE, in that it enables banks that use this service to offer on-line foreign exchange trading to clients without taking on the market risk themselves. The service takes the clients' trade requests and allows the bank to take on the client risk while passing market risk to a pre-arranged market-making AutoDeal LITE bank.
Liquidity Linq takes things a step further. With the exception of Citigroup, and a few other global giants, most banks aren't active in all currencies. Rather, they tend to specialize in a few currencies, usually within the banks' general geographic region. Banks that choose the Liquidity Linq service can deal in markets they don't regularly cover. They do so by Liquidity Linqing with other financial institutions that use the AutoDeal LITE service and are active in the market in question. This allows second- or third-tier banks to trade like money-center monsters. Standard Chartered signed on for Liquidity Linq on February 14.
A newly launched module, called AutoDeal CONNECT, enables financial institutions that use the AutoDeal LITE service to connect to multibank foreign exchange portals, such as the FXAll consortium. Last November 13, Cognotec announced that it had been approved as a connectivity provider to the FXAll consortium. A recent announcement indicated that Bank of Tokyo-Mitsubishi plans to use the AutoDeal FXAll CONNECT module to provide prices to its clients via FXAll.
The keys to Cognotec's success, says Beckert, are the sophistication and scalability inherent in the pricing engine. Other, more simplistic approaches just take a rate feed and put a price out. "The Cognotec pricing engine takes into account a wide variety of factors, such as transaction amount, currency and client, in determining the appropriate price. Our system says who the counterparty is, too, since you're not going to price a large hedge fund the same way you'd price a small retail client,” he says.
"We've honed our pricing engine through a decade of involvement in live trading environments with some of the largest, most demanding and complex financial institutions,” he adds. "Our system recognizes a variety of factors inherent in determining the appropriate price, and can therefore deliver you the right price for the right quote, every time, and can be scaled across the entire world.”
Evidently, Cognotec's years of product development and tweaking have paid off. For three years in a row, FX Week has named AutoDeal "Best Automated Dealing Software.”
For more information, see www.cognotec.com. — Robert Hunter
