FX Trading

FX Trading

FX Connect® for State Street

In 1995, State Street determined that they wanted to introduce an electronic trading system for their customers and take the lead in electronic trading.

The Situation

State Street has a number of institutional money manager clients. These clients manage multiple funds and must deal in foreign exchange for the international investments across their funds. Because these deals were being done on the phone, with orders faxed and manually entered into the bank’s operational and settlement systems at the end of the day, the bank was missing out on significant revenue on block deals.

The Goal

By developing an electronic trading system, the bank would ease the operational burden of manual entry, allow for straight through processing, and enable the bank to realize significant profits on a number of new trading opportunities.

By making it operationally easy for clients to initiate trades, State Street hoped to see higher volumes of trades from their clients.

How Was It Done?

The trades were broken into two components, the spot deal and a swap to convert the spot into forwards at different value dates for the different funds.

Since the spot rates were highly volatile, traders could focus on pricing these by aggregating across all the funds and then price the less volatile swaps. Once the systems were linked to the back office systems of the bank there was no additional operational work to be done after pricing, and at the push of a button, the fund manager could load all of the trade details into the bank’s settlement systems.

Technology

The technology used for the system was the same as the ones that had been tried and tested for distributing real time market data to traders’ desks. This ensured that there were no failures during the entire trading session and the audit trail for the whole process was maintained at the central location.

First to Market

The bank deployed the system in 1996. No major competition arrived on the market until 2000 when FXAll and Atriax were announced by a consortium of banks. FXAll didn’t begin trading until 2001, giving FX Connect® a full five year head start.

The system had such market dominance that some of the customers were using the system to such an extent that State Street had to advise them to trade with other banks in order to ensure that their fiduciary obligations were maintained.

The Results

Stanley W. Shelton, executive vice President and head of State Street's Global Markets business said, "FX Connect® was the first online FX portal when launched in 1996. It remains the market leader, despite the emergence of competitors in the last few years.

According to a recent Tower Group report, FX Connect® has a 70% share of the online foreign exchange market.

On March 1st 2000, live trading commenced with Deutsche Bank making FX Connect® the first-ever multi-bank foreign exchange system.

The trading system is deployed at over 200 of the largest asset managers globally and in use by more than 30 of the largest banks around the world. FX Connect® has surpassed $20 billion in daily trading volume.