in investment banking
The main focus of
where Investment Banks see the challenge in the coming months (and years)
is in the area of E-Commerce. This has created a number of changes in the
ways that banks have organized themselves, joint offerings in the form of
ECN's (Electronic Communication Networks), and banks offering services to
other institutions in the form of ASP's (Application Service Providers).
As banks started to move into e-commerce they found it very hard to
integrate it within their existing infrastructure from the start. This led
to a number of banks having separate 'incubator' start up units that have
been used until banks have reached a level at which e-commerce can be
rolled out within their existing (enhanced) infrastructure. One of the
effects of e-commerce is acceleration of the integration between the
different business areas; not only within similar product lines (e.g.
interest rate products) but also across different product lines (interest
rate and equities). This is being driven by the demands of the banks
clients such as fund managers.
One of the areas
that their clients are looking for are the ability to look at prices
through a single view or 'portal'. This has led to a number of joint
ventures, where banks are grouping together and offering the ability to
trade with a number of them on a best price basis (providing that the
clients have credit lines in place). Clients have been increasingly
stating that they do not want to have a different screen from every one of
the banks that they deal with.
Banks are pressing ahead with a number of offerings in different areas,
but still to a large degree single product systems. A number of banks are
integrating their interest rate areas but no-one yet has pulled in the
equities side of the business as well.
One of the first areas that e-commerce appeared was Futures. UBS Warburg's
Swiskey product first appeared over Private Data Networks but has since
been migrated to the web. It provides their institutional clients with
access to their Exchange Traded Derivatives Research, Execution and
Clearing services. Dresdner Kleinwort Benson came into the market early,
with one of their first offerings being in the Futures area and is known
as GATOR (Global Access to Order Routing). This is an Internet based
application for placing orders for exchange-traded derivatives. Another
entrant building a significant offering on the web is Barclays Capital.
They have introduced their e-Futures product, which is an order management
tool together with order execution directly onto the exchanges.
Foreign Exchange is another area that has seen a proliferation of systems.
This is to be expected from one of the most liquid markets. One bank that
has really raised its profile is Dresdner Kleinwort Benson with its
Piranha system. It provides the capability to trade all major FX
currencies and build all currency pairs (spot, outrights and swaps).
Barclays introduced in March their first release of their e-Foreign
Exchange product and also announced a joint venture with Charles Schwab.
Their focus of the system is to process very high volumes at low cost. It
processes spots and forwards, and has a blotter, ticker and scratch pad as
well as market chat rooms. Meanwhile UBS Warburg introduced in May its new
Foreign Exchange transaction platform, "Fx2B". They also
announced that they would provide live foreign exchange pricing and
execution of foreign exchange transactions for E*Trade in its global
cross-border trading network for online investors.
Bonds have been a big area of activity recently. Nomura have recently
introduced Bond-Zai, an online bond trading system that will allow their
clients to view real time prices and trade electronically with Nomura via
Bloomberg. The next release will not only allow investors to assess live
prices and execute on the Web, but also to specify particular investment
criteria. It will soon enable investors to retrieve offerings from
multiple sites on the web to offer investors an aggregated picture of
available investments in the market place that meet their particular
criteria. Barclays have their e-Bonds system, which is an on-line
secondary bond trading system that offers live pricing, analytics and
trading. The bonds are drawn from a list of the currently traded bonds.
increasingly being marketed over the web. Barclays (via their
e-Origination product) worked with the World Bank in launching one of the
first global issuances. Clients can enter orders directly onto the web,
which in turn feeds through to Barclays and World Bank order books, with
the allocation fed back to the clients. UBS Warburg and Freddie Mac
launched in January one of the first international bonds to be marketed
and subscribed to via the Internet.
CSFB is one of the first banks to offer an integrated product offering,
PrimeTrade. They added an FX module at the start of the year. PrimeTrade
is an Internet-based multi-product trade routing system, and related
clearing platform with analytics. The FX module enables authorised
institutional customers of PrimeTrade to trade in major currencies on an
automated basis for spot, forward and swap transactions. It incorporates
trade order routing and clearing, and research in one global platform,
which enables customers to obtain confirmation of their trades, automatic
reconciliation and export of these trades to their back office system
State Street is one of the leaders in this area, with Deutsche Bank
signing up as one of the first institutions to adopt their FX Connect
product. This is part of the State Street Global Link offering, which
provides research, analytics and trade execution tools from a single
platform across multiple markets and multiple assets. The main usage of
Global Link is concentrated heavily among asset managers. FX Connect
itself is a real-time, interactive foreign exchange execution tool, which
provides transmission of trade details to multiple banks and brokers,
allowing institutional investors to focus on risk management instead of
the clerical aspects of trade execution. Equity trading is also supported
via their Equity Connect and Lattice products.
Research has also changed dramatically with the introduction of the
Internet. Whereas previously Research was faxed out, it then became
available as downloadable PDF (Portable Document Format). Now the approach
is changing towards Multi Media. In future, as market events occur,
subscribers to a banks service will see for example a video window pop up
with an analyst giving their views, with a report being downloaded in the
background, a graph showing the reaction of the markets in another window,
along with the ability to chat with the bank and other clients. UBS
Warburg has announced the spin-off of its Interchange chat product. A new
company called Parlano will sell and support the entire suite of
Interchange products. Users can 'chat' online, and share knowledge in
real-time, as well as send files and links instantly via an unlimited
number of channels. These channels can be created ad-hoc, as structured
public forums with large numbers of users, or as restricted channels. The
application is already in use with over 165 clients of UBS Warburg.
The trend here is that clients want the ability to enter all their trades
into one system for portfolio and other risk. However there are problems
with this being provided by one bank, as clients will not want a single
bank to see their trades with other banks. The current trend is for
individual ASP's (Application Service Providers) to be set up that will
process the risk for clients. These will be independent from banks,
although banks may be investors in them.
CSFB have chosen to
go the individual bank approach and introduced PrimeRisk II that is
integrated into their PrimeWorld family of products. They have merged
their own models with the instrument valuation and Monte Carlo
Value-at-Risk capability provided by Algorithmics (via RiskWatch). J P
Morgan have gone with the ASP approach, spinning off Cygnifi, their Risk
Management company in which they retain a minority stake. Cygnifi is
aiming to be the first ASP to address Market and Credit Risk, as well as
providing consultancy on these areas and Collateral Risk. Their offerings
fall into a number of different areas; portfolio valuation and market risk
services, counterparty exposure and credit risk services, and collateral
management services. Another new individual offering is CFOWeb, the first
independent portal site. It is targeted at CFO's, Fund Managers, and
Corporate Treasurers, and offers Portfolio Analysis (Mark to Market, Cash
Management) and Risk Management (Value at Risk, Scenario Analysis, Market
Rate Sensitivity Analysis).
Banks are starting to turn to this area to provide added value services.
Dresdner are providing their etd/settlement product, initially for Futures
and Options. It allows the clients to retain records of all trades
undertaken, and it provides a range of query fields through which past and
present positions can be analysed. Dresdner are targeting it to possibly
replace single function legacy systems. Barclays have implemented their
e-reporting product across a number of product areas. One area that they
have focused on that is becoming increasingly important is margin
optimization. This allows you to calculate a single net margin call across
FX and OTC Derivatives, Exchange Traded Futures and Options, and Repos.
This is part of an increasing trend in banks to provide full service and
transparency across all phases of a product lifecycle.
One of the biggest debates in the Investment Banking World is the role of
WAP (Wireless Application Protocol) in the Investment Banks in the future.
The general feeling is that the main role will be to display information,
i.e. as an alternative distribution channel. Wireless will be used to
stream prices, market alerts, and send credit alerts to credit officers.
Anywhere where communication lag is critical. For example, UBS have
recently announced that they are providing their Internet-based financial
information system UBS Quotes via WAP-enabled telephones. Starting
immediately, market quotes and indices for thousands of securities can be
called up via WAP-enabled phones. The quotes cover 6 global stock markets
and are offered in real-time for the Swiss Exchange. This includes all
standard quote information and a number of charts.
Clients want to have integrated portals where they can compare prices and
offerings from a number of different banks. These may be driven by one
bank, a number of banks acting together, an independent vendor or an
existing data distribution vendor. A number of clients are talking about
having their own internal distribution mechanism that banks would
interface to. The feeling is that a common data distribution interface
standard will emerge, so that banks will be able to supply one trade feed.
Settlement is a big
issue particularly in FX. Clients need the ability to open a trade with
one counterparty and close out with another. Until systems like CLS
(Continuous Linked Settlement) and/or other similar ones become
operational, it will limit the capabilities of the market.
to be a big concern. Whereas before you would recognise who was on the
phone trading with you by their voice/personality, how do you recognise
them when it is all electronic? There has been a lot of debate about
Digital Certificates and Smart Cards but what happens when somebody walks
away from their trading workstation and somebody else executes a trade?
One possible solution that banks are exploring is bio-verification i.e.
the trade is authorized via a thumb or voice print.
One area that banks
do agree on is that one of the factors in who will be the winners in
e-commerce are the one that are most efficient. Although all banks have
driven towards Straight Through Processing (STP), it is crucial to get
this efficiency as margins are driven ever tighter by e-commerce.