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This week saw quite a stir in the foreign exchange waters, with some big-name players making moves into the FX space and rocking the boat. Interdealer broker ICAP announced last Friday the acquisition of London-based electronic FX trading vendor EBS Group while Lava Trading (New York) on Tuesday revealed what it calls a "major initiative" to introduce an interbank foreign exchange trading platform.

What's interesting about the EBS deal is that the company is owned by a consortium of 13 of the world's largest investment banks that sold their stakes in the company to ICAP. This group of shareholders included at least one institution you may know -- Citigroup. Interestingly enough, Citigroup has owned and operated the now-enamored-with-FX Lava as an independent subsidiary since July 2004.

"I don't think it's a coincidence," says Harrell Smith, manager of Celent's securities and investments practice. "I think for them to be major shareholders in two interdealer platforms and to wholly own one of them would certainly be a conflict of interest."

It's clear that Citigroup and Lava brass are anticipating the considerable growth in electronic trading of FX to continue, and it looks like it might be a smart bet. Research out of consultancy Greenwich Associates suggests that total electronic foreign exchange volume is growing steadily. Volume among participants in the firm's annual global FX Research Study increased to nearly $17 trillion in 2005, up from $15.7 trillion in 2004.

The majority of this growth, according to Greenwich Associates is coming from fund managers and pension funds that increased their average electronic FX trading volume 68 percent. But growing even more was the average volume of what the study classified as "other" financial institutions -- organizations that are not banks, funds, hedge funds or insurance companies. This group, which Greenwich Associates says represents retail investors, increased its trading volume 70 percent from 2004 to 2005.

The FX market has become an attractive opportunity for financial institutions over the last several years. As the market attracts new business from influential segments such as hedge funds, investment managers and, increasingly, retail investors it continues to grow, and in turn bring in more business -- a cycle that makes the future of FX look bright.

"I think a lot of that [growth] is because there are new entrants into the space that nobody necessarily predicted would be entrants," says Timothy Sangston, managing director of Greenwich Associates. "If you look at the characteristics of the market five or six years ago, you may be under the impression that it was a market in decline. On the contrary, it has been growing quite rapidly in that period."

A new industry forecast from IBM anticipates major changes in the global financial markets by the year 2015.

Researchers from the IBM Institute of Business Value have looked into their crystal ball and what they see is troubling for many players in the global financial services industry. According to a new 10-year industry forecast, electronic trading, regulatory pressures and interest in emerging markets will change the very foundation of the world's capital markets businesses.

The convergence of market transparency, the speed of modern electronic markets and the investor's demand for greater returns will lead to a major market shakeout, claims Suzanne Dence, a senior consultant at the IBM Institute of Business Value and one of the authors of the report.

"The regional broker-dealers and regional exchanges are expected to lose and be shaken out," she said, offering that small firms have neither the expertise, nor the scale to handle the rigorous demands of the investor in ten years. "The winners are expected to be the universal banks."

Of the 402 business leaders surveyed for the report, representing 296 financial markets firms, nearly half lacked confidence in their organization's ability to address the forthcoming changes to the global financial services industry. "As far as how they're going to be able to handle this significant change, ... close to 50 percent said that they were only moderately able to respond to those forces," Dence reports.

The solution appears to be business process outsourcing, a strategy that can cut the cost of redundant process bloat and streamline an institution into an efficient, mission-oriented specialist, able to offer unique products and develop resilient client relationships.

"We think that partnering is going to be critically important going forward," explains Dence. "We're saying very optimistically, 'You can partner with other organizations that can provide a more effective service and help support you, and you yourself can strengthen as an organization instead of shrink.'"

In doing so, the firms with a global presence will prove more nimble, and by snapping up local and boutique ships along their way into emerging markets, bulge bracket firms will afford themselves a true competitive advantage -- the ability to duplicate the depth of local client relationships within a global footprint.

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By Greg MacSweeney, Editor

Following a near decade-long transformation, the IT Controls group in JP Morgan’s Investment Bank is rapidly automating many of the traditionally manual controls that surround application development and maintenance, says Brian Mitchell, vice president of technology controls. By automating many of the control processes, executives have found greater efficiencies and have been better able to accurately monitor all of the technology in the investment bank, says Mitchell.

Background Music "Species (instrumental mix)" Courtesy The Cow Exchange under Creative Commons License.

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