Matchbook Holdings, Inc. is looking to obtain an intellectual properties patent for its foreign exchange (FX) currency trading system and also market that system to small banks that lack the resources to develop an FX trading platform on their own.
The system, designed for MatchbookFX by NexTrade, uses the Internet for communication but relies on a browser-based secure network for trading. Customers download the software application and then have a TCP/IP connection to the server, which is also hosted by NexTrade, where their orders are sent and matched.
According to MatchbookFX President and Chief Operating Officer Mark Smith, the patent has as much to do with protecting a new approach to foreign exchange trading as it does with protecting the technologies involved. Smith says that in the past-and with most companies in the present-FX dealers make their money by working against the customer.
"They have a request-for-price system that allows the dealer to read the customer. They know who the customer is, they know what position the customer has, if any, when they come in. And they are able to adjust the prices they make against the customer so the dealer will make a profit for the company," explains Smith.
Smith says MatchbookFX works the opposite way. He states that the anonymity afforded a customer dealing with MatchbookFX and the fact that there are firm prices in the system are clear advantages in the FX world. "It's the process of bringing buyers and sellers directly together to allow them access to each other's prices," says Smith, "This is the first time this business model has been offered to any customer in the world of FX."
Smith says his company is not interested in going after the whole FX market, which is understandable considering that market does a brisk business of $1.5 trillion per day. He says MatchbookFX is focused on targeting hedge funds, money managers, commodity trading authorities (CTAs) and introducing brokers-a market niche Smith says is also being pursued by Currency Management Corporation (CMC) of London.
Roger Hynes, chief operating officer of CMC, says he's not worried about the new challenger. "We have the technology and the longevity in the market over and above MatchbookFX. We have no problem with a company like that, and we'll compete on our own grounds," says Hynes.
MatchbookFX acts as a counterparty and clears all trades. The company obtains its revenue by charging a smaller commission on what they term the passive side of a trade (placing an offer to buy or sell out in cyberspace) and a larger commission on the aggressive side of the trade (the party that chooses to act on that buy or sell offer).
Smith says he doesn't consider sites like FXall or Currenex to be players in MatchbookFX's marketplace. Those systems, he says, require a trader to have a relationship with a financial institution they might want to trade with. "If I'm a customer and I don't have a banking relationship already with one of the banks that is on Currenex and I go to execute against it, I get rejected," contends Smith. "In FXall they can only deal with the banks they are affiliated with. Even if you see the best price, you can't have access to it unless you are already a customer of that bank."
With the help of Languageworks Inc., MatchbookFX launched a Japanese site two months ago and is planning to launch one in French during the third quarter. It is also marketing its system to small banks during the fourth quarter, which would give the overall system added liquidity. Smith says MatchbookFX already has two potential clients for its FX system-he declined to name them but said one was from the world of technology and one from futures. He adds, "They can simply private label the Matchbook system-redistribute is to their customers and give them the power to trade directly in the market."