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Traditionally, when traders at AXA Investment Managers, the London-based arm of the big French insurance company, wanted to buy or sell currencies, they picked up the phone and called the firm’s bank, JPMorgan Chase & Co. Then in 2007, AXA’s traders began using an electronic currency-­trading platform, FXall, for many of their transactions. But with new technology multiplying the number of potential trading venues, AXA is now undergoing another shift. It is in the process of moving most of its currency business to a new platform, called TradingScreen, a step it hopes will enhance and simplify its trading activities, says Lee Sanders, the firm’s London head of FX and money market operations.

“We want one screen with all the capabilities,” says Sanders, whose firm trades about $300 million a year in currencies. Among other bells and whistles, TradingScreen attracted AXA with its extensive range of algorithmic trading, flexibility in enabling users to set their own risk parameters and transaction cost analysis tools to help AXA ensure it is getting the best currency deals. TradingScreen “is bringing more ingenuity and enhancements to the market than FXall,” Sanders says. “We want to stay ahead of the curve.”

A platform war is intensifying in the global foreign exchange market, with more than half a dozen entrants jumping into the space in the past few months. It’s still too early to know which platforms will emerge as winners, but the proliferation of venues is already sparking declines in already-low trading costs, with banks earning less on each trade, in a situation similar to what’s happened in equity markets over the past decade. One banker estimates that revenue per trade has dropped by about 9 percent over the past year through a narrowing of bid-offer spreads.

“This is the beginning of a big change in FX trading,” says Rebecca Healey, a senior analyst with financial consulting firm TABB Group in London. “A revolution in technology is taking place, and this is just the tip of the iceberg.”

Although electronic trading has been part of the FX market for many years, it traditionally focused on interbank trading. Just two players — ICAP’s EBS and Thomson Reuters — dominate that segment today, with a combined market share of roughly 80 percent.

The rise of new players has effectively spawned four distinct market segments: the interbank market, which has attracted new entrants, such as Currenex and  traFXpure; a new wave of platforms like FXall, FX Connect and tpSpotdeal, which link end users like AXA with multiple banks; single-bank proprietary platforms such as Deutsche Bank’s Autobahn and Barclays’s BARX FX, which offer a wide range of customized services to clients; and so-called aggregator platforms like TradingScreen and MarketPrizm, which offer end users a variety of possibilities, such as multiple-bank price streaming, single-bank proprietary feeds and even access to other electronic networks.

“There are new market participants coming in, new methods of trading, and all in all it’s a huge growth opportunity,” says Healey. Some sophisticated traders now have seven screens on each of their foreign exchange desks just to keep up with the latest technology.

Although the proliferation of trading possibilities is shaking up the FX market, the big banks that have long dominated currency trading are seeing their market shares rise. To stay in this increasingly competitive game, banks have to spend hundreds of millions of dollars to acquire the latest technology; only behemoths like Barclays, Deutsche and JPMorgan can afford to make that kind of investment.

“If you imagine the FX trading market like a funnel, the rash of new platforms has widened the mouth considerably,” says Marc Chandler, global head of FX at Brown Brothers Harriman & Co. in New York. “But the narrow end, where most of the trading takes place, is getting even smaller as five big banks continue to dominate the market.”

One of the drivers of the multibank platforms was the series of federal and state lawsuits filed against two custodial banks, State Street Corp. and Bank of New York Mellon Corp., alleging that they had overcharged for FX transactions. Both have denied the allegations.

At issue in those lawsuits was whether the two banks were offering clients the most-attractive prices for currency trades on the days those trades were recorded. The U.S. government’s lawsuit alleges that BNY Mellon used the worst price of the day, even if the trades occurred at a time when prices were better for the client.

Although the suits have not been resolved, the allegations were disturbing enough to make institutional investors take another look at their currency trading to see if they were getting the most-attractive market prices, or what is known as best execution.

Simultaneously, in Europe institutional investors have been looking to overhaul their trading following the 2007 introduction of the European Union’s Markets in Financial Instruments Directive, which requires institutions to show their clients that they are getting best execution.

Michael O’Brien, head of global trading at asset manager Eaton Vance Corp., says his firm has implemented a best-execution policy and uses platforms to get quotes in liquid currencies from multiple dealers, from which it chooses the best quote available. “Electronic trading has lowered our transaction costs as measured by the bid-offer,” O’Brien says. “Five years ago most of our foreign exchange business was on the phone.”

Unlike equities, the spot foreign exchange market has never involved an actual exchange. Currencies trade over the counter, and there can be as many prices as there are market makers. The only way an institutional investor or other end user can be sure of getting anything like the best execution price is to compare quotes offered by a large number of banks.

Institutions like AXA and Eaton Vance that formerly relied on just one or two banks for their FX dealings now need to compare quotes from ten or more institutions to satisfy clients that each trade was conducted at the most attractive rate. Coming online nearly every month, new platforms share one feature: the ability to compare quotes. Some involve what is known as request for quotation, or RFQ, in which they basically post a potential trade online and ask banks to bid on it. Alternatively, some services offer so-called streaming quotes, in which the banks put their buy and sell offers for currency pairs, such as dollar-euro or dollar-yen, online.

“My goal is to give the traders who work for me as many tools as possible and let them pick what’s most appropriate for any given trade,” O’Brien says. “Each platform typically offers something unique that is useful to us in certain circumstances.”

For example, some platforms allow him to trade using computer algorithms, which chop up big trades into smaller pieces. That technique is useful because it disguises the fact that an asset manager is making a big purchase or sale of a currency; it’s harder for other market participants to adjust their prices and profit at the asset manager’s expense. Traders say Deutsche Bank has a particularly strong algorithmic offering. Another type of platform, such as EBS, goes out to 20 banks and gets quotes without revealing who the client is.

O’Brien believes there are more platforms today than the market can ultimately support, but he says the technology is so impressive that it’s worth waiting to see which ones emerge as the winners.

“It is a very daunting time to be keeping track, because the changes are occurring so fast and from different angles,” says Javier Paz, who follows foreign exchange trading for Boston-based research firm Aite Group. “I think the markets are still in flux and will remain so for the next year or so, until we can tell with certainty that one model seems to be prevailing.”

Although advances in technology have produced some clear gains for currency traders, there have also been some distinct downsides from the point of view of institutional traders. Perhaps the biggest concern is the growth of high frequency trading, which has roiled equity markets in recent years. Typically, high frequency traders go in and out of the market in a fraction of a second, posting bids and then removing them almost instantly, to the detriment of regular, slower traders like institutional investors and banks.

In fact, so great was the concern about market manipulation by high frequency traders that market volume on one of the largest trading venues, EBS, declined by 50 percent between July 2011 and July 2012. Several reasons were advanced for the drop, but one thing was clear: EBS’s traditional client base was abandoning the platform for other venues — an apparent snub by banks concerned about the influence of high frequency traders on the market.

In response, EBS’s owner, ICAP, moved to repair its tarnished image. In March 2012 it named a new CEO, Gil Mandelzis, to run EBS. Mandelzis is co-founder and chairman of   Traiana, a firm used by banks for its automated posttrade processing and risk management that ICAP bought in 2007 for $247 million. (ICAP sold a 12 percent stake in Traiana to seven major banks in January.)

By September, Mandelzis had pushed through a number of rule changes that make it more expensive for high frequency traders to dart in and out of the market to the disadvantage of more-traditional traders.

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