October 18th 1999 | Vol 10 No 41




New Web Trading Service Tightens Squeeze on Traditional FX Business


NEW YORK -- MatchbookFX, a New York-based company, launches a new online FX trading system this week, aimed at both the institutional and retail forex markets.


Officials claim that the system will offer a new concept in the FX business, by using the web to directly link buyers and sellers of foreign currency. It thus eliminates the need for a broker or a conventional FX dealing desk intermediary.


Work on the project began earlier this year, and the site had a 'soft-launch' in July. Since then it has undergone extensive beta testing, according to executive director Joshua Levy.


"MatchbookFX will change the nature of trading," claims Levy, a former senior spot and forward dealer at Goldman Sachs. "The system allows participants to deal directly with buyers and sellers… We believe this is the fairest way to trade in terms of getting a true price."


"The site will allow anyone who deals in FX but hasn't had direct access to the market to trade," he continues. "This includes private investors, but also large institutional customers who currently deal through banks."


The company will turn a profit by charging customers a set transaction fee for each 'aggressive trade' which takes liquidity out of the market. The charges will be determined by a sliding scale, starting at $15 per $100,000 for transactions worth up to $4 million. For transactions worth $4-8 million, clients will pay $10 for every $100,000. For larger transactions, a fee of $5 will be charged for every $100,000. The minimum amount of risk capital required to trade is $25,000.


Aside from the trading component, which is based on technology used in the NexTrade ECN (Electronic Communication Network) for US equities, the site offers a range of services for users, including daily FX news and commentary, a market round-up and a regularly updated economic calendar. "Our aim is to help people make money," says Levy. "We are offering as many tools as possible to help people achieve that."


For newcomers to FX there is an educational section, providing an introduction to the forex market, a glossary of terms and advice on the relative merits of spot trading and cash FX versus futures.


Potential Risks


The site also features a detailed section dealing with FX risks, warning participants of potential losses. "We are stressing that users should be 100 per cent confident and aware of the risks involved in unregulated markets," he says.


However, he adds that concerns about credit risk are a moot point: "There are no credit lines in Matchbook FX so if a participant does not have adequate funds to cover their positions, the system will not allow the trade." The site also offers fidelity bond insurance to protect clients assets, along with MatchbookFX's assets, from various types of fraud, theft and embezzlement.


Levy, who argues that the service will open up the market to a panoply of new market participants, has ambitious plans for the new site. "Essentially, anyone with a PC can trade on the system, from large institutional investors to the small guy," he says. "We expect to be the premier site for liquidity in the FX market with the potential for hundreds of thousands of clients globally."


However, some observers interviewed by FX Week have pointed out that Matchbook's lack of an existing clientbase represents an obvious weakness for the service. Because Matchbook is starting from scratch, it will take time for it to build up a sufficient pool of customers to foster a liquid and efficient trading environment.


"The key issue here is liquidity," comments an official at another leading US Internet FX provider. "Matchbook has no customers yet, so who is going to trade with whom ?"


Although Matchbook has pipped them to the post, two other US firms -- ChoiceFX and Money Garden Financial Group (MG)--are currently laying the groundwork for similar services. MG, which already offers clients online currency trading via its own dealing desk, originally hoped to go live with its own version earlier this year (FXW, July 19). Progress has been stalled by technical hitches which are now being ironed out by programmers, but officials say the service will be up and running some time in January. They also claim that MG's version will have the added advantage of a substantial existing clientbase, which will enhance liquidity.


MatchbookFX was developed as a three-way partnership between Wall Street currency brokerage Valhalla Forex, software developers NetTrade ECN and information and news provider GlobalNetFinancial.com.


Around 30 people are currently working on the project, with staff working in several satellite offices throughout the US, and one in London. Aside from Levy, the Valhalla team comprises several other former FX trading professionals who have worked at banks such as Standard Chartered and Merrill Lynch.


The partnership with GlobalNetFinancial.com means that users will have access to a wide range of information and market data beyond that offered as in-house content by the Website.


Looking to the Future


As for the future of the online FX business, Levy has strong views. He sees most of the other online FX trading systems currently being offered by banks and brokerages as a sham. "The online services from banks merely offer a new means of communication," he says. "Participants still have to trade against dealers, with the same problems regarding price transparency -- the other side of the trade hasn't changed."


Instead, he sees the longer-term future of the business in services which eliminate the middleman as much as possible.


This prospect may sound like grim news for those in the traditional FX market -- the dealers and brokers who have made the market work for decades. But nevertheless, Levy does see a future for large banks in the FX market. "The nature of relationships between FX market participants will change," he says. "However, trading in areas like exotics, volatility plays and complex derivatives are just too complicated, and imply too many risks for a system like MatchbookFX."