|
|
Thursday, 18th April 2024 |
| Implementing automatic Forex trading at Credit Suisse |
Back |
| Richard Pike of Comit Gruppe Ireland looks at the implementation of an automated trading system for Credit Suisse and argues that the failure of banking e-commerce projects are often due to a lack of a well developed business plan and integrated processes. |
The current hype surrounding e-commerce in the banking sector is often characterized by offerings that lack well thought out business cases and are not well integrated into the processes and systems of the bank. The most successful initiatives have been those that use the technology available, to strengthen or augment the currently available business processes. One area of banking in which it is evident that business processes can be supported is that of foreign exchange trading. As a result of the introduction of the euro Currency, the demand for foreign exchange transactions has declined acutely.
This drop in volume is accompanied by increased competition and therefore decreased spread, hence a shrinking income for the financial institutions active in the Forex business. One potential solution to maintain profits is to cut costs by automating Forex trading.
This article describes a project within Credit Suisse Group to implement an Automated Trading System (ATS). The project has used technology primarily to cut costs but also provides a basis for rolling out a very strong e-commerce offering that is deeply embedded into the banks systems and processes, thus greatly reducing the risks in a usually risky area. The project was completed in conjunction with the COMIT Gruppe who are a large independent European financial IT consulting company based in Switzerland. The article provides readers with an explanation of the main functions of the system, the integration within the Credit Suisse environment and the plans for the future.
Overview
The Automated Trading System (ATS) is a front office system, which offers automated Forex (initially for Spot, Outright and Swap transactions) in conjunction with automatic price calculation, deal capture and on-line transfer of deals to the position keeping system. The system not only optimizes the cost of Forex client trading but also serves to reduce handling errors and misunderstandings. The system also ensures a consistent pricing scheme for exchange rates that in turn allow the system to automatically create the secondary trades, generated as a result of payment transactions, foreign stock settlements etc, with online prices.
This set of business requirements was coupled with the internal CSG technical standards and an evaluation phase for an ATS system took place in the first half of 1999. The product Valuta.Direct from Data Sciences (a German subsidiary company of IBM) was selected out of five candidate systems for the two business units Credits Suisse Private Banking (CSPB) and Credit Suisse (CS). In the second half of 1999, Valuta.Direct was adopted based upon CSPB and CS requirements and integrated into the IT environment.
Functions
Automatic price calculation
ATS receives its market rates from external data providers such as Reuters, Telerate, etc. A sophisticated rates filter is inserted in front of the ATS pricing machine in order to sieve out erroneous rates. The system then automatically calculates and returns Forex prices based on the following data; deal type, currency pair, trade amount, the client margin and the counterparty rating. Once the price has been agreed, the system generates the corresponding deal and sends it, real-time, to the bank’s position keeping system. The ATS dealer intervention component allows on-line control of the ATS system. It supports monitoring functions for the control of the automatic price calculations, means of supervising the automatic trading activities and features for intervening into the man-machine trading. A chat function for exchanging text information electronically is also provided.
Client trading
The automatic dealing is utilized by the European Credit Suisse sales operations. The trading units of the CS/CSPB treasury departments are responsible for the pricing and the supervision of the ATS system. Presently, 500 Forex deals are transacted daily via ATS, 90 people use ATS for generating client deals and 4 traders monitor the automatic trading activities.
Consistent pricing schema for exchange rates
The pricing machine of ATS acts as master for Forex prices for the entire bank. The rates generated by ATS are treated as correct. This for two reasons:
• The rates filter ignores rates which do not correspond to the filter criterion
• Traders of the treasury department verify the rates before use.
A master of price information has different benefits:
• The price basis is consistent for all applications of prices
• The maintenance of prices is highly automated, concentrated on one system and therefore relatively cheap.
Reduction of handling errors and misunderstandings
Compared to the traditional way, the process of creating a deal via ATS is much easier. The manual interactions are concentrated on the client advisor and there is no duplicate input for a deal required. Verbal communication only occurs between the client and the client advisor. Due to the automated price offering, an 80 per cent reduction in misunderstandings between client advisors and traders can be generated due to fewer verbal communications, single input and a higher degree of automation, ie. the deals generated in ATS are of higher quality. This results in lower costs for the settlement process.
Integration
The shaded boxes in the diagram below represent existing IT system components of the Credit Suisse Group; the white boxes are part of the ATS environment. Today, clients still communicate with the sales organisations via telephone.
The TIB distribution platform acts as backbone for rates through the entire bank. It distributes internal and external rates and makes them available to the applications within the bank. The rates filter is a key component with respect to correct price information used in ATS and other applications within the bank. The pricing machine is the ‘heart’ of ATS. It receives price information in real-time from the rates filter and delivers calculated rates, again in real-time, to ATS and back to the TIB platform for use in other applications.
The ATS server component acts as the interface between the users, the pricing machine and the position keeping system. It creates deals and maintains a repository for deals and a database for static data. ATS sends closed deals on-line to the position keeping system. From there, they are forwarded to the bank host system for settlement and book keeping functions.
Further plans
Credit Suisse Group will enhance their ATS system in different areas:
• The deployment process of ATS continues. In addition to the today’s ATS users, investment consultants, relationship managers and independent asset managers will be equipped with ATS.
• The incorporation of ATS into the E-Commerce environment is on-going and is well advanced.
• ATS will be used for the automatic creation of secondary Trades (see below).
• Additional financial products (such as money market, FX options) will be supported in the future.
Automatic creation of secondary trades
Secondary trades are created by payment and settlement transactions in which foreign currencies are involved. The number of secondary trades generated at CSG per day is very high. Today, the rates for secondary trades are updated four times a day. This update frequency can cause immense risks for the bank when one considers the today’s volatility of rates.
In the future, ATS will create secondary trades automatically, based on application requests, and will provide a rate per trade. The advantage of this is:
• Secondary trades generated by ATS are delivered on-line to the position keeping system.
• The rates applied for secondary trades are up-to-date. This minimizes the market risks since the refinancing of secondary trades can take place immediately after they have arrived at the position keeping system.
• The price building process is identical for normal client trades and secondary trades (based on the current market conditions, the currency pair, the deal amount and the client rating).
The success of ATS within the Credit Suisse Group has confirmed the need for automating the Forex client trading. The concepts and architecture chosen by Credit Suisse Group allow them to extend ATS in many directions in the future. ATS is open for the integration into the E-Business environment, for additional products and for a wider range of users.
Beside the cost saving due to the automated trading and the reduction of manual errors, ATS provides a number of other benefits to the clients and to the bank:
• ATS minimizes the manual work required for negotiating prices and transacting closed deals. This gives the client advisor more time for the support of his/her clients, which has a positive effect on the client satisfaction.
• ATS information services are available to the client advisor for displaying market -, deal - and client information. These tools are a great help in improving the services the client advisor can give to his/her clients.
• ATS is the master of Forex rates. These rates are available to all of the applications within the bank. This has the benefit that consistent rates are used, bank-wide for all transactions.
• The chosen architecture of ATS permits us to connect clients directly to the ATS system, which is a prerequisite for the integration of ATS into the well-established E-Commerce environment of Credit Suisse.
• The introduction of ATS is the ‘door opener’ for the automation the trading in other areas (fiduciaries, money market, etc.)
Richard Pike is director of Comit Gruppe (Ireland). |
|
| Article appeared in the March 2001 issue.
|
|
|
