E-Trading In Forex: A Case Study In Growth

ActForex is a technology company with special expertise in the online retail foreign exchange or Forex markets. It was formed six years ago by a group of IT and Forex (“FX”) veterans.

ActForex focused on the retail FX market in response to the demands of the steadily growing industry. Its objective was to create a modular plug-and-play platform that would make it possible for new players to quickly gain entry to this new world of online Forex trading.

Greenwich Associates, a Connecticut-based research company that followed the online FX marketplace, reports that the industry (which did not even exist a decade ago) is growing in the range of 10% a year for the past three or four years. But those figures measure activity at large companies and financial institutions. The more significant part of the story is the growth from non-traditional or “other” financials, which has jumped over 70% from 2004 to 2005. Greenwich Associates attributes this growth to “retail aggregators” located in the US and globally.

Clearly something new and significant is happening in the online retail Forex market, and that story is told compellingly by a case study involving a client of ActForex. The story provides insight into the forces that are shaping this new market.

A Regional Bank with a Vision

The story begins in a small city in the northeast United States. A small regional bank wanted to grow and their executive committee carefully evaluated their options. After a long and careful search the bank hired two experienced FX traders who knew that economic conditions were changing and that globalization was a factor they could not ignore as they looked to the future.

The decision was made to establish a wholly-owned FX subsidiary. The senior hire, who had gained much of his experience in Europe, led the efforts to write the market evaluation report that was presented to the bank. “Our original idea was to establish ourselves in the traditional inter-bank Forex market”, he said. “But after a few months of operation the changes in the Forex landscape became apparent, we were missing the much more profitable on-line retail FX segment of the market.”

The two Forex traders realized that the market dynamics were shifting, virtually right before their eyes. There was a strong new market developing, in this country but mostly abroad, of smaller retail accounts. The market was sizable and getting bigger every day.

What is the Engine Driving e-FX Growth?

“The main driver is technology and the Internet. Internet use is booming all over the world and many more people are online. Then too, the technology to enable trading is much better and easier to scale to massive numbers of users. Finally, there is the allure and excitement of this market itself. It is fast, thrilling and highly leveraged. The Forex market is open 24 hours a day and offers great liquidity any time of the day or night. The cost of entry is low because the margin requirements are quite high. Transaction costs are also low. At the same time, more traditional markets have a much higher cost of entry and a much lower potential for profits.

“Another reason for market growth is the greater sensitivity to currency exchange in other parts of the world. Americans don’t think much about currency exchange rates, but in Europe, South America, Australia and the Far East, the average citizen is acutely aware of currency rate fluctuations that directly affect their lives. I’m sure that there are other reasons as well, but the bottom line was clear: the biggest potential for growth in Forex is the fast-growing retail trade market.”

The two Forex traders wrote their report recommending that the bank could expect much better returns on their investments in the new retail segment of the FX market than they could in inter-bank trading. The executive committee accepted these findings and decided to enter the online retail Forex market.

Because of the comparatively small size of the bank and limited IT and cash resources for this project, they concluded that the best route was to find a technology provider with an established platform.

They required a platform with a low cost of entry, proven stability and reliable, built-in risk management functionality to prevent the bank from assuming excessive risk in this new venture.

The bank evaluated several providers and ultimately chose ActForex because of their successful track record in the industry and also because of the completeness of its solution. ActForex provided a turnkey, comprehensive solution that included a front office with multilingual, white-label interface, a middle- and back-office, extensive reporting and 24/7 customer and technical support.

The bank licensed the ICTS platform from ActForex and built a website to establish and brand the new business. While the retail Forex business was wholly owned by the bank and carried the bank name, the plan was to market the new company independently.

The bank worked closely with ActForex. To help market the new trading company, ActForex customized an intuitive, easy to use interface with all tools needed by traders and all controls required to manage the business. They also offered a demo platform that could be used to train novice traders quickly and easily.

When the platform met the bank’s standards, the bank began advertising their platform, under its brand name, on the Internet.

The Results were Astounding

New customers came to the website in droves and the bank’s new trading business was generating revenue almost immediately. There were other benefits as well.

The website attracted attention from overseas and as a result, this bank – which previously did no international business at all – was attracting new deposits due to the international exposure of its trading operations. The business continued to prosper and ActForex continued to support the bank’s success.

At one point, the bank was audited by the Federal Deposit Insurance Corporation (FDIC) which included a system audit. In order to comply with the regulatory demand ActForex actually moved its hosting facility to SAS-70 data center to provide the required level of redundancy and security.

This case study has an unusual ending. A large European financial services company made an offer to the bank for its successful online operation. Even though it was highly profitable, the bank decided that retail Forex trading did not completely fit in with its business model and was competing with its other operations, so the bank agreed to sell it.

The European financial services company retained the senior manager and is continuing to successfully operate the company under a new name. When the company was founded, there were only five employees; today there are 40 employees, serving over 10,000 accounts and transacting approximately $10 billion in Forex trades each month.

A Proven Formula for Success

ActForex continues to be the integral part of the success of this company, confirming that having a proven technology partner in this highly demanding business environment is essential for any company entering this field.

For information about the Forex market or ActForex’s online trading platforms, please call 1. 212. 425.71.11 or visit their website: www.actforex.com.