increasingly competitive pricing. Web sites offering corporates e-trading in

everything from foreign exchange to leasing began to spring up.

But as 2001 comes to a close, it's clear that corporates haven't been sold yet

on the advantage of giving up the security of a telephone trade. And it's not all

their fault.

First, in yet another Internet disappointment, trading sites failed to come online

as rapidly as promised and, when they did, failed to provide the

straight-through processing–the fully automated flow of information about a

trade all the way through its settlement–that corporate treasurers have said

can save them time and money. This was particularly true in the largest arena

for e-trading by corporations–foreign exchange–where analysts now

estimate that only about 10% of the $110 billion in daily trading between

corporates and banks is actually done electronically.

But in foreign exchange, it's not just the buy-side that appears to be dragging

its feet. Banks haven't committed wholeheartedly to e-trading for fear it will

cut into revenues from forex trading. Sell-side firms "have been brought in

kicking and screaming," says Dave Potterton, research director for the

e-financial group at Meridien Research in Newton, Mass. "I don't know of

anyone who goes out of their way to compete on price."

Gradual Acceptance

Given this reluctance, it's not surprising that FXall and Atriax, foreign

exchange trading sites launched early last summer by bank consortia, came

online a few months late and then only in stages, making it harder for them to

win corporate acceptance.

According to Potterton and others, the best the market can hope for when it

comes to e-trading by corporates is gradual acceptance. "I don't think the

floodgates will open for a while," says Potterton, who expects just 10% to

15% of buy-side firms to use FX trading sites on any kind of a regular basis

over the next 12 to 18 months.

And then these pioneers will probably not head online for every trade,

restricting e-trading to what Potterton calls "their vanilla trades. For large

transactions or something more exotic, they'll always want to pick up their

phone and get their trader," the Meridien analyst says. Big trades or those

involving exotic currencies require some negotiating, and corporates are more

comfortable doing that by phone. There's also concern that requesting multiple

quotes for a big transaction could cause the market to tick up, raising the price

of the trade.

Given the fear factor, it's probably not surprising that statistics gathered by the

Tower Group in Needham, Mass., suggest that the biggest users of online

trading sites thus far aren't corporates but rather institutional investors. Tower

estimates forex e-trading totaled $11 billion a day in August–$5.75 billion

of

which is handled by State Street's FX Connect platform for institutional

investors, the oldest of the platforms offering e-trading via a private network

since 1996.

Tower estimates $3.5 billion of trading occurred on the 100 or so single-bank

platforms. Of the remaining volume, $1.35 billion occurred on Currenex, a

third-party platform that has been able to offer the straight-through processing

that many corporates crave to some of its corporate clients. And despite

the

fact that Currenex charges both buy-side and sell-side, the prospect of

straight-through trading has allowed it to make inroads with

corporates. Bob Iati, an analyst at Tower Group, estimates that 70% of Currenex's volume

reflects corporate business and 30% comes from fund companies.

The Royal Dutch/Shell Group, for example, chose to do its forex transactions

on Currenex. Shell also went so far as to invest $11.5 million in Currenex,

giving it an ownership stake of less than 10%. Tom

Buschman, development manager for Shell's Treasury Center, says the company's goal in trading

forex

online, "first and foremost, is to improve operations: more efficiency from

straight-through processing, as well as limitation of errors."

Straight-through processing frees back-office personnel from mindless tasks

like rekeying data and transferring information from one system to another,

giving them time to look for errors, Buschman says. "When you automate the

processes around it, you will have much more time to focus on the trade

itself

and [on] doing the proper trade."

Underwhelming Volumes

And mistakes can be expensive. If a firm sells dollars and buys euros when it

meant to do the opposite and a couple of hours elapse before it realizes the

mistake, "the price may already have moved 1%," Buschman says. "You may

have lost 1% of the amount you were trading." Such mistakes are fairly

easy to make, he says, but electronic trading systems provide improved controls and

can be programmed to enforce credit limits and other trading

standards.

The two multibank Web sites that garnered so much attention last summer,

Atriax and FXall, aren't doing much business yet, according to Tower's

statistics. These show Atriax's flows at just $220 million a day in August and

FXall's at $200 million. "In the short time they've been live, FXall and

Atriax

have both disappointed," Iati says. "You talk to some people and they'll tell

you they're not terribly easy to use."

The low volumes are not entirely attributable to disenchantment with online

trading. Iati also notes that platforms are vying for customers at a point when

overall forex volume is declining. Iati estimates that total daily forex flows

have fallen with the economy to $1.1 trillion from $1.5 trillion.

But while progress has been slow, few in the marketplace doubt the

inevitability of electronic bank-to-corporate FX trading. Iati is forecasting that

as much as 37% of bank-to-corporate forex trades will be done electronically

by the end of 2002 and 66% by the end of 2003.

Since foreign exchange is the sector where e-trading has come the furthest,

market participants say they'll watch what happens there for clues to how

e-trading is likely to develop in other markets. "The other electronic trading

capabilities, especially the newer ones such as leasing, will only be successful

if FX establishes itself more firmly," says Lyndon Harvey, president of

e-commerce at Selkirk Financial, the Vancouver-based Treasury workstation

provider.

STP: The Treasurer's Edge

So Treasury workstation vendors like Selkirk are doing everything they can to

make sure the e-trade environment is a friendly one for corporate

treasuries.

Given corporations' interest in achieving straight-through processing, a number

of workstation vendors are working with forex trading platforms to achieve it.

For example, both Integrity and Trema are working with Currenex to provide

straight-through processing.

Selkirk, too, is doing similar development work, and Harvey says the vendor is

close to announcing deals with foreign exchange platforms. "We've been

in

discussions with the major trading hubs for some time," he says.

SunGard, the biggest provider of workstations, is taking a different approach: It

put together its own multidealer platform, STN Treasury, to provide

trading in

foreign exchange, money-market securities and derivatives. The platform

offers straight-through processing for those with SunGard

workstations. Ben

Auld, STN Treasury's director of marketing, says several banks are

participating in the site's current beta testing, which has gone

"very well." The

platform will launch this fall, he says.

Foreign exchange, however, is far from the only marketplace in which

electronic trading was slated to flourish. E-trading was also supposed to

revolutionize the bond market by allowing corporations to sell debt directly to

investors, eliminating or at least reducing Wall Street's traditional role as

underwriter. Here, too, the level of activity never lived up to initial enthusiasm.

Since an inaugural Dow Chemical bond issuance of $300 million in the fall

of

2000, only Ford Motor Credit has followed up online with a $750 million,

three-year issue in March 2001. Two systems designed for corporate bond

auctions, W.R. Hambrecht's OpenBook.com and Bear Stearns' DAISS

system, remain open for business.

Where electronic debt issuance has taken root is at the short end of the

fixed-income market. Here, corporations sell their commercial paper (CP)

directly to investors on Bloomberg and cpmarket.com. Bloomberg says that

CP trading is occurring at an annualized rate of more than $8 trillion on its

Auto-Ex system, which offers both directly issued and dealer-placed CP.

CPmarket.com, which offers only directly issued CP, says $100 billion has

traded on its platform since its June 2000 launch.

There has been an explosion this year in the number of platforms offering

trading in very short-term corporate debt, known as money market securities,

as well as institutional money funds. Market professionals say processing

efficiency is also a factor driving online trading in this area.

Among the money fund sites are: The Bank of New York's

MoneyFundsDIRECT, Goldman Sachs Asset Management's Global Cash

Services, SEI's TreasuryPoint and, the latest entrant, MoneyFund Trader,

launched by Pittsburgh-based Mid-Atlantic Capital Group in September.

Corporates looking for money-market securities can buy dealer-placed CP on

bond platform TradeWeb as well as Bloomberg and cpmarket.com.

TradeWeb

launched its CP product in August and averages $15 billion to $20 billion a day

in trades. Reuters Liquid Markets plans to offer money-market trading when it

launches next year.

Despite the less than overwhelming acceptance of online trading by

corporations, proponents still assert that e-trading's toeholds in forex and debt

markets will eventually allow it to expand into the esoteric domains of

derivatives, leasing and trade finance. But the terrain is rugged: these areas

are less liquid, and developing sufficient volume will be difficult. Transactions

are also less uniform and harder to move online.

A number of the foreign exchange platforms either provide or plan to provide

forex derivatives. But the platforms dealing with other types of derivatives

so

far are aimed at market participants like banks and brokerages, rather than

corporations. Creditex and CreditTrade, for example, provide trading in

credit

derivatives, and SwapsWire, which is expected to launch later this year, will

focus on interest-rate swaps.

New Frontiers

In the leasing market, the platforms are sponsored by third parties. Companies

can use the Pure Markets (www.puremarkets.com) site to put out

requests for

proposals for lease financing, and analyze the responses. In the last year, $1

billion of transactions have been posted on the platform.

LeasingX

(www.leasingx.com) sets up private auction sites that equipment vendors can

provide to customers who want to arrange lease financing.

LeaseTrading

(www.leasetrading.com) is an online secondary market where companies can

dispose of leases when they no longer need the equipment.

Trade finance is another potential e-trade target, but one with very little

standardization. "Each asset is a pile of documentation that describes a

specific import or export transaction," said Neal Katkov, an analyst at

Boston-based Celent Communications.

Portals, such as bolero.net and BizCurrency.com, aim to organize that pile. For

example, "bolero is trying to set up new online equivalents of trade

documentation, which will incorporate standards," Katkov says. He says

trading platforms for these instruments, like ITFex (www.itfex.com) and

LTPtrade (www.ltptrade.net), won't attract a wide audience until some

standardization is achieved.

Rick Striano, senior vice president of New York-based ITFex, says financial

institutions dominate secondary trading in trade instruments. But

corporations

could benefit from easy access to the secondary market because liquidating

trade obligations is one approach to reducing exposure to

foreign risk as well

as a way of cutting down on receivables, he says.

One trade finance platform, LCconnect (www.lconnect.com), looks a lot like

the foreign exchange platforms. Corporations seeking letters of credit can

use

LCconnect to solicit bids from a number of banks.

The electronic trading universe is crowded these days with platforms backed

by single banks, platforms backed by groups of banks and platforms run by

third parties. There's an assumption that, as Web sites compete for market

share, those that allow users to trade with more than one bank or brokerage

will have the advantage, since the ability to get a number of quotes

simultaneously is seen as a big pluses of electronic trading. Yet, according to

an April survey by the Association of Financial Professionals, 47% of financial

professionals prefer to use Internet sites operated by a single financial

institution for securities trades.

"Mid-tier and smaller corporations" that need more support from their banks

are likely to stick with single-bank platforms, says Celent analyst Fritz

McCormick. But if all a company is doing is talking to bankers via email

instead of by telephone, one could reasonably ask: Why not just call? "People

will be inclined to return to the telephone," says Shell's Buschman, "unless

they get really better execution" electronically. And that day hasn't arrived

yet.