E-trading forces banks to rethink

It makes sense for large companies with huge exposure to foreign exchange risk to be able to cut spreads and manage exposures centrally through a single platform. However, while there are obvious benefits to the buy side from the direction in which the market is inexorably moving, it should also be causing banks to look again at their operations.

The UBS decision to move its trading operations to Zurich was obviously largely a financial one, and while it is the largest bank to move in this direction it is by no means the first. Cost pressures caused by falling spreads have been causing banks to look at their global footprint for some time now.

The pages of FX Week covered a spate of withdrawals from London and New York about 18 months ago. Commerzbank closed its London sales and trading operations in late 2004, Danske concentrated its trading operations in Copenhagen at around the same time, while Dresdner also made cutbacks.

However, the UBS decision is more significant because it shows that a major bank at the top of its game no longer feels able to justify the expense of supporting a trading operation in London, the world's financial capital. Cost savings thought to be around 40% just proved too tempting for the bank to ignore.

None of this means we are likely to see Deutsche moving its FX operations to Frankfurt, or Citigroup shipping London traders to New York. Indeed, some less traditional players, such as Saxo, are moving into London and other centres just as the more established banks are retrenching. However, the downward spiral of margin that is near to reaching its logical conclusion of almost zero spreads should cause banks to take a close look at how they operate.

Banks that are keen to build their FX business rather than see it fall away should maintain a local presence in as many centres as possible. However, the onward march of multi-bank portals has meant the era of printing money by trading on behalf of naive corporates has gone forever.

But this means that having good people in the right places is more, rather than less important. Banks need to have staff that can offer smart solutions to the complex , problems that their clients face. Holding onto the right staff will, as ever, be key to delivering this.