A solution for our times

A brave new post-crisis world of white-label forex is upon us – and Saxo Bank is leading the way. Selwyn Parker reports


Every time the euro rises or falls – and there’s been a fair amount of both lately – it asks tough questions of traders of what action to take. This is where white-label providers such as Saxo Bank play an increasingly important role. Specialists in online trading and investment, they plug the gap between knowledge and action: between reading the situation and pressing the button.

Copenhagen-based but with offices around the world, Saxo Bank has worked with hundreds of institutions in the last decade to provide the proprietary technology and insights necessary to ride the forex storms. As co-founder Lars Seier Christensen says: “We see the thorough due diligence process done into our business by large institutions as a form of documentation of the quality of our white label solution.”

The spate of accolades recently won by Saxo Bank can also be seen as a form of documentation. At Euromoney’s 2011 forex awards, it scooped six prizes: best improved market share by volume in two categories, best speed of execution, best effective risk management and execution strategies, best research and analytics, and best integrated workflow and compliance solutions. Arcane as they may sound, these are much-valued capabilities; the tools that make forex trading more efficient.

Saxo Bank has grown rapidly on the back of internet-based trading in what is surely the age of forex, as observers of the troubles in the eurozone will vouch. With European sovereign currencies punished by lenders in the wake of the financial crisis, the markets have been in turmoil as traders seek safe havens or, more commonly, look to achieve profits from the general mayhem while central bankers and regulators try and restore some semblance of order.

But it’s not just the eurozone. Never have global forex markets been busier, more volatile or more challenging. The old rules are ripped up almost on a daily basis by developments in literally scores of currencies that until recently were very much on the sidelines of world markets.  Even the most experienced traders have been caught out by unexpected movements that defy conventional analysis.

Yet during this turbulence forex has steadily established itself as an asset class in its own right, one that requires all the tools of the trade necessary for traders to find their way in what looks at first sight like a labyrinthine maze of complex and interlocking relationships, unpredictable outside forces and exotic currencies that are relatively new to this fast-moving yet fascinating universe.

Currency demand
To name a few recent upheavals, it’s only in the last few months that corporates have been able to deal in China’s renminbi. In the wake of the financial crisis many sub-Saharan currencies now offer more attractive returns than western ones do. BRIC nations’ sovereign bonds have established their own presence in the markets. And the warning of a downgrade of the US dollar rocked long-held assumptions about the greenback as the world’s fall-back currency.

Thus a deep knowledge of the forex markets has become even more obligatory for exporting companies, corporate treasurers, financial institutions and a fast-growing body of individuals who deal in currencies in much the same way as other investors buy and sell equities or any other asset. It’s also a multi-faceted market, with many different niches.

“Currently, spot is experiencing high demand from investors,” points out other co-founder Kim Fournais. “However, as retail clients become more aware of the advantages of using options, we expect to see significant growth in the option space.”

Overall, forex is a vast market. Daily average turnover hit a staggering $4trn last year – 20 percent higher than four years ago, according to a survey by the Bank for International Settlements. Although that’s down on the unprecedented high levels of trading in the years leading to the financial crisis, volumes are expected to grow in the future. Much of that furious growth is down to the financial sector which accounted for 85 percent of the increase in turnover.

“This growth was driven mainly by high-frequency traders, banks trading as clients of the biggest dealers, and online trading by retail investors,” explains Mr Christensen, a 25-year veteran of the industry. “But a rise in trading by small retail investors has made a significant contribution to growth in spot forex and this was made possible by the spread of online trading.” He is convinced that this kind of retail trading will continue to grow as the internet becomes an indispensable tool.

And with the market deepening year by year, almost month by month, the thirst for higher-quality information grows. “Clients want more transparency, better products, pricing and services,” adds Mr Fournais. “Modern traders and investors demand usability, mobility, performance, and service when executing online trades.” Saxo Bank therefore continuously rolls out new products; tools, technical studies, charts and anything else that will help take clients’ trading to the next level in this turbulent market.

Future of the eurozone
As a global investment bank involved in international markets, Saxo Bank has a close interest in the entire eurozone debate. Indeed one of the group’s European offices is in Athens – currently at centre stage in this highly charged debate. And it’s a debate that requires careful analysis. Almost as a philosophy, the bank prides itself on developing independent, rational opinions on important topical issues. Originally called Midas, the institution acquired its current name in 2001 when it was awarded a European banking license. The unusual title comes from Danish folklore – Saxo Grammaticus was a medieval historian famous for his Story of the Danes, the basis for Shakespeare’s Hamlet. And clearly, rational analysis pays off – Saxo Bank’s profit before tax in 2010 was 913.8m Danish kroner (approximately €122.5m), representing nearly quadruple the 2009 figure.

The institution has prospered through the rapid expansion of the forex universe. A vast alternative network of information has rapidly developed in the form of investor communities and financial news portals where institutional and retail traders swap insights and tips. The 1.8m users of Saxo Bank’s recently acquired European portal, EuroInvestor.com, provide plenty of evidence of this flood of interest in the asset class. “We want to bridge the online universe of the communities and the trading platforms of Saxo Bank,” says Mr Fournais. “This way we can support investors who lost trust in advisors from the traditional banks and brokerage houses during the financial crisis.”

Although hit by the crisis like most other asset classes, forex has bounced back better than most. Forex was one of the banking sector’s most profitable divisions before the crisis and during immediate fall-out. At the time of the bankruptcy of Lehman Brothers, forex activity hit a near all-time high in October 2008 before falling suddenly until October 2009 when it began a recovery. Right now, activity is steady.

However the numbers remain impressive, even in a recovering market. At Saxo Bank alone for example, monthly average trading has been running at about DKK 1.3trn (US$240bn). Although that’s down from an average DKK 1.7trn a month (US$320bn) in the first half of 2010, it still represents a lot of trades as well as a new-found respectability.

“The perception of the forex industry has most certainly changed internationally,” says Mr Christensen. “It’s considered an asset class on its own rather than as a necessary add-on to cross-border transactions. More and more traders recognise the opportunity to make a profit in what is a volatile asset class.”

Rise of white-label
Saxo Bank’s rapid rise reflects the growth of the asset class itself. Launched by Messrs Fournais and Christensen in 1992, it now boasts over a thousand employees in offices all over the world, including Australia, the Czech Republic, France, Greece, Italy, India, Japan, the Netherlands, Singapore, Spain, Switzerland, the UK, Ukraine and the United Arab Emirates. Along the way Saxo Bank has become perhaps the leading global provider of white-label trading solutions. That is, the purchase by the financial sector of proprietary intellectual and technological platforms developed by outside specialists. Increasingly, this is seen as preferable route to forex-trading than the burden and cost of developing such complex expertise in-house.

As Mr Christensen explains, white-label platforms make sense on several levels: “Both large and small institutions are asking themselves why they should waste valuable time and resources on building their own online trading platform when they can get a proven platform like SaxoTrader [the award-winning solution largely devised by Mr Fournais, the bank’s online and IT expert]. Instead of starting from scratch, they benefit from decades of expertise and development.”

Specialists such as Saxo Bank underpin the trading function. It has, for instance, many smaller banks as clients, which in turn make markets for their own clients trading in local currencies. Adds Mr Christensen: “This hybrid role allows these banks to add value to their own clients by profiting from their local expertise and comparative advantage in the provision of credit, but without the heavy investment necessary to compete in spot market-making for the major currency pairs.”

Regional and local banks, brokers and global giants including CitiBank – a Saxo Bank client – are turning toward white label solutions. Indeed hundreds of financial institutions have collaborated with the trading specialist since it won its banking license in 2001. “With such a broad range of white-label clients, we have been able to acquire a very deep experience across the entire trading value chain,” says Mr Christensen.

Paradoxically, as the market deepens the technology becomes simpler to use, more helpful and richer in options that allow traders to express their currency views. No firm can afford to mark time in such a fast-moving universe, and in mid-June Saxo Bank will launch two highly exotic technologies – a one-touch option and a no-touch option. Despite the complexity of the design process underpinning, it’s a straight forward, easily understood, functional technology that allows clients to execute a position for a directional currency movement.

A big attraction of white-label trading platforms is their affordability. For Mr Fournais, it’s a win-win situation seldom seen in the financial industry, where the reverse is commonplace and banks and corporate customers can fall out in a welter of litigation over expensive solutions that proved to be anything but. “A white-label solution is extremely cost-efficient and requires very little upfront investments by the bank or broker,” he explains. “For Saxo Bank, the return on the investments comes over time from trading income. The situation is even better for the white-label clients because the trading activities create earnings but require none or minimal investment.”

Using the platform
But what criteria should buyers look for in a white-label platform? Interestingly, Mr Christensen doesn’t cite wondrous technologies, but simply “a good chemistry between the two organisations.” In practical terms, that means a happy match in terms of culture, values and strategy. Without all three, the technology is unlikely to meet its full potential.

White-label trading works best as a mutually beneficial partnership. “The choice of white label solution is an important strategic decision for both large institutions and smaller banks and brokers,” explains Mr Fournais. “The provider must be able to support the current online trading business as well as guide its future development.”
Yet it’s a balancing act too between support and guidance on the one hand and too close an involvement on the other. “The bank or broker must remain in control of the business,” insists Mr Fournais. “It would be a mistake for the provider to force second-best decisions on the client just because of the white-label relationship. We work hard to support the business of our white-label clients, but we definitely don’t try to run it for them.”

A crucial element of that relationship is the enhancement of the client’s ability to adjust to often rapid and hectic changes in the trading environment. “A good white-label provider should constantly present new opportunities rather than locking the bank into an inflexible solution that may work for today but not for tomorrow,” adds Mr Fournais. “This is a highly competitive environment.”

In short, the onus is on the provider to help the business grow. Although it has made its mark as a forex firm, Saxo Bank offers multi-asset trading platforms on which the client institution can add more products to its offerings, either for itself or for its own clients.

Impressive as some of the trading technology may be, back-office functions remain crucial because they underpin the integrity of the whole process. Thus Saxo Bank provides its white-label clients with a number of operational services that are integrated into trading applications, such as the extraction of end-of-day files for further use and support for the burden of regulatory or management reporting. This is done without breaching confidentiality. “All our back-office processing is done using anonymous customer identification,” explains Mr Fournais. “That ensures Saxo Bank has no record of customer contact details.”

Strategic vision
Saxo Bank’s journey began in 1992 when the partners opened for business with little more than a phone book and a telephone as their prime business tools. However, they had a clear idea of the mission. “Our objective was to provide private investors with the same opportunities as professionals,” remembers Mr Christensen. “We later recognised that only through the internet could this be achieved.”  They saw that better technology could differentiate them from competitors and launched an online trading tool in 1998. They also saw that white label was the way forward and their first customer was a 150 year-old Portuguese securities dealership that signed up in 2001.

Saxo Bank’s secret weapon is that it is a facilitator. Namely, a trading platform that is integrated into the exchanges and allows orders to be routed directly to them with the support of large financial institutions that provide liquidity and the essential infrastructure.

So far, so good. What lies ahead in this exciting asset class? Messrs Christensen and Fournais identify three major trends – transparency (“driven by regulators and pure self-interest”), self-empowerment (“following the crisis many clients think they can do as well as the professionals”), and networks across industries (“communities and news portals will play an even more important role”).

Take transparency. As the co-founders describe it, only transparent white-label providers will cut it in the post-crisis, highly regulated world with increasingly sceptical clients. They also predict an increase in litigation between disappointed clients and inadequate providers.

Take self-empowerment. As Mr Christensen summarises it, “Clients are saying: ‘I want to understand what happens and I want to have influence on at least a part of the portfolio. I understand that there is more than stocks and bonds out there, and I want to learn more. I increasingly have a view on oil, gold, the US dollar, the Swiss franc, and the politics, economic and market conditions that affect these assets. And I want to do this when I have time – evenings, weekends, 24/7.’”

And take networks. “The best way to enhance understanding and increase access to information [in addition to what the banks provide] is through the media, financial sites, social networks like Twitter, Facebook, linkedin and online communities with people that you trust or respect,” concludes Mr Christensen. “I would rather get my information from people in my own situation, with the same interests as me, than from a salesperson. And the information sites need to drive real revenues, not just advertising. Information and software price is going towards zero and these need to be combined with trading revenues.” He cites MSN Trader and Euroinvestor.com as stand-out examples.

Saxo Bank’s co-founders believe that white-label forex finds itself in a different environment after its first flurry of growth and after the turmoil of the financial crisis. “The tail wind has gone and only real quality, real competence and real common sense will replace the sophisticated but inefficient models and complicated and, in many cases worthless, financial structures that defined the past decade.” As the forex markets never sleep, the development here is likely to continue at a considerable rate.