Online Money Trading Takes Off

As Online Money Trading Takes Off the pricing power shifts from the banks to the customer.

Many corporations used to exchange billions of dollars worth of currencies over the phone each year. When the global heavy-equipment company converted money, its finance staffers called bank trading desks for quotes and placed their orders. Minutes passed before a deal was consummated--too slow in the quicksilver foreign-exchange market. Often by the time a trade went through, the best price was gone.

At long last, companies and institutional investors, which together initiate about 30% of the daily $1.5 trillion in global forex trading, are realizing that the old way of doing currency transactions was only a boon to banks. While global corporations worked the phones, the bank dealers bought and sold electronically, allowing them to profit from quick price shifts customers didn't see. Now the Internet is shifting pricing power to customers, as it has with equity trading, with big implications for banks' revenues and profits.

The forex market has been much slower than the equities world to join the Internet Age. Banks say that's because devising a new system to connect so many players is technically challenging. But some chief financial officers suspect the banks were dragging their feet because they make such big profits--an estimated $10 billion among them last year--from the status quo. More than 25% of the banking profits of Deutsche Bank (DTBKY ) and Citigroup (C ) came from forex last year. The interbank market was automated.

TRANSPARENCY BOOST. The Internet will give customers similar advantages. The first online trading venue was mutual-fund giant State Street Bank's FX Connect, a private network established five years ago to allow its institutional clients--pension and mutual funds--to trade with it electronically.

Now institutions that lacked the global presence of the top forex players are creating their own online exchanges. Goldman, Sachs & Co., for example, jumped from sixth place last year to third place this year in forex trading volume.

The bet in the forex market is that the two new arrivals will quickly dominate.