ICAP plc (LSE: IAP) Israeli subsidiary Traiana Inc. and international foreign exchange settlement services firm CLS Group have set up a joint venture to provide trade aggregation services to participants active in the over the counter foreign exchange market. ICAP acquired Traiana 18 months ago for $247 million.
Four of the world's leading foreign exchange prime broking banks are participating in the joint venture: Citigroup Inc. (NYSE: C), Deutsche Bank AG (XETRA: DBK; NYSE: DB), JP Morgan Chase & Co. (NYSE: JPM) and Royal Bank of Scotland (LSE:RBS).
Traiana will own 49% of the joint venture, which will apply the Harmony Network, a technology developed by the company, in a foreign exchange management platform. In recent years, foreign exchange trading has become a full commodities system, handling $4 trillion a day.
Traiana founder and CEO Gil Mandelezis said that the growth in foreign exchange trading occurred before banking systems were ready. As a result, foreign exchange trading is still carried out via obsolescent systems, which require banks to physically transfer the money bought and sold.
"Globes": What is the significance of the joint venture?
Mandelezis: "In recent years, foreign exchange has become a commodity, but the trading process has not changed. The commodity is physically transferred, and banks need to a way to streamline the process and make it cheaper. The joint venture with CLS was established with the collaboration and recognition of the banks and the regulator. The objective is to revolutionize foreign exchange trading so that banks won't have to physically transfer amounts of money during the trading day. Our service will make it possible to largely sever the process from the need for physical exchange."
Mandelezis adds that, in many ways, foreign exchange trading resembles trading in stocks and commodities. What he does not mention is that even if the joint venture does not obtain official recognition as an industry standard, in practice it will almost automatically become a kind of monopoly in foreign exchange trading.
What is the business model? How will Traiana and ICAP make a profit, and how much will it be?
"The joint venture will make a profit on each transaction carried out on its platform. For the banks, there will be a substantial reduction in the costs of the process, which will enable them to carry out transactions that until now were not worthwhile."
The current cost of a foreign exchange transaction for a bank is $1-1.50 per deal. Traiana's platform will lower the cost to $0.05-0.15 per large deal. The system can also spot problems more quickly and report them in an organized way to the banks using the system.
The advantage for ICAP is two-fold. The joint venture will undoubtedly generate cash flow. The company also owns a large foreign exchange trading platform, and it will profit from market growth. The good news for the Israeli market is that the new venture requires Traiana to grow, and it will soon hire more employees for its R&D center in Tel Aviv.
Published by Globes [online], Israel business news - www.globes-online.com - on April 6, 2009
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