State Street (NYSE:STT) is pushing for a larger share of the foreign exchange market with the launch of its TruCross/FX spot benchmark execution offering for institutional clients earlier this week. ((State Street Launches TruCross/FX to Create Trading Efficiencies in Electronic Foreign Exchange Benchmark Trading, State Street, May 27 2014)) TruCross/FX uses the WM/Reuters mid-rate benchmark rate and provides clients a platform to submit orders that will be matched and executed at the time the currencies are priced – keeping information about the trades secure and also protecting clients from unwanted volatility during the period.
TruCross/FX will compete directly with benchmark trading products like Citigroup’s (NYSE:C) CitiFX Benchmark, RBS’s (NYSE:RBS) RBS FiX and HSBC’s HSBCfix, which have been losing steam of late as a result of the restrictions on proprietary trading by investment banks. The move marks yet another step by a financial institution without a major stake in the securities trading industry into niche markets which were once a stronghold of the investment banks. It follows the recent announcement by asset management leader BlackRock (NYSE:BLK) to allow its clients better access to the rates and derivatives markets (see BlackRock Integrates Rates Trading Into Existing Aladdin Platform).
Fee revenues generated by offering securities trading and financing services to clients are an important source of value for State Street. Based on our analysis of the bank, we estimate that these services contribute almost 14% of its share value, as shown in the chart above. Foreign exchange trading is responsible for a bulk of this figure, as it brought in revenues of $589 million in 2013 – roughly 42% of the $1.42 billion in total revenues from securities trading and financing.
As a part of its trading services division, State Street offers institutional investors foreign exchange services under an account model that focuses on the global requirements of a customer along with brokerage services. The bank executes foreign exchange trades and also conducts proprietary research to meet the clients’ needs. Before the implementation of TruCross/FX, these trades were carried out through a bilateral buy-side to sell-side benchmark order submission process which suffered from two big issues: information leakage and volatility. ((ref:1)) The first issue is due to the involvement of the counterparty before actual order placement, as this could result in pre-trade information leaking into the forex market, whereas the volatility is an inherent problem around the time when benchmark rates are fixed. The newly launched system eliminates the need for a counterparty, and also matches trades to the extent possible – substantially eliminating these issues.
As State Street is providing this new service only to institutional clients who use its multi-bank electronic trading system, FX Connect, the added feature is expected to attract more business over the coming years. This should have a positive impact on the bank’s foreign exchange trading revenues, which we capture in our analysis as a part of total trading revenues. You can make changes to the chart below to understand how these revenues affect State Street’s share price.