Reuters Unveils Supertrading

Back in the fall of 1989, the share price of Reuters Holdings PLC was surging. It was an open secret that the company was about to launch an automated trading system that promised to revolutionize the way banks trade currencies. Analysts salivated over potentially huge profits. The only problem: It was never introduced. Software and other flaws forced one embarrassing delay after another.

Reuters shares have been jumping again lately. This time, it doesn't look like a false alarm. Reuters watcherssay the company will soon unveil the long-awaited Dealing 2000, Phase 2,a big advance over existing systems.An announcement could come Feb. 12, when Chief Executive Peter Job presents the company's 1991 earnings. Traders at 34 banks in New York and London have been conducting last-minute tests since late January. "We're just waiting for the word to go live," says one trader.

The launch, if it wins favor with currency traders, would be a welcome boost for the London-based company. Reuters has spent an estimated $80 million developing its new system at a time when the company's profit growth, which averaged more than 25% in the late 1980s, has tailed off markedly (chart).

FAT MARGINS. The two-year delay has been costly for Reuters in other ways, too. Two powerful groups are currently developing similar systems. One, called Electronic Broking Service (EBS), is backed by 11 giant U.S. and European banks, including Citibank, Chemical, and the major Swiss and British banks. Quotron Systems Inc., Citi's information-services unit, is helping with technology. EBS could be available by early 1993.

Financial players in Japan, meanwhile, have another entrant, called MINEX Corp. Its backers include Tokyo Forex Co., Japan's leading currency broker; telecommunications carrier Kokusai Denshin Denwa; and 18 big Japanese banks. Dow Jones & Co.'s Telerate Inc. unit will market MINEX outside of Japan. Planned launch date: April, 1993.

The target of all three services is the $600 billion a day traded in the world's spot foreign-exchange market. Banks and currency brokers conduct about half that volume by phone. The rest flows over existing electronic systems, 95% dominated by Reuters.

The present telex-like setups, though, are like Model T's compared with what Reuters and its rivals have in the works. They promise automated matching. Traders will key in prices anonymously, and the best bid and offer will be visible to all market participants. Another trader can execute a trade by simply hitting two buttons. One drawback: If equipment failure leads to broken trades, Reuters plans to let brokers sort it out themselves. MINEX has already said it will handle some liability.

The payoff could be huge. For the first time, information-services companies such as Reuters will be reaping revenues from each transaction, not simply monthly fees for screen rentals. The cost will be about $25 a trade. That may sound steep, but it's less than half what a broker charges. Analyst Paul Norris of Barclays de Zoete Wedd Ltd. in London expects a slow takeoff as traders get used to the system. But in four or five years, he predicts Reuters' system could garner extremely fat profit margins of 40%.

The three rivals each claim technical advantages for their systems. But the real question is, which one will active traders want to use? "If a system has liquidity, dealers will use it," says Peter Bartko, chairman of EBS's steering committee. Reuters has the edge there. It's already dominant in forex information, and it will beat its rivals to market by at least a year. Judging by the stock price, up 40% to just above $20 over six months, investors are betting that Reuters will be one tough act to follow.

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