Is nothing sacred? Now, even the complex financial engineering of the derivatives market is becoming the target of the ruthless competition of the Internet. A company called CFOWeb.com has launched a Web site with the aim of creating a virtual and efficient marketplace for such instruments as interest- rate swaps, currency swaps, and foreign exchange options. CFOWeb joins a rush by other start-ups and investment banks to set up online markets for sophisticated financial products.
Stepping into the derivatives market is "generally not a very transparent process," notes Harpal Sandhu, CEO of Integral Development Corp., the developer of CFOWeb. "There's a limited number of prospective counterparties," something CFOWeb aims to change by creating a site that aggregates a critical mass of potential financial institutions for companies, say, looking to swap some floating debt with fixed debt, to choose from. Just as standard stock trading has been driven down to $7.95 from several hundred dollars just a few years ago, Sandhu sees "similar potential changes in margin costs."
CFOWeb says it distinguishes itself by providing analytical tools to end users' desktops. The site has a "value" icon that allows the CFO or treasurer to determine what the break-even rate would be for the prospective transaction, and then put it out to bid. The counterparties would then respond, "knowing full well there are other institutions able to enter in the bid at the same time." The result, says Sandhu, is "classic Internet economics. It's a mechanism to get directly in front of treasurers."
CFOWeb represents an assault on a cash cow for investment banks, but it also needs the banks to make the model work. Seeing the writing on the wall, many investment banks are busy building their own sites in order to create a direct Internet sales model. Sandhu, however, believes the corporate customer will gravitate toward the aggregate sites in search of the best deal. The investment banks "are not going to give up the direct model," Sandhu says. "They're viewing CFOWeb as an additional source of deal flow."