September 16, 2007 9:00 PM PDT

Online currency trader nabs $100 million in venture funds

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Online currency trading site Oanda only takes in about one one-hundredth of a percent in revenue off of each trade, according to Chief Technology Officer Michael Stumm.

But, since the site can clear around $10 billion in trades on a big day, it's a somewhat attractive business, he adds.

Founded in 1995, Oanda has effectively become the E*Trade for currency speculators and traders. Customers log onto the site and try to earn money by betting on the rise of the euro, for example, or the decline of the dollar.

"Truth in advertising, the vast majority of the people at this time lose money at it," Stumm said. "But there are quite a few people who consistently make money. The main mistake people make is that they are not conservative enough."

The company is now hoping to expand by moving up the food chain in the banking world. New Enterprise Associates (NEA), a Silicon Valley VC firm often associated with semiconductors and clean technology, has invested $100 million in the firm. Oanda will use the money to beef up its balance sheet. And with that amount on the books, the hope is that Oanda will be able to attract more business, handle larger transactions with more ease, and qualify to perform other services in various jurisdictions.

In currency trading, volume is key. The site earns money from the difference in the bid and sells quotes for currency. Let's say a customer requests 10 million euros at a specific price. Oanda will sell it, but then will have to go to other banks to find the currency to sell or reduce its exposure to further currency fluctuations. This raises costs. Thus, even though Oanda pulls in roughly 0.01 percent in trading fees on transactions, all of that money doesn't turn into profit.

"The margins are extremely thin in this market so the only way to make money is through volume," he said.

Besides booking trades for customers on its site, Oanda also creates and runs private label services for banks. The online currency trading service at ABN AMRO, for instance, was created by Oanda.

The company originally started out as an information-only site. Stumm's old high school friend, Richard Olsen, had an economics consulting company. Olsen was interested in currency exchanges, so the two formed the company. Over time, it morphed into a trading service. The transformation in part occurred because the company realized there might be more to life than providing information over the Web, he said. Regulations also changed to allow investors to trade in smaller blocks of currency, that is, less than in the millions range.

"Oanda has made currency trading possible for the common man," said Krishna Kolluri, a partner at NEA.

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