Increasing FX trade liquidity rebuilds bank model

Increasing FX trade liquidity rebuilds bank model

Changes to the market structure for foreign exchange trading, such as increasing liquidity outside major bank platforms, will challenge bank dominance in the sector, according to consultants GreySpark Partners.

Examining the impact of e-commerce, macroeconomic forces and new EU and US regulations on the investment bank-dominated FX market, the firm's Trends in FX Trading 2013 report argues buyside customers have greater choice and control in FX trading than in the past.

Greyspark noted that the rise of 'dealer-to-client' (D2C) trading platforms had massively increased trading options for buyside clients. As many of these platforms are registered in the US as swap execution facilities, their growth will lead to greater liquidity outside of the traditional bank-to-bank dealer-to-dealer model.

Frederic Ponzo, GreySpark managing partner and lead author of the report, said: “In the FX market of the future, there is no one-size-fits-all solution for banks as they look to adapt their currencies dealing models to make them more suitable for an equities-like, electronically-traded FX environment.

“Banks must focus on putting their clients at the centre of their plans to utilise single-dealer platforms for FX liquidity while also ensuring they have the technological sophistication necessary to maintain strong profits from proprietary currencies trading.”

The report also argued that pricing changes introduced last year would force spot and forward spreads between major currency pairs on bank-to-bank dealer-to-dealer platforms to grow tighter, while banks have also begun to try to make currency dealing an integral part of their capital markets business following the global financial crisis.

Greyspark said these trends were “a clear indicator that the long-standing FX market model of bank-to-bank trading venues housing the majority of global liquidity is under threat”.

The report also predicted that over the next three years, the distinction between the bank-to-bank and D2C models would become blurred, with an all-to-all (A2A) market for FX liquidity growing. Greyspark characterised an A2A market as “an equities-like market in which all counterparties share unrestricted access to currencies liquidity”.