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Buyside wield more control over FX trading
15 July 2013 London
Reporter: Georgina Lavers

Image: Shutterstock
Macro conditions and new capital markets regulations are giving buyside customers “more choice and control than they have ever had before” in their FX trading activities, said a report.

GreySpark Partners, a London-based capital markets consultancy, has published a new report today exploring changes to the market structure for foreign exchange trading.

Trends in FX Trading 2013 examines how e-commerce trends, macroeconomic forces and new capital markets regulations in the EU and US are challenging the investment bank-dominated FX market.

Since 2010, the proliferation of so-called dealer-to-client (D2C) multi-dealer platforms (MDPs) has meant that the buyside has enjoyed more choice in where they trade FX than ever before, said the report.

“As the number of these platforms—many of which will be registered in the US as swap execution facilities—grows, FX liquidity will naturally fragment away from the concentrated, bank-to-bank dealer-to-dealer (D2D) platforms onto the new D2C platforms."

The report predicted that spot and forward spreads between major currency pairs in the D2D venues will grow increasingly tight every year as a result of the decimalisation of pricing introduced in 2012.

Also, since 2010, banks began directing increasingly larger amounts of proprietary and client FX liquidity onto D2C venues in an effort to make currencies dealing an integral part of their capital markets business following the 2008/2009 global financial crisis.

This movement of currencies liquidity away from the D2D platforms is 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, said the report.

In the next three years, GreySpark’s research anticipates that the lines will become blurred between the characteristics of D2D and D2C venues, and an all-to-all (A2A) market for FX liquidity will arise. An A2A FX trading venue is an equities-like market in which all counterparties share unrestricted access to currencies liquidity.

The emergence of A2A venues will continue from 2017 onward as the blurring of the divide between the characteristics of D2D and D2C FX trading venues continues.

The report concluded that banks must be prepared to adapt to this shift in the FX market’s structure in an effort to retain client business that could be lost as the A2A market encourages buyside FX investors to trade directly with one another, breaking the mould of their traditional relationships with inter-dealer brokers.

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.”
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