FX Markets are Ready for a Shake-up

The biggest finding in our latest report on FX electronic trading was nothing.  Our 1500+ interviews with global FX users showed fxcontinued growth in electronic trading (74% of users trade FX on the screen), growth in execution algorithm usage (expecting 65% growth in 2014) and high hedge fund use of the two.  But those data points were largely as expected.

What really struck me was the lack of of change over time in the competitive landscapes for FX single-dealer portals and multi-dealer portals.  While market penetration of the dealer-to-client platforms did gyrate slightly over the past five years, the proportion of the market addressed by the top 5 looks the same  today as it did in 2009.  If the last five years had been “normal”, than that wouldn’t be surprising.  Big given the massive changes in market structure, market participant behavior, regulation and technology since the crisis, no change makes me think.  Are clients simply happy with the platforms in front of them today?  Is the landscape ripe for change?

As we described in detail in our earlier report “The Futurization of FX“, FX markets are anything but exempt from regulatory change.  But the major changes are yet to come – Basel III, NDF clearing mandates, uncleared margin – which could explain the lack of change in e-trading platform usage to date.  I also suspect the focus on interest rate and credit derivative market regulations have distracted many major market participants, forcing them to put FX changes to the side as they race to meet deadlines.

Our data shows that Footnote 88 did in fact force behavior changes, with trading moving from MDPs to SDPs for the first time in five years or more.  If that is any indicationof the impact of regulations on behavior, FX’s time in the spotlight seems to be coming.  NDF clearing mandates, as an example, could be in place by year’s end.  The regulations mentioned above coupled with probes into FX fixings tell us 2014 will be a big year in FX market structure.

The press release from our latest report (available to market structure and technology customers):


Demand for Algorithms and Regulatory Complexity Drives Business Back to Proprietary Bank Platforms


Tuesday, April 1, 2014 Stamford, CT USA — Algorithmic trading strategies are taking hold in FX — a development that is providing a boost to proprietary bank trading systems that had been losing market share to multi-dealer trading platforms.

According to a new report,  FX Electronic Trading 2014 – Global Trends and Competitive Analysis, from Greenwich Associates, 11% of FX market participants now use execution algorithms for some portion of their trading — up from just 7% in 2012. This report is based on the results of more than 1,500 interviews with buy-side FX users.

Greenwich Associates projects that global use of algorithmic trading for FX will increase to 18% by the end of 2014 — a 64% jump from the current adoption rate. Use among hedge funds and retail aggregators is expected to be significantly higher.

“This rapid growth in adoption will have a major impact on the market because algorithmic trading users are executing more than a third of their FX trading volume through them,” says Kevin McPartland, head of Greenwich Associates Market Structure & Technology. “Hedge funds using algos execute even more volume through them, over 50%, and we expect that to only increase.”

Algo Growth Provides Boost to Single-Dealer Platforms

Demand for broker-provided algorithms last year helped increase the amount of FX trading volume executed on single-dealer platforms (SDPs) for the first time since the financial crisis. Hedge funds moved particularly large proportions of their volumes to SDPs, trading 22% of their 2013 volume with SDPs, up from 7% in 2012.

While Greenwich Associates attributes some of the uptick in SDP volumes to buy-side demand for algorithms, SDPs also received a temporary boost from regulations – particularly Footnote 88. “The requirement for MDPs to register as Swap Execution Facilities (SEFs) has driven more clients to SDPs as they look to minimize the impact of new regulations on their trading process,” says Kevin McPartland.

Competitive Landscape

Despite market share gains by SDPs and some massive changes in market structure, the multi-dealer platform competitive landscape remained largely unchanged. Among MDPs, FXAll continues to have the highest market penetration among institutional investors, with 360T and Bloomberg rounding out the top three.

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