In a new report, Electronic Platforms in Foreign
Exchange Trading, Celent analyses the state of the foreign exchange
market in terms of volume growth, adoption of electronic trading, and
drivers for evolution. The report, also, examines the interbank platforms
Reuters Dealing 3000 and EBS and the dealer-to-client platforms FX
Connect, FXall, Currenex, and Hotspot FX. A collaborative effort between
Reuters and the Chicago Mercantile Exchange branded FXMarketSpace is
discussed briefly in that report as well.
Despite the overall growth of the FX market, a
detailed look reveals more nuances. The “real money” trading, notably
from corporations covering the currency risk of their international trade
business, has experienced an important but smaller increase compared to
the volume of speculative trading from the hedge fund industry. Although
everyone is concerned about hedge funds, the term covers a more diverse
reality. Hedge funds can trade using different strategies from model
trading, direction trading, momentum trading, etc. Therefore, their needs
will vary widely according to their trading strategy, as will their
favorite trading venues and functionalities.
According to Axel
Pierron, Celent analyst and author of the report, “The importance of
new market participants on the buy side and their ability to improve and
generate liquidity is blowing the wind of change in FX markets. The
segregation of the market between interdealer and dealer-to-client is
already being attacked, with the two major interdealer platforms breaching
the wall to attract these profitable new customers. The question to ask is
not whether the FX market will adopt an exchange model, but when."
The development of interdealer electronic platforms
has driven the smallest banks out of the market because it has generated
visibility on the market and less volatility, narrowing the margins. Today
the FX market is a business of high volume and low margins, which only
leaves room for very large institutions and specialists. Celent estimates
that 75% of the interdealer spot market volume and 50% of the
dealer-to-client volume is traded electronically.
Pierron adds, “The acquisition of Currenex by
State Street could signal a wave of consolidation in FX e-trading
platforms, but I doubt it. This acquisition is a specific answer to State
Street / FX Connect issues, such as outdated technology and expansion into
new customer segments. In fact, there are many projects to develop FX
platforms such as Lava plan to launch an interdealer FX platform and FXAll,
a new dealer-to-client platform. The market is large, with various
customer segments and numerous single dealer platforms, so market
participants will hold the consolidation mantra for a while. As ICAP’s
acquisition of EBS and Knight Capital’s acquisition of HotSpotFX
demonstrate, if consolidation happens it will be complementary, to provide
multiasset trading facilities.”
The 41-page report contains 14 figures and 3 tables.
A table of contents is available online.
