Regulatory action risks to squeeze big banks’ profit margins from FX, but bringing increased transparency and likely more volumes
A report in Monday’s edition of the Financial Times outlines an accelerating shift that is occurring within the FX markets industry during the past couple of months. Yes, we are talking about electronic dealing finally arriving in full scale to leading merchant banks. As the negative publicity started to roll-out against dealers manipulating forex rates and specifically the fixing rates, and as a couple of companies have started to offer forex benchmark rates in real-time, the change is finally inevitable.
Only a couple of years ago when one would walk into an FX dealing desk at any major bank there would be a bunch of crazy looking stressed out dealers and traders who would be shouting at each other and at their customers over the phone. Those days might well be behind us now. The latest trigger to bolster further technological revolution in FX dealing at major banks has been the 4pm fix investigation.
The change has been going on for about a decade now, and this time it’s going to roll-out fast. Business is likely to shift to a more transparent space as customers are becoming aware of practices that were conducted by their fellow bankers, and clients start demanding best execution proof. The downside – well… lower margins for the dealers; the upside – much better trading conditions for customers that could drive FX trading volumes even higher.
According to the Bank of International Settlements 65% of foreign exchange dealing is now conducted in electronic form. UBS has already increased the limits on its electronic dealing platform Neo. According to industry insiders cited in the FT report, electronic dealing limits have been raised from between $5 million and $25 million a couple of years ago to $100 million now. As the market liquidity conditions continue to get better, these limits could be raised even further.
In contrast volumes at the fixing have dropped dramatically, which in itself is not very good news, as apparently that reduces liquidity at these hours, hence providing conditions for easier price manipulation. As time passes people will start realizing that fixing events in the forex market are becoming sort of obsolete. With real-time pricing becoming ever-more widely available there is not much sense to go back to the old ways of piling orders around the 4pm fix in London.
For the full report by the financial times click here.