A new report from GreySpark Partners, a London-based capital markets consultancy, has found that buyside firms are increasingly accessing spot FX liquidity by trading with other buyside firms within trading venues that were previously considered bank-only platforms. The report, Trends in FX Trading 2014, shows how recent growth in the level of e-trading in the flow FX space is leading to the creation of new, all-to-all (A2A) market structures that could one day spread into other instrument classes like FX options and non-deliverable forwards.
Specifically, the report found that there are now at least three Tier I banks that offer direct market access (DMA) services to their buyside clients to electronically trade spot FX within leading inter-dealer spot FX trading venues. There are also many other banks that allow their clients direct connectivity access to inter-dealer spot FX platforms using bank ID codes to trade spot FX. These findings mean that, while broker-dealer FX banks still largely control the level of liquidity present in an inter-dealer spot FX venue on any given day, banks are increasingly allowing their buyside clients to dictate the level of churn or volatility that occurs within that liquidity. The banks are making it possible for their clients to dictate the level of volatility in the spot FX market by, effectively, allowing buyside firms to meet other market participants, including hedge funds, on the other side of a spot FX trade.
The level of buyside-to-buyside spot FX trading has increased dramatically since 2008, when prime brokerage technology platforms operated by inter-dealer venues began to make it easier for buyside firms to directly trade with one another in so-called bank-only venues. GreySpark believes that these changes in the spot FX space will set the stage for greater levels of e-trading in other types of instruments, such as FX options. These increases in the overall level of FX e-trading could cause pure, equities-like A2A market structures for spot FX to arise. FX options will remain principally-traded by banks, with multi-dealer platforms remaining the venues of choice for calls and puts liquidity. Meanwhile, sell-side NDF trading could disappear entirely in the future, with exchange-traded futures contracts utilized to mimic the liquidity in the market that the instruments currently provide.
Frederic Ponzo, GreySpark managing partner and report lead author, said: “In 2014, already high levels of e-trading in the FX market are causing all-to-all market structures to evolve, especially in spot FX, where evidence of an equities-like trading environment is common knowledge to the majority of market participants. The next steps in this evolutionary journey will be for electronification of trading to increase in other instrument classes – standardized FX options could become nearly fully electronic in the next few years. These changes mean that the balance of power in the FX market is now shifting toward the buy-side, away from the sell-side, and banks must continue to find new ways to compete with each other for client flow.”.
Russell Dinnage, GreySpark senior consultant and report co-author, added: “A GreySpark assessment of bank FX e-trading service offerings and a likewise survey of buy-side opinions of those service offerings showed that, while all the banks reviewed offer strong principal trading business and dealing models that their clients find useful, the competitive battleground of the future is in the agency trading space. The leading FX banks must continue to develop e-trading technology offered to their clients via single-dealer platforms to build new agency dealing models that simplify and bring efficiency to the provision of liquidity or access to liquidity venues to their customers, which will ultimately reduce costs across the board.”
GreySpark’s Trends in FX Trading 2014 report is the third report in a series of reports focused on Trends in E-commerce and Electronic Trading released this year. The series of reports also includes Trends in Equities Trading 2014 and Trends in Fixed Income Trading 2014. The final report in this year’s series, Trends in E-commerce 2014, is set for publication in October.
For further information and to purchase copies of GreySpark’s research, click here.