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Importance of Banks in Inter-dealer Spot FX Trading to Continue to Decline

By 22 Mar, 2017November 11th, 2019Press Releases
  • Drop in spot FX volumes recorded by the Bank for International Settlements in 2016 likely linked to a decrease in the amount of real economy trade taking place as opposed to being linked to a structural shift in the currencies markets.
  • Dedicated spot FX dealer-to-dealer liquidity pools are functionally extinct, and liquidity provision in spot FX has largely shifted to a select number of buyside firms specialised in price-making and risk warehousing.
  • A large number of spot FX trading venues and platforms now support buyside liquidity provision and all-to-all (A2A) trading models.

LONDON – 22 March 2017 – GreySpark Partners, a leading global capital markets consultancy, has published a new report — Trends in FX Trading 2017 — exploring how banks have become less central to the management of liquidity flows in the spot FX market due to the commoditisation and proliferation of prime brokerage (PB) and direct market access (DMA) services for buyside firms seeking access to dealer-to-dealer (D2D) liquidity pools. In 2016, the market share of the top-five spot FX broker-dealers fell to 45%, which was the first time in recorded history that those banks were seen holding less than 50% of the overall liquidity transported within D2D venues.

Likewise, the report examines how in 2017 the role of buyside spot FX market participants – specifically algorithmic and high-frequency trading hedge funds – in the management of these D2D liquidity flows is increasing in importance. However, despite the increasing importance of the role that non-bank liquidity providers play in the D2D marketplace, the report found that they are not yet uniformly offering traditional bank market-making services such as PB or DMA to the venues.

GreySpark believes that this differentiation between the roles of traditional bank market-makers and new non-bank liquidity providers in D2D spot FX trading venues will remain relevant for the foreseeable future. As such, that differentiation in the roles only serves to accentuate rather than diminish the necessity of the emergence of all-to-all (A2A), exchange-like liquidity pools for spot FX trading. GreySpark also believes that peer-to-peer spot FX platforms could serve as another enabler of the growth of A2A trading in the future.

Frederic Ponzo, GreySpark managing partner and report co-author, said: “What is interesting in today’s spot FX market is the continued shrinking of D2D liquidity flows coupled with electronified A2A functionality across a wide range of trading venues and platforms. Nonetheless, the market struggles to function when volatility is low and reverts to older, voice-brokered trading models. So there remains space for innovation in creating new market structures to overcome this challenge.”

Willis Bruckermann, GreySpark analyst consultant and report co-author, added: “The challenges in today’s spot FX market – such as the time-fragmented liquidity identified in the report – are the result of its successful transition to e-trading. We explored responses to these challenges and although there has been some incremental change on the part of market participants and trade venue operators to address the new challenges, the big changes to market structure still lie ahead of us.”

For further information on GreySpark’s research, please e-mail: