The flow FX market – comprising spot as well as vanilla OTC and listed FX futures and forwards – was historically structured as a multi-tiered market with a strong focus on a dealer-to-client trading venue market supported by the dealer-to-dealer platforms used by investment banks for hedging and risk management. Consequently, currencies liquidity within this two-tier structure was fragmented, and traditional asset managers and institutional investors interacted with only a small number of trusted broker-dealers.
Equities derivatives markets – which historically revolved around a single exchange for the trading of a given instrument and in all liquidity for that instrument was concentrated – fragmented since the introduction of Reg NMS in the US in 2006 and the EU’s MiFID I in 2007. In 2018, equities derivatives liquidity is spread across a range of venues and matching methodologies, including some structured as multi-tiered, D2C markets.
As a result of these shifts in the structure of both markets, convergence between the two is occurring, and market participants are adopting new behaviours and trading solutions tools – the functionality of which are often refined in the other asset class before being adapted for the new context – such that the key criteria for flow FX and equities derivatives market-makers as to what the core, functional components of the solutions must allow them to achieve are also converging.
Recognising the similarities between the markets, broker-dealers are beginning to consolidate their disparate FX and equities trading desks. This consolidation both calls for and is supported by changes in the technology landscape; technology vendors increasingly offer multi-asset trading solutions, which broker-dealers purchase to refresh their historical technology stacks and, ultimately, to reduce technology cost overheads.
This report examines how combined FX and equities desks now have a unique opportunity to utilise a range of trading technology toolkits that are capable of servicing the needs of both asset classes while also accommodating their remaining, marginal differences.
