Trends in FX Trading 2013

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GreySpark Partners has published a new report examining future structural changes to the FX market as the fragmentation of FX liquidity across a larger number of trading venues increases. Trends in FX Trading 2013 explores the macroeconomic forces and new capital markets regulations in the EU and US that are challenging the investment banking industry’s status as broker-dealers of liquidity to the FX market.

The report is the second in a four-part research series titled Trends in e-Commerce and Electronic Trading 2013. The first report in the series, Fixed Income Electronic Trading 2013, can be found here.

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Starting in 2010, the number of dealer-to-client (D2C) FX multi-dealer platforms (MDPs) in the market began to proliferate in response to new capital markets regulations, creating an environment in which the majority of FX liquidity is now naturally fragmenting away from the concentrated, bank-to-bank dealer-to-dealer (D2D) FX platforms and onto D2C platforms instead.

Responding to this trend, banks began directing increasingly larger amounts of proprietary and client FX liquidity onto D2C venues in an effort to make currencies dealing an integral part of their capital markets business following the 2008/2009 global financial crisis. This movement of currencies liquidity away from D2D platforms is a clear indicator that the long-standing FX market model of bank-to-bank trading venues housing the majority of global liquidity is changing.

In the next three years, GreySpark’s research anticipates that the lines will become blurred between the characteristics of FX D2D and D2C venues, and an all-to-all (A2A) market for FX liquidity will arise. The emergence of A2A venues will continue from 2017 onward as the blurring of the divide between the characteristics of D2D and D2C FX trading venues continues.

Banks must be prepared to adapt to this shift in the FX market’s structure in an effort to retain client business that could be lost as the A2A market encourages buyside FX investors to trade directly with one another, breaking the mould of their traditional relationships with inter-dealer brokers. The report examines this theme and also looks in detail at the existing currencies dealing models at banks, analysing how each type of model can be adapted to become client-centric to offset the emergence of the A2A market.

Published on: 16 Jul, 2013

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Trends in FX Trading 2013 – Table of Contents

  • 1.0 Economic Background
    • 1.1. Economic Decoupling
  • 2.0 Financial Markets Regulation and FX
    • 2.1 Basel III — the Margining of FX Forwards and Swaps
    • 2.2 The Dodd-Frank Act and the US Treasury Exemption
    • 2.3 EMIR — ESMA in Control
  • 3.0 FX — The Asset Class of Last Resort
    • 3.1 No Bank Will Voluntarily Exit the FX Business
    • 3.2 The Pricing War
  • 4.0 Evolution of the FX Market Structure
    • 4.1 Reallocation of Roles between Market Participants
    • 4.2 The Blurring of the Divide between D2D and D2C Venues — 2012 2016
    • 4.3 The Prospective Future Market Structure — 2017 and Beyond
    • 4.4 Hurdles to Overcome
  • 5.0 Adapting to the New Competitive Landscape
    • 5.1 Flow Monsters — Living off the Spread
    • 5.2 Living off the Skew
    • 5.3 Living on the Frontier
    • 5.4 Becoming an Execution Specialist
    • 5.5 Changing Roles in Changing Times
  • 6.0 Conclusions: Transforming the Organisation