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Structure of FX Market to Fundamentally Change as Fragmentation of Liquidity Increases

By 15 Jul, 2013November 11th, 2019Press Releases

Cognito Europe

  • Spread of multi-dealer trading platforms puts pressure on bank-dominated FX market
  • New all-to-all liquidity-sharing model to emerge in the next three years

LONDON – 15 July 2013 – GreySpark Partners, a London-based capital markets consultancy, has published a new report today exploring changes to the market structure for foreign exchange trading. Trends in FX Trading 2013 examines how e-commerce trends, macroeconomic forces and new capital markets regulations in the EU and US are challenging the investment bank-dominated FX market. These forces are giving buyside customers more choice and control than they have ever had before in their FX trading activities.

Since 2010, the proliferation of so-called dealer-to-client (D2C) multi-dealer platforms (MDPs) has meant that the buyside has enjoyed more choice in where they trade FX than ever before. As the number of these platforms – many of which will be registered in the US as swap execution facilities – grows, FX liquidity will naturally fragment away from the concentrated, bank-to-bank dealer-to-dealer (D2D) platforms onto the new D2C platforms.

Spot and forward spreads between major currency pairs in the D2D venues will grow increasingly tight every year as a result of the decimalisation of pricing introduced in 2012. Also, since 2010, 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 the 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 under threat.

In the next three years, GreySpark’s research anticipates that the lines will become blurred between the characteristics of D2D and D2C venues, and an all-to-all (A2A) market for FX liquidity will arise. An A2A FX trading venue is an equities-like market in which all counterparties share unrestricted access to currencies liquidity. 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 GreySpark report, Trends in FX Trading 2013, 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.

Frederic Ponzo, GreySpark managing partner and lead author of the report, said: “In the FX market of the future, there is no one-size-fits-all solution for banks as they look to adapt their currencies dealing models to make them more suitable for an equities-like, electronically-traded FX environment. Banks must focus on putting their clients at the centre of their plans to utilise single-dealer platforms for FX liquidity while also ensuring they have the technological sophistication necessary to maintain strong profits from proprietary currencies trading.”

Russell Dinnage, GreySpark analyst consultant and report co-author, added: “New regulations will incentivise the utilisation of innovative new technology in the design of multi-dealer platforms, bringing to an end to the banking industry’s attempts to maintain good-governance principles for the FX market.”

The Trends in FX Trading 2013 report is one of four reports GreySpark are set to publish in 2013 that build on the success of the Trends in E-Commerce and Electronic Trading annual reports. The next report in GreySpark’s series of reports will be Trends in e-Commerce 2013, which will explore wider issues dominating the cross-asset e-commerce field. The final report in the series will examine the current state of play in equities e-trading.

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