Making sense of the FX connectivity conundrum
Foreign exchange is the most inclusive of financial markets and has
used technology to lay out the welcome mat to all-comers. Initially
the preserve of the inter-bank market, electronic platforms have
been developed for corporates, asset managers, hedge funds and now
retail investors. In democratising foreign exchange, the banks have
set themselves the challenge of supplying liquidity to multiple
market sectors competitively, while the buy-side has been quick to
realise that best use of technology a critical factor in obtaining
That new players have gladly accepted the banks' invitation in
droves is evident. The global FX market will reach almost US$3trl
in average daily turnover when the Bank for International
Settlements' 2007 triennial survey is released - a substantial
increase on BIS's 2004 estimate of US$1.8trl. Much of this growth
is the result of buy-side activity. According to BIS figures, the
banks' share of FX trading activity fell from 64 per cent in 1995
to 53 per cent in 2004; trading activity by non-bank financial
institutions rose from 16 per cent to 33 per cent over the same
period. With hedge funds and CTAs reportedly ploughing more volume
through ECNs, it would surprise no one if the BIS were to report a
50:50 split in the 2007 market.
Although the FX market's migration to electronic trading is
overwhelming, it is far from complete. Just over half of all FX
trading (56 per cent) took place electronically in 2006, with the
inter-dealer market (66 per cent) still leading the
client-to-dealer (45 per cent) sector, according to Aite Group. The
research firm predicts 75 per cent of FX trading will be done
electronically by 2010. This combination of overall volume growth,
diversity of participants and ongoing migration to electronic
trading venues has put connectivity top of the FX agenda.
Connectivity is key
"Connectivity is key and will continue to play a major role in how
the market develops," says Sang Lee, Managing Partner, Aite Group.
"To the extent that this is a fragmented market, if you aggregate
it from a user perspective, you can consolidate it into one single
view. Leading players don't want another intermediary aggregating
their prices to enable even greater transparency. But it's
happening already; hedge funds are using their own technology to
aggregate prices from different venues."
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