Over the last five years the outlook for the global FX market place has dramatically flipped. To many back in 1999 the prospects were dire. A lacklustre environment of currency consolidation (Euro) and surplus, expensive, dealing capacity, delivering poor or volatile profits. At the same time demanding substantial investment for millennium compliance and to take down operational costs by automating the dealer-to-customer workflow through what became knows as eFX.

It turned out a lot better than expected! But why? There were two superficial reasons. Firstly, a predictable recovery from the impact of the double-whammy of Euro & Millenium on FX turnover. FX is a long term bull market but we know there are always periods of retracement. Secondly, a package of underlying growth drivers - in cross-border security transactions, emergence of emerging market economies, political volatility, and diversification into FX for trading profits whilst equities and bonds suffered. More important was that bank execution portals began to deliver on the promise of re-setting the economics of servicing customers for FX, whilst freeing up dealing headcount to enable concentration on higher value structured product sales, and just better customer service.

Re-shaping the collective outlook for FX In my view, though, there have been two further factors which have been most influential in re-shaping the collective outlook for FX to date. One has been the accumulating sophistication around the build and operation of bank pricing engines and the associated cost and risk effective capabilities to process rapidly growing e-transaction volumes. A few banks have now perfected the model and have gained the trading profits, customer accolades, and brand recognition for doing so. Many more are now convinced and investing heavily to catch up.

The second, and key factor, has been the largely unanticipated trading profit and flow information benefits which the pioneer banks have experienced by pointing their highly tuned eFX execution portals at the re-structuring regional and domestic banking segment. The days of most banks quoting each other in size, as equals, are long gone. The FX market structure has polarised away from the peer-to-peer model of the last quarter of the twentieth century to one which is now beginning to price counter-party credit worthiness, and risk management capabilities more realistically into an FX quote. So as the top 20 trading banks have found fresh reason to look at FX for trading profits, in the last few years they have also begun to find the potential for improved margin from regional and domestic banks. Large corporates are very important customers to banks but dont generate much FX profit. Hedge Fund have now made their mark as major drivers of FX flow, but when they move on to trade other products it is the regional and domestic banks which will still be pumping huge FX flows. So a high level view of FX industry dynamics over the next few years could be a triangulation between the Hedge Fund and Regional/Domestic Bank segments generating most flow. Whilst consolidating global FX market-making banks manage and profit from that flow through their eFX capabilities.

Currents driving for linkage But in practice that view doesnt reflect the current needs of bank market-maker end users, nor fit the developing requirements of their institutional customers. Analysis of these factors can expose the currents now driving for linkage between execution venues and vendors like Reuters and Bloomberg.

Lets look at the needs of bank market-makers first. More than ever before they need the ability to quickly execute in sufficient size to effectively manage and profit from the positions they inherit from their banks eFX portals. Following industry polarisation, the demise of the etiquette of peer-to-peer guaranteed quotation and the increasing drive towards electronic FX liquidity priovision, the market is seeing an emergence of anew framework of aggregating exchange venues.Existing inter-dealer brokers - and mostly that means the electronic commerce network (ECN) execution venues of EBS and Reuters, are seeing the likes of Hotspot and Currenex presenting themselves to the market as potential alternatives to providing this liquidity. The need for quick and easy access to multiple markets, associated post trade processing and risk management has been the customer pull for Reuters recently announced alliance with the CME. Bank market-makers will be able to execute either into cash markets or onto Globex in spot equivalent easily tapping into buy-side originating flow from their existing Reuters Dealing 3000 keystation.

Needs of buy-side users So what about the needs of users at the bank and non-bank institutions who represent the buy-side of the marketplace. Firstly keep in mind that Hedge Funds have muscled into this category and will probably irrevocably change the FX marketplace in the next couple of years. Often staffed by ex-inter-bank dealers they have demanded rather than requested the quality of FX quotation that used to be reserved for inter-bank dealers. Increasingly trading though automated programs they seek API access to the most liquid execution venues to run their programs and usually have better counter-party credit in place than many regional and domestic banks. It can only be a matter of time before the global banks extend credit and enable them to participate on Reuters and EBS matching, either directly, or through the Prime Brokerage model.

However, the requirements of say the top fifty Hedge Funds, do not represent the issues of the broader, diversified, buy-side of the market place. Here substantial long-term growth in volumes can be expected from the investment fund segment which has only quite recently accepted FX as a genuine, stand-alone, asset class in their investment theory. FX is now going to be treated on equal terms to equities and bonds and lets face it its a lot simpler for most investors to understand. But it will take more time before the multitude of national regulatory authorities enables this potential to be realised. When it is it amplifies the wider buy-side needs for:

1. Equality of execution subject to counter-party credit standing. The global banks are currently actively addressing this need through the rapid introduction of Prime Broking services. Any buy-side customer can now get as competitive an FX quote as any one else so long as they pay a fee on top fairly which represents their counter-party credit risk. It may be a corporate or it may be any domestic bank in a country experiencing the sort of credit risk we are seeing in Russia presently. In pricing terms this Prime Brokerage model is pretty much the same as the exchange model for pricing credit and in practice the banks providing the service are mostly clearing members of the major exchanges. Interesting.

2. Simplified workflow and best execution As FX platforms proliferate the end-user experience will become extremely difficult. Be it coping with multiple log-on codes, user-interface conventions, STP formats, not to mention simple desktop real-estate issues. For best execution there needs to be a simplified, normalised access to trade across execution venues. These factors alone will underpin further alliances between exchanges and the key vendors. The position of the vendors is key here because they have a natural global desktop foot-print with a viable business model supporting it. This desk-top foot-print can be re-purposed to support the growing needs of various execution venues to distribute their liquidity into a normalised environment, in front of the end user and into their trade management environment. The biggest task when it comes to normalising access to executing eFX has got to be that of addressing the customer needs to norm