New FX Venues Emerge

LMAX Exchange

The first generation of FX electronic trading venues initially emerged in the interbank market in the early 1990s. Both Reuters and EBS have remained traditional powerhouses in the electronic FX market since their launches, supported by the dealing banks that relied on the two venues to manage their risk in a timely manner.

The second wave of significant changes in the electronic FX market occurred during the late 1990s, when numerous electronic platforms surfaced to address trading issues in the client-to-dealer market. While most of those venues, such as Atriax, Lava, and FXMarketspace, ultimately ceased operations due to lack of market adoption, the few that survived, including Currenex, Hotspot FX, and FXall, form the backbone of today’s established FX ECN players.

Over the last couple of years, we have witnessed the next wave of new FX venues flooding the marketplace.

A Sample of New Market Entrants

Source: Aite Group ‘Global FX Market Update 2013: Increased Market Transparency, More Competition’, June 2013

There are numerous reasons for the entrance of new FX venues into a competitive landscape that had been fairly stable until a few years ago:

• Traditional electronic venues such as EBS and Reuters have been gradually losing market share to HFT-oriented market-making or proprietary trading firms, providing much-needed hope for new entrants to build attractive levels of liquidity unthinkable even three years ago.
• Dealing banks have become increasingly dissatisfied with the current group of FX venues due to (1) what they perceive as certain practices that favor automated trading firms and (2) the outdated trading infrastructures of existing platforms. Both of these may lead to potential opportunities for new venues.
• New participants from non-FX markets have entered the space looking for faster, more streamlined, transparent FX trading venues similar to what they are used to in equities and futures markets.
• Continuing regulatory changes in the OTC derivatives markets across different asset classes such as fixed income, commodities, and equities are leading to growing expectations from global FX market participants that similar obligations will be eventually applied to the FX market.
• FX clients are becoming more sophisticated and looking for more choices and efficiency in trading FX electronically.
• The existence of an FX ecosystem has drastically lowered the cost of entry for new market players.

Source: Aite Group ‘Global FX Market Update 2013: Increased Market Transparency, More Competition’, June 2013

Video Transcript

New FX Venues Emerge

David Mercer: There has been a new wave of FX venues in the last two or three years and of course LMAX Exchange is one of those. Why has it happened? Well, I think there are a few reasons, one of which is client demand, they want choice, I think competition is good for the client, they’re always seeking out the best price, the best method of execution. The second reason is technology, it is becoming easier to launch a venue, that venue can be quicker, can be more scalable, can have more throughput, and in that way it challenges the existing bohemiest that are in the marketplace, but they have big budgets, that’s the challenge for all new venues such as LMAX Exchange, we need to increase the distribution, gain some traction, and keep the big guys on their toes. I don’t see it slowing down, I think there is going to be more venues not less venues, it’s becoming relatively easy for the underlying liquidity provider to provide liquidity into these new venues, and why wouldn’t they? It’s a source of new flow, the flow that we attract at LMAX Exchange is very different from the flow attracted in other major venues. People talk about the consolidation because they assume that the cost of running a venue is too high and these smaller venues can’t exist, I disagree, it’s not as expensive as it used to be. Certainly we can scale to do 20-30% of the spot FX market with our existing infrastructure and personnel. But who’s to say that the big guys will consolidate, maybe it’ll be the new players. In the meantime, I think the marketplace and client benefits through wider market access. Competition is good, and may it be survival of the fittest.

New FX Venues Emerge: survival of the fittest

Scott Moffat: The emergence of new FX venues, this is a hot topic in the market. If you go to any FX conference around the world there will always be a panel there where they’re talking about the proliferation of new venues and the likely consolidation of these new venues, and the questions is why this proliferation, why all these new venues? I think to answer that, you have to look back to where FX has come from and also look forward to where it’s going, and here at LMAX Exchange we definitely think we’re at the forefront of where it’s going. To start looking back, FX is OTC traded and traditionally voice-brokered. Until the early 1990s we had the first two electronic venues, EBS and Thomson Reuters, which provided bank-to-bank ability to hedge their FX exposure, those two venues are still around today and are two massive players in the FX market but they served a specific purpose to the banks at that time. During a part of the 1990’s there was another surge of FX venues, you had FXMarket Stream, Lava, Currenex, HotSpot FX and FXall, which were more geared to solve buy-side problems at that time, client-to-dealer issues, and these are massive players in the FX space and still around today, and then moving on, there has been a surge of new entrants in to the market you’ve got LMAX Exchange, gain GTX, parFX, Fastmatch. There are probably 4 main reasons to new entrants in the market, 1) FX volumes 2) the rise of the high frequency funds 3) Dissatisfaction with current incumbents 4) Regulatory changes.