LMAX Exchange
According to the recently published report by Aite Group ‘Global FX Market Update 2013: Increased Market Transparency, More Competition’, June 2013, the spot FX volumes will continue to grow on the back of prime-brokered clients (retail FX brokers and hedge funds/HFT firms) for the foreseeable future. Other FX products not impacted directly by regulations, such as outright forwards and FX swaps, should experience similar growth trajectory. Aite Group expects the spot FX market to reach US$2.2 trillion in daily turnover by 2016, up 35% from 2010 levels.
The largest daily trading volume in foreign exchange has traditionally come from the FX swap part of the market, but there are clear signs that new regulations on both sides of the Atlantic— particularly related to higher margin requirements for OTC FX swaps—will temper volume growth as market participants unable to secure margin to maintain or roll FX swaps choose to let them expire or look for alternative hedges on the futures/on-exchange side of the market, something that is now being termed “the futurization of FX swaps.”
Source: Aite Group ‘Global FX Market Update 2013: Increased Market Transparency, More Competition’, June 2013
Video Transcript
Is the growth in Spot FX expected to continue?
David Mercer: The Aite Group report predicts a 35% growth in average daily spot volumes by 2016, we agree, personally I think we may even exceed that, I’d be looking for maybe a 50% growth in the next 5 years. There are a few key drivers to the growth, one being geographical growth, we’re seeing a lot more interest from emerging market territories, led by the Asia pacific region. At LMAX Exchange, we’ve got clients in 55 countries and that’s after only 18 months of operation. The second major driver of growth, I think, will be new participants into the market place. So, you’re seeing Asset Managers, Fund Managers, who traditionally used equities or futures, now looking at this hugely liquid asset class being FX to deliver value on their strategies and to their clients. New venues such as LMAX Exchange have a big part to play in this, we can accommodate a whole range of clients from the traditional participants to the new ones I’ve mentioned. Likewise, I think, using modern and agile technology, we have ability for wider geographical reach. In short, I think the future’s bright for the spot FX market, there is good insight in the report and we certainly expect volumes to go significantly north from here.
Will FX swaps remain the most traded FX product?
David Mercer: Outside of spot foreign exchange, I think there are more challenges, the swap market is traditionally the biggest part of the FX market. It’s not completely electronically trading right now, regulations making it slightly more difficult, so we’re watching that with interest to see how that develops. I’m not sure necessarily the swap market will become a multi-dealer platform market, I think it may remain as a single-dealer platform but we need to see how this new technology such as Dodd-Frank and MiFID plays out to see what happens there but certainly the market participants will be looking for the exchange-style execution that you see in other parts of the FX market.