LMAX Exchange
One of the most significant changes that the FX market is currently undergoing is the substantial increase in trading activities from “other financial institutions” —included in this group are retail aggregators, high frequency trading firms, and smaller (Tier-2, Tier-3) banks. Banks with an FX expertise (dealers, reporting dealers) accounted for 64% of all trading in 1995, but that figure declined to less than 40% by 2010. Non-financial customers (primarily corporate clients) as a group have more or less kept pace with growth in the FX market and held on to a 13%-to-18% share of FX volume. Trading from non-bank financial institutions (such as high frequency firms, smaller banks, and retail aggregators) increased from 20% in 1995 to 48% in 2010, thereby becoming the largest counterparty in the FX market. Principal reasons for this large jump in activity follow:
- The growth and popularity of electronic trading platforms that started in equities markets two decades ago has gravitated to the FX market.
- The lack of steady, profitable returns from traditional asset classes such as equities and fixed income have propelled FX and commodities as the new alternative asset classes, thereby attracting fresh investor money flow into the FX market itself.
Source: Aite Group ‘Global FX Market Update 2013: Increased Market Transparency, More Competition’, June 2013
Video Transcript
Banks are no longer the largest counterparty in the FX market
Campbell Millar: I think if you split the FX market broadly into three major categories, namely, banks, corporates and non-bank financial institutions we’ll see that in terms of market share, banks have decreased from mid-90% about 65% down to less than 40% by 2010. We’ve seen corporates over the same period maintain probably around about 15 % market share. We’ve seen a large increase from non-bank financial institutions, which have increased from probably less than 20% to almost 50% by 2010, and by non-bank financial institutions I’m including high frequency traders, retail brokers, and other buy-side firms. I think there are three or four major developments in FX which could increase in market share. Firstly, you got emergence of a large number of FX venues over that period which is wider distribution of FX liquidity. Secondly, also in that period you’ve got the emergence of FX as an asset class in the same right, providing uncorrelated returns for asset managers uncorrelated to the likes of equity and fixed income. Thirdly, over the same period, you have the emergence of high frequency traders in the foreign exchange markets, and these guys have taken a significant share from the banks over the period. Lastly, we have seen a very large increase in the retail market space over the same period and I think a large part of that is probably down to increased global internet penetration which allows these brokers to sell online to a truly large audience and it has resulted in a large increase in volume and in turn market share for them. I think going forward, we are likely to see the market share increasing for the non-bank financial institutions but I’d say at a much slower rate and that’s primarily because the banks will always be a major part of the FX market and therefore their share can’t really reduce below a certain point.