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New FX Venues Emerge
Challenging the establishment – new FX venues emerge. David Mercer, LMAX Exchange CEO, shares insights.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.
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Banks are no longer the largest counterparty in the FX market
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.
Volume by Market Participant Type
Source: Aite Group ‘Global FX Market Update 2013: Increased Market Transparency, More Competition’, June 2013