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Retail FX trading – regional trends
Retail FX trading thus far has primarily been an Asian-European story, and going forward it will become much more Asian. Of the 55% of retail trading volume originating from Asia, a little more than half of this continent’s FX volume originates from Japanese traders. Outside of Asia, Europe (and in particular Eastern Europe) is a growth engine for the industry, generating a third of global volume. Russian trading activity is to Europe what Japan’s is to Asia; Russia’s FX trading activity (approximately US$20 billion per day) is equivalent to more than a fifth of the continent’s total volume.
David Mercer, LMAX Exchange CEO, shares insights.
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Volume by currency pairs
Popularity of currency pairs can change rapidly depending on various factors. The share of prime brokered trades in spot FX out of London is rising over time. The notional value of prime-brokered trades rose 27% from April 2010 to October 2012, while the value of non-prime-brokered trades fell 17% over the same period.
David Mercer, LMAX Exchange CEO, shares insights.
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Growth in retail FX brokerage
Little noticed by BIS, retail investment regulators, and the public at large, retail FX volume has surged in the past 10 to 12 years to reach an impressive US$280 billion per day, roughly 6% of the overall FX market and 18% of the spot FX market. This buzzing market grew on the opaque OTC side of the market, with a few hundred FX brokers of various sizes growing their business purely online and with the help of introducing brokers and Web affiliates. While a good number of these specialist brokers only offer spot FX, an increasing number of them promote various forms of FX (spot FX, contracts for difference [CFDs], FX options, and binary options) and have added other asset classes such as equities, commodities, and fixed income products.
David Mercer, LMAX Exchange CEO, shares insights.
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Electronic trading venues top Spot FX execution methods
The outlook for spot FX execution methods is both fluid and evenly split. The first BIS reading of execution method market share came in April 2010. Using execution venue data from the U.S. FXC and FX JSC semi-annual surveys, Aite Group constructed an estimate of how the market share of various execution methods has changed since April 2010. Aite Group estimates that between April 2010 and October 2012, the industry witnessed the following market share changes:
- Electronic trading venues: Aite Group estimates that SDPs and MDPs have seen a (substantial) 4.0% market share gain since the April 2010 BIS survey. An estimated US$520 billion (32% of the spot FX market) was executed daily through electronic trading venues in 2012, making this the largest type of spot FX execution venue.
- Customer direct execution: Trading between a reporting dealer and a client or non-reporting dealer via direct telephone conversation or RCD has likely fallen from 21.3% to 17.9%. This change denotes a slight shift toward electronic trading venues.
- Electronic broking: Trading executed via electronic broking venues increased slightly in notional terms, from US$389 billion in April 2010 to US$402 billion in October 2012, but it saw some market share tussle with electronic trading venues in 2012.
- Voice brokers: The ongoing trend away from voice broking in the spot FX market likely continued between 2010 and 2012, with the share of this execution venue falling from 8.5% in April 2010 to 6.4% in October 2012.
- Inter-dealer direct: Direct activity between two reporting FX dealers saw a noticeable increase between April 2010 and October 2012, from 14.8% to 18.4%. Higher bank capitalization in the United States and Europe appears to be boosting trading activity among financial institutions.
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Testing in production
We test a lot at LMAX Exchange and we do lots of different types of testing. Testing is completely integrated throughout our software development process and while much of our testing is automated we also have a team of dedicated test professionals who do a fantastic job of manual exploratory testing. All this testing involves the usual array of integration, test, compatibility, performance and staging environments – none of which are exactly cheap. So it’s gratifying that all the investment and energy we put into testing actually pays off and as a result we have an exceptionally low level of software defects in production. Some people would probably be happy to leave it at that.
Over the last few months we have started testing in our production environments as well. The motivations for this are fairly compelling. No matter how similar to production you make your staging environment it will still never actually be the same thing. No matter how careful you are in configuring your software and infrastructure components there is always the potential for problems due to external factors or human error – even when all of your processes are completely automated. In the end whenever you release new software or make a change to an environment the only way you will ever know for sure that it works is to try it.
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High Frequency Trading accounts for over 40% of FX trading
Within the context of the FX trading the terms “high frequency trading” and “automated trading” are interchangeable. Automated trading represents trading activities driven by systems that (1) automatically determine when and where to trade based on input of internal and external data and (2) trigger order flow into execution venues via APIs. Automated trading firms continue to make their presence felt in the FX market―slightly more than 40% of trading volume in spot FX is currently represented by high frequency trading.
Unlike the equities market, however, it is unlikely that automated trading could account for more than 50% of overall volume. Indeed, the sheer diversity of FX market participants and their varied reasons for participating in the market would make it difficult for a single group of FX market participants to overwhelm the rest. It should also be noted that at least half of the 40% HFT presence in the spot FX market is represented by banks themselves.
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UK share of global FX went up to 39% in 2013
Global FX volume traded on OTC markets for the 1995-to-2013 period saw tremendous growth overall, but the share from the top 10 nations remained intact at roughly 88%, following a dip to 84% during the 2001-to-2004 period. Certain factors, such as the emergence of the euro in 1999, the rise of high frequency trading in the mid-2000s, and the ensuing race toward creating low-latency environments, did create change within the share of top 10 nations. During the 18-year period from 1995 to 2013, the U.K. raised its market share in FX markets by 5.3% points, while Japan’s share fell by 4.1% points and the combined share of Germany and France dropped by 3.6% points based on FX client flows.
Volume by Region
Source: Aite Group ‘Global FX Market Update 2013: Increased Market Transparency, More Competition’, June 2013 -
Evolution towards transparency – the new wave of FX venues
Price discovery and trading models in electronic FX have evolved over the last decade, and current market structure supports multiple formats.
- RFQ/RFS: The most primitive method of price discovery and trading is the RFQ, a model that was adopted by first-generation client-to-dealer platforms. While most FX venues have evolved and added requests for streaming as well as order book information, FX Connect continues to dominate this particular marketplace, driven by its large asset management client base and its ability to provide support for extensive post-trade service, including netting.
- Streaming quotes/order book: Most FX ECNs currently support some combination of streaming quotes and order-book-style price discovery and trading. Despite the emphasis on anonymous, transparent trading, most FX ECNs have hidden markups and provide only limited post-trade transparency in terms of the counterparty; the identity of the prime broker is only disclosed if the trade has been prime brokered.
- Exchange style: Currently, only LMAX Exchange has launched a truly exchange-style trading model that provides pre-trade anonymity but full post-trade transparency. LMAX also does not support last look. Both Molten Markets and ParFX are slated to have price discovery and trading methods similar to LMAX Exchange.
Evolution of Trading Models in FX
Source: Aite Group ‘Global FX Market Update 2013: Increased Market Transparency, More Competition’, June 2013 -
Adoption of electronic trading
Electronic trading has become the main mode of trading in FX and now accounts for more than 60% of all trading done in the global FX market. Moreover, Aite Group expects to see electronic trading adoption to continue in the FX market, reaching 70% by the end of 2013.
This reality does not predict the end of voice trading, however. Typically, voice has a bigger role when large trades are being done. In addition, during times of severe market volatility, it is common for clients to rely on their relationships with banks to get much-needed color into where the market is headed and to get it via voice. This was certainly the case in 2009, when, following the record volume of 2008, the dramatic dislocation of the general global economy created much uncertainty in the marketplace, leading to widened spreads and lower trading volume. During this time, reliance on high-touch, voice-driven trading became crucial for clients seeking to navigate market uncertainty.
Estimated Adoption of Electronic Trading in FX
Source: Aite Group ‘Global FX Market Update 2013: Increased Market Transparency, More Competition’, June 2013 -
The moving finger writes…
The LMAX Exchange software platform has been in development for a few years now. We have a great development team who are exceptionally talented and productive, so it’s not surprising that we have built up a reasonably large code base. The core exchange is a few million lines of Java and we have a lot […]
TCA and fair execution.
The metrics that
the FX industry must use.
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