Mega-platforms emerging in forex markets, more consolidation expected
The pace of change in forex markets accelerated this year and is moving towards regional centers of liquidity. Venues now offer access to multiple liquidity pools and a hybrid model combining principal and agency trading has emerged. GreySpark Partners said that the structure of spot forex is approaching tipping point with early signs of an all-to-all market. The market underwent significant consolidation in 2015 with Bats Global Markets acquiring Hotspot Fx, Deutsche Börse acquiring 360T, ICAP’s EBS buying Molten Markets and Thomson Reuters integrating all of its forex services onto one platform. Consultancy firm, Celent, predicts the establishment of these new global mega platforms will trigger a new wave of consolidation with an eye toward merged liquidity within a global forex platform, however Greyspark suggests that buy-side and non-financial corporates will need to develop currency aggregation tools similar to those that were developed by banks to enable a true all-to-all market place to emerge. 

Banks ‘Mega’-Platforms Emerging in FX

The foreign exchange market is moving towards regional centers of liquidity and the birth of mega-platforms that are buying trading technology and access to a variety of execution methods and analysis tools according to consultancy Celent.

Celent said the speed of change in foreign exchange accelerated this year due to regulatory scandals, price dislocations and tepid volume trends. Brad Bailey, a research director with Celent’s securities and investments practice, said in a report that users are trying to find better ways of assessing FX trading opportunities from banks, non-traditional dealer, and platforms.

Bailey added: “Many of the solutions sets for accessing the FX market are now available from single firms, which have become the new global mega-platforms. Concurrently, fintech disruption and blockchain are becoming part of the FX conversation.”

Last month, for example, Thomson Reuters brought together all its FX transaction venues onto one platform. Phil Weisberg, global head of foreign exchange at Thomson Reuters, told Markets Media at the time: “Customers used to come in discrete buckets but there has been a dramatic change in how markets are organised. They prefer common workflows and pre- and post-trade reporting regardless of the variety of execution mechanisms.”

Celent predicts the merger of historically separate FX liquidity, multiple protocols and functionality under a single roof will create opportunities for cross-FX product leverage and a new wave of consolidation.

Thomson Reuters bought FXall in 2012 and Celent said merging dealer and client functionality has been a key feature of recent acquisitions such as the purchase of Molten Markets by EBS BrokerTec, Icaps’s electronic FX and fixed income business, in October 2015. Molten Markets provides foreign exchange technology to asset managers and pension funds.

Justyn Trenner, global head of strategy at EBS BrokerTec, said in a statement: “This acquisition will allow us to address a clear and unmet need expressed to us by real money managers – to achieve demonstrable best execution from a single platform that also addresses the unique workflow challenges they face.”

Celent said: “This will provide EBS Direct with better tools for needed functionality across a spectrum of client types as they consider the future of separate buyside and dealer liquidity moving into the future, and their potential separation from Icap.”

Exchanges have also made FX acquisitions. In October 2015 Deutsche Börse completed the purchase of 360T and the German exchange said it aims to launch a new trading venue for spot FX and potentially, derivatives instruments.

Carlo Kölzer, chief executive of 360T, said in a statement: “The acquisition follows the trending FX industry logic towards global integrated infrastructure providers, adhering to the highest regulatory standards.”

In March this year Bats Global Markets, the US and European exchange operator, completed its acquisition of Hotspot FX. In September Hotspot launched its first matching engine in London, the largest global centre for FX trading. In October Hotspot migrated its US matching engine from New Jersey to the same New York data center that houses Bats’ US markets including its four equity exchanges and two options markets. Rival Nasdaq is also preparing to launch an FX trading platform.

Celent said: “The FX venue space is in a cycle of rebirth and acquisition. Nearly all of the first and second wave FX venues have been acquired, and a next wave is being created with an eye toward merged liquidity within a global FX platform.”

GreySpark Partners, a capital markets consulting firm, said the structure of the spot foreign exchange market is approaching a tipping point with early signs of an all-to-all market emerging.

In a report this month, Trends in FX Trading 2015, Greyspark said all-to-all trading has become a reality in the spot FX market over the past year as both dealer-to-dealer and dealer-to-client venues are altering their trading models so that they can offer access to many currency liquidity pools.

Russell Dinnage, senior consultant at GreySpark said in the report that the structure of the FX market for spot liquidity is approaching a tipping point.

“This is emerging because of increasing levels of similarity between the characteristics of dealer-to-dealer spot FX liquidity pools, which are no longer dominated by market-making investment banks, and the characteristics of dealer-to-client trading venues, wherein the sellside now focuses the bulk of its market-making activities. We interpret these facts as the early signs of an emerging all-to-all market for spot FX trading,” Dinnage added.

Greyspark said banks have developed a new hybrid trading model that combines principal dealing – where the bank buys up the currencies liquidity needed to service client demand on an ad hoc basis – and agency trading, where banks will broker client trades onto trading platforms.

“However, for financial buyside firms and non-financial corporates, spot FX liquidity in an all-to-all marketplace remains fragmented, and there is an imperative for those companies to now develop the same currencies aggregation tools pioneered by banks several years ago.” added the report.

Greyspark explained that many spot FX brokerage platforms have been launched to allow buyside firms and corporates to trade without using a bank but they do not offer mid-price matching of trades against an independent benchmark or the ability to directly exchange and immediately transfer the currencies being traded into bank accounts in the countries where the currencies are needed.

Frederic Ponzo, managing partner at GreySpark said in the report, said: “In the future, peer-to-peer currency exchange platforms will grow in sophistication to a point wherein they will become commonplace as FX trading venues.”

Feature image by higyou/Dollar Photo Club