Multi-dealer trading platforms have been gaining popularity among global FX users for years as efficient vehicles for price discovery, trade execution and the documentation of best execution. However, single-dealer platforms experienced something of a resurgence in recent years. FX users turned to single-dealer platforms in part to avoid the impact of new regulations in the United States that were affecting multi-dealer FX platforms. Users have also been employing single-dealer platforms to access increasingly sophisticated algorithms provided by individual banks.
The majority of the 1,612 top-tier foreign-exchange users participating in the Greenwich Associates 2015 Global Foreign Exchange Study expect to move volume to multi-bank platforms in a big way. Two-thirds of respondents plan to increase their activity on multi-dealer platforms in the coming year. That share is up from the 57% of users predicting an uptick in multi-bank platform usage in the 2014 study. Nearly 85% of corporate FX users interviewed expect to shift activity to multi-dealer platforms in the year ahead.
Currently, multi-dealer platforms capture about half of global FX customer trading volume, with phone execution accounting for close to 20% and single-dealer platforms attracting less than 15%. Comprehensive data about FX trading, including overall trends in electronic trading and choice of specific execution venue is available from Greenwich Associates. For the first time, Greenwich Associates annual research includes competitive data on dealers, including market share in electronic and voice trading and qualitative rankings of dealers’ e-trading platforms and capabilities.
Regulations influencing choice of trade venues
In 2012 and 2013, the implementation of new U.S. regulations slowed the industry-wide movement toward multi-dealer platforms. In particular, new derivatives rules and regulations requiring multi-dealer platforms to register as SEFs drove trading volume to single-dealer platforms as clients looked to minimize the impact of new regulations on their trading process. Even at the time, however, we projected that this move to single-dealer platforms was a temporary phenomenon that would again reverse itself once the regulatory picture became clearer.
That reversal seems to be at hand, and somewhat ironically, regulation is again playing a key role. Although the primary drivers of trading flows to e-trading platforms remain specific to FX users’ needs and macroeconomic conditions, the impact of recent scandals and regulatory actions appears to be hastening the flow of trading volumes to e-trading systems generally and to multi-dealer platforms in particular. Last year, banks paid more than $3 billion in fines in connection with the FX “rate-rigging” scandal. Across the industry, banks’ foreign-exchange units are devoting increasing amounts of attention and resources to regulatory compliance. Under intense scrutiny, traders and salespeople are avoiding any activity that could even give the appearance of impropriety. They have become less comfortable providing clients with trade ideas and market color based on their view of the activities of other clients and the market as a whole. As a result, FX users are deriving less value from telephone interaction with sell-side traders and salespeople and, therefore, have less reason to direct trading volume to a particular dealer that has provided them with market or trading insights. Given these changes, it makes sense that users would be open to moving greater amounts of trading volumes to multi-dealer platforms.
Single-dealer platforms will maintain a certain level of trading volume because they fill a specific and important role for FX users. In particular, algorithms are becoming an increasingly popular part of FX trading. While algo trading is still gaining traction throughout the FX market as a whole, our data shows that nearly a quarter of the very largest and most active FX market participants are employing algorithmic trading. For now, the best algorithms can be accessed only through proprietary bank systems.
E-Trading platforms attracting new customers
Three-quarters of customer-generated foreign-exchange trading volume was executed on electronic platforms last year – a share that was essentially unchanged year-over-year. Japan remains the world’s most electronic market, with 86% of trading volume executed through e-trading systems. Although the overall proportion of FX volume captured by electronic platforms worldwide has stabilized for the moment, Greenwich Associates data reveals clear signs of e-trading’s continued growth. For starters, the share of FX users around the world executing at least some portion of their trading volume electronically ticked up from just over 70% to almost three-quarters. E-trading platforms are attracting new users in areas in which past penetration levels lagged, such as Canada.
E-trading platforms are also gaining ground among corporate FX users. In the past, many corporate users—who are often less active than their financial counterparts—were content to execute their smaller volumes through voice trades with their own banks. But in 2014, the share of corporates using electronic trading platforms climbed above 60%, and the share of corporate trading volume executed electronically reached 57%.
Based on all these trends uncovered in our annual research, FX market participants looking ahead in 2015 should expect continued incremental growth in e-trading as new users sign onto platforms for the first time and existing users continue to ramp up the share of their overall volume routed to electronic systems. As overall e-trading volume gradually increases, multi-dealer platforms will capture a growing share of this dynamic business.
Between September and November 2014, Greenwich Associates conducted in-person and telephone interviews with 1,612 financial professionals using foreign exchange at large, top-tier corporations and financial institutions in North America, Latin America, Europe, Asia, Australia, and Japan. To be considered top tier, a firm must meet one of the following criteria: be a fund manager, hedge fund, central bank, retail aggregator, Fortune Global 500 firm, or treasury center; or have reported trading volume of more than $10 billion; or have sales of more than $5 billion.