Chris Hall
Chris Hall

Making sense of the FX connectivity conundrum

Foreign exchange is the most inclusive of financial markets and has used technology to lay out the welcome mat to all-comers. Initially the preserve of the inter-bank market, electronic platforms have been developed for corporates, asset managers, hedge funds and now retail investors. In democratising foreign exchange, the banks have set themselves the challenge of supplying liquidity to multiple market sectors competitively, while the buy-side has been quick to realise that best use of technology a critical factor in obtaining best price.

That new players have gladly accepted the banks’ invitation in droves is evident. The global FX market will reach almost US$3trl in average daily turnover when the Bank for International Settlements’ 2007 triennial survey is released – a substantial increase on BIS’s 2004 estimate of US$1.8trl. Much of this growth is the result of buy-side activity. According to BIS figures, the banks’ share of FX trading activity fell from 64 per cent in 1995 to 53 per cent in 2004; trading activity by non-bank financial institutions rose from 16 per cent to 33 per cent over the same period. With hedge funds and CTAs reportedly ploughing more volume through ECNs, it would surprise no one if the BIS were to report a 50:50 split in the 2007 market. Although the FX market’s migration to electronic trading is overwhelming, it is far from complete. Just over half of all FX trading (56 per cent) took place electronically in 2006, with the inter-dealer market (66 per cent) still leading the...continued

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