Axel Pierron
Axel Pierron

Model-based versus keyboard traders: a difficult FX sell-side balancing act

The development of electronic trading and especially electronic platforms in the forex market has driven out the smallest banks from the market. Electronic trading has increased visibility on the market and reduced volatility, drying out the margins. Today, the FX market is a business of high volume and low margins, which leaves room only for very large institutions and specialists. Indeed, there are fewer banks involved in this market, which is now in the hands of the largest banks, which are becoming bigger and bigger.

In the FX market there are many “buy-side” participants from commodity dealers to asset managers, hedge funds and corporates, that are active in this market for disparate reasons, with different needs and ways to conduct transactions.  If we look at the market of electronic trading platforms in the FX market, we can clearly see that those platforms are developing functionalities that meet their customer segment requirements- either asset managers, corporates or hedge funds. From a sell-side perspective, we can broadly divide buy-side institutions operating in the FX  market into three segments : Large hedge funds, quantitative trading firms and active currency managers. These participants have investment strategies that require them to trade FX frequently and to seek deep liquidity, therefore they now need to receive the same narrow spreads available on the inter-dealer market; in fact they want to be part of the inter-dealer market rather than depend on bank’s quotes. In...continued

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