Brad Bailey
Brad Bailey

FX Trading 2.0

Brad Bailey is a research director with Celent’s Securities and Investments practice

This year in FX is about engaging with the right type of liquidity for the specific needs of each FX trader. The market is in state of macroeconomic volatility but it regaining its center following the disruption of the Swiss National Bank (SNB), and the generational dislocation it created a year ago, and then the devaluation of the Chinese Yuan last summer. 

At the same time, the regulatory environment, a changing liquidity world, more diverse technology offerings, and business model pressures have accelerated change. The year was also marked by the next wave of major strategic positioning, with global exchanges positioning themselves in spot FX. At the same time, the trend of interdealer platforms acquiring platforms and tools to better service a broader swath of FX traders.


The cycle of change in FX is rapid, and the overall ecosystem outside the major and minor dealers incorporates a variety of vendors across the spectrum: data, analytics, TCA, tools (connectivity, aggregation), nonbank liquidity providers, FX electronic venues with focus on institutional space, and the processing space (reporting, allocations, and clearing/settlement). 

The TCA grouping provides firms that offer tools for providing a framework for TCA in a variety of timeframes. The tools group includes firms that provide the key connectivity, or gateways to liquidity via LPs, exchanges, ECNs, and point-to-point liquidity solutions. Furthermore, they offer aggregation of pricing from venues and dealers. The processing grouping attends to straight-through processing in FX. 

London Daily Average Turnover: A drop of 21% year over year from October 2014
London Daily Average Turnover: A drop of 21% year over year from October 2014
Source: Bank of England (BoE)

Some key themes in FX:

• The cost of priming continues to be major factor in how a large swath of traders engages with liquidity. As prime brokers invest in better tools for managing allocated credit across venues, and move toward advanced pre-trade risk functionality, this situation will continue.
• Global regulation surrounding spot FX has driven a new desire for transparency driving new data providers, compliance tools, analytics, and next-generation TCA.
• Legal ramification from the fixing scandals has altered trading and communication in FX and is one of the factors driving a new wave of tools such as secure messaging, compliance-friendly IM platforms, and voice capture systems.
• Trading volume is being dispersed and fragmented over a greater number of venues driving the need for better and easier connectivity, aggregation, and access to colocation.
• The continued automation, combined with the ease of trading out of major FX pairs, has only increased the level of dealer internalization.
• Alternative (or nontraditional) liquidity providers are increasing their interaction with flow across the market and continue to become a more substantial component of trading volume, across the platform landscape and point-to-point liquidity spaces.
• Regional banks continue to leverage technology, in many cases via full-service (i.e., white-label or broker in a box solutions) to protect and grow their market share.
• Wholesale retail flow continues to look for the right type of relationship and venue to engage for liquidity.

The FX market continues along the trend of greater interaction between traditional major FX dealer, smaller dealers, and nontraditional liquidity providers via direct interaction and trading on multi-dealer venues. The growth in specialized FX liquidity provision continues, with traditional electronic market makers, HFTs, and specialized hedge funds continuing to build technology and hire sell side FX talent. Defining and developing additional tools for best execution and TCA continue to be key trends. Richer analytics and API-delivered data sets is another way FX providers are serving their clients. Liquidity and tools are merging by the day. Formerly distinct liquidity is resident in the same firms, and those firms are continuing to merge the delivery of their offerings. There is a growing technology universe in each part of the pre-trade to settlement value chain.

FX Ecosystem: A lot of different pieces
FX Ecosystem: A lot of different pieces
Source: Celent


A new wave of consolidation is taking place. We are witnessing the birth of megaplatforms that are buying trading technology and access to a variety of execution methods and analysis tools. At the same time the nature of venue trading is quickly changing, as the prime brokerage model evolves and “dealers” grapple to have direct contact with their clients. The commoditization of FX trading is driving demand to embed client tools into an overall offering.

Recent moves give some sense of how competitors have been viewing the evolving landscape. Essentially, this wave started in 2012 when Thomson Reuters brought FXall, with client side liquidity, and put buy side middle and back office functionality under the same roof as the Thomson Reuters dealer platform. The theme of merging dealer side and client side functionality has been a key feature of recent acquisitions. The most recent example of this was the fall 2015 acquisition of Molten Markets by EBS; which will provide EBS Direct with better tools for needed functionality across a spectrum of client types as they consider the future of separate buy side and dealer liquidity moving into the future, and their potential separation from ICAP.

Schematic of FX Trading from the Front Office to Processing
Schematic of FX Trading from the Front Office to Processing
Source: Oliver Wyman, Celent

The dealer-to-dealer venue space has reacted to changes across the regulatory landscape to acquiring client venues and building a holistic suite of liquidity. A key in these acquisitions is the ability to service a broad section of the client space, including: asset managers, hedge funds, regional banks, wealth managers, and corporates. The merging of dealer and client liquidity pools within the same platform is here; actual, increased interactions between these liquidity pools also continues to blur. The two largest dealer-to-dealer pools have both acquired into the client side-EBS with Molten Markets and Thomson Reuters with FXall. This is allowing global megaplatforms to deliver FX through a single portal for their client consumption, complete with robust access to multiple liquidity pools, a variety of market protocols, pricing, analytics, and TCA.

Another theme this year is the continued demand for growth by large exchanges expanding their asset classes to FX, a bet on the continued growth and a future in FX that consolidates liquidity across the FX product set. 

FX Deals Bringing Everyone under the Same Roof
FX Deals Bringing Everyone under the Same Roof
Source: Celent

Expect to see more strategic alignment, for instance, last year there was considerable noise around FastMatch doing a deal. Where there is smoke there is often fire! Look for additional strategic alignments and deals in the coming months.

The complexity of the FX ecosystem is increasing. FX market participants are looking to regain the center following the shocks of scandal and market dislocations. These forces are increasing the demand for transparency and tools around pricing and engagement with a variety of liquidity sources, as well as tools for acquiring accurate pricing and properly, analyzing price and trading information.

From the vantage point of any participant in FX, as a principal market, the view of the market is based on how many price makers, venues, and sources of dealer data are incorporated. For certain players, the more they can aggregate/sort and price across liquidity venues, across time zones, the greater their informational advantage. One side of this spectrum are firms that combine access to low speed infrastructure, colocation, microwave market data/orders, and, regardless of platform speed rules, will have the ability to profit in millisecond space. Most market participants, however, have to accept that their frame of reference will be defined by the dealers they engage with, or the venues they choose, and deciding how to engage with high-speed fleeting liquidity (or not to engage) is a choice they will have to make. 

The view of the FX market is very much a function of how a firm interacts with the market. Another way of stating this is, each firm that engages with the market has to ask itself whether it needs to connect to another venue. For a firm that solely gets its view of FX from a single point of liquidity, the chance that some form of best execution occurs is greatly diminished. The other side of this is how many LPs, of varying types need be engaged to consider that they have the proper and current state of FX pricing.

Furthermore, is it necessary for a firm with this route to liquidity to then bring in additional views of the market from other venues, or is the view created by dealers in competition sufficient to provide the insight on the state of the FX market? Of course, in a diverse, principal market like FX, there will be no total view of the state of the market. Participants must choose the frame of reference for establishing their view of the market from the LPs or venues they choose.


One area to continue to watch is the balance between trading in listed FX derivatives, spot and the methods of engaging disclosed or anonymous liquidity. We continue to see a drive for access to not only more liquidity, but the right liquidity. For certain traders that will come from direct relationships with banks, for others that will be through aggregated liquidity form a variety of banks or non-traditional dealers. 

A key theme here is the ease in building connectivity for rapid deployment and engagement with liquidity. At the same time, we will carefully watch the macroeconomic conditions in China, for clues to the degree that the yuan will impact overall FX volumes. 

Another, exciting, but nascent area is the implication of blockchain for clearing and settlement in FX pairs as well as whether cryptocurrencies like bitcoin will gain transaction and become a more important component of FX trading. Especially if a major central bank, like BoE, were to launch a crypto-sterling currency!