ALREADY THE LARGEST financial market, foreign exchange is growing fast. Results of the Bank for International Settlements' sixth triennial central bank survey of FX and derivatives market activity, published at the end of last month, show a large increase in trading volume in traditional foreign exchange markets.
Average daily global turnover in traditional FX markets rose to $1.9 trillion in April 2004, up by 57% on April 2001 at current exchange rates and by 36% at constant exchange rates (see table). This hefty increase more than reverses the fall in global currency trading volumes between 1998 and 2001 that accompanied the introduction of the euro.
Following three years of negative to flat equity market returns, investors have been looking for new markets to place their funds in. Consequently FX has emerged as a legitimate asset class alongside equity and fixed income, and specialist currency-only funds and hedge funds have flourished.
That's good news for banks. But as more types of investors seek alpha from currencies, demand for greater transparency and maximum efficiency continue to preoccupy FX service providers. The market infrastructure is gearing itself towards this changing investor base.
Delivering the inside price
Last month, Reuters launched a price feed called Reuters FX Spot View that will enable buy-side participants such as asset managers, hedge funds, corporates and CTAs to access real-time prices on the leading FX currency pairs derived from the professional inter-bank market via Reuters Dealing 3000 Spot Matching service.
The new price feed offers a broad range of transactional data across 15 major currency pairs, including hourly snapshots, regional ranges, real-time derived bids and offers and displays of the top five highest and lowest trade prices of the day.
Although indicative FX rates have been available for many years, investors and corporate treasurers have suffered from lack of access to the core dealing rates.
"In the last two years, there has been a renewed interest in foreign exchange and we have simply responded to customer demand," says Robin Poynder, global head of foreign exchange customer solutions at Reuters. "We had extensive consultations with all types of foreign exchange participants and this new service is part of the evolution we are seeing in the foreign exchange marketplace."
The bank-backed FX trading network EBS has been moving in the same direction. EBS started life as a partnership of the world's largest FX banks, seeking to facilitate FX trading through a variety of products. Last year, it launched a new trading network called EBS Trader on Bloomberg, Reuters' arch-rival. EBS Trader enables users to view spot prices, chat electronically and complete trades on a conversational basis. The dealer-to-client trading platform takes interbank prices, adds a spread through an algorithm, and displays them to end-users, including funds and corporates.
In September, EBS announced its latest plans to test a new system aimed at facilitating currency trading by non-bank professional FX traders that trade with high frequency in FX, such as hedge funds, CTAs and futures commission merchants.
EBS will enter into a detailed research phase starting in December 2004 for a product to provide this non-bank professional trading community access to EBS Spot system, focusing on US and UK funds.
Participation on EBS Spot will provide access to increased liquidity and all the benefits of electronic trading on EBS, provided through the EBS prime banks. During the pilot phase, five EBS prime banks will work with selected customers to gauge the appetite for the service.
"FX remains a highly liquid, increasingly non-cyclical asset class and there is a significant appetite in the professional trading community for access to the optimum pricing and liquidity in this market," says Jack Jeffery, chief executive officer at EBS.
These new products have varying advantages but the fundamental driver behind them is to capture business from a growing range of new market participants.
"These new FX market players are pushing for more instantaneous transactions," says Stephen Best, global head of e-commerce for JPMorgan's global currency and commodities group. "Human beings are slowly being taken out of the equation, opening up many opportunities for the sell side to add value with more sophisticated, tailored products. Previously, only sell-side participants used Reuters and EBS products but we are now seeing more activity outside the broker market. This has opened up more avenues for growth, and Reuters and EBS are simply responding accordingly, taking advantage of this new client base."
Abundance of new products
And the list of new products being offered to customers in the FX market continues to grow. Citigroup announced at the end of last month that its CitiFX Benchmark will be offered to clients on Currenex, the FX and money market trading technology solutions provider. CitiFX Benchmark enables international corporates, other treasuries, and equity/fixed income fund managers to trade currencies at independently sourced rates. The Benchmark methodology is designed to ensure a reliable reflection of the currency market.
The technology firm Lava has responded to the growth in FX by extending its equity trading products to FX. Its product LavaFX was due for launch at the beginning of this month. It will provide a central limit order book of live dealable prices, full price transparency and depth of book. The system will aggregate multiple sources of FX liquidity into a single access point, which can be tapped either via a LavaFX user interface or through a FIX API geared towards model-driven and programme traders.
"The preoccupation with transparency lies fundamentally with the buy-side customers that are putting increasing focus on FX," says JPMorgan's Best. "Model-driven hedge funds for example have an increasing desire for direct connection, as they need to have an understanding of pricing in order for their models to work. On the other hand, real-money managers are also concerned about straight-through processing, as well as price."
One key question for all these new products is cost. Barclays Capital is looking to broaden further the currencies it trades electronically. It presently offers over 300 crosses and 45 currencies online and is keen to expand this in Asia Pacific, South America and central and eastern Europe. It also wants to develop its cross product offering. This is the electronic capability to offer FX, commodities, futures, fixed income and equity products on the same platform. Customers increasingly want to transact multiple asset classes on one platform.