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Single-dealer platforms set to dominate FX market, report says

by Russell J. Dinnage

Single-dealer bank FX platforms are best positioned to capture a greater share of FX trading volumes at a time when volume growth is beginning to plateau, according to a report by Oliver Wyman Group consultancy Celent.


The report says that when the Dodd-Frank Act was signed into US law in 2010, many market participants believed that single-dealer platforms (SDPs) would lose market share to multi-dealer platforms (MDPs), such as FXall, FX Connect and Bloomberg, as more trading gravitated to that model, despite the fact spot and forward trading did not fall with the regulations.

That perception has now changed, says Celent, with the leading FX banks increasing their investments into SDPs, making them the primary means for client transactions. Now, the leading SDPs will compete for ways to better integrate a client’s FX workflow needs into the platform’s trading operations, according to the report.

Still, Celent warns, the market is highly competitive and has seen substantial growth in recent years beyond the top-tier banks that were early entrants into the electronic space.

"The growth of SDP volumes is guaranteed, but the success of individual SDPs is not," says the report.

Specialities in pre-trade enhancements, better post-trade offerings and client access through multiple channels, including voice, into the electronic platform hold the key to the dominance of one SDP over another, according to the Celent report.

"Unlike the execution-centric approach of the MDPs, the SDP approach will be more client-centric and involve easy end-to-end trading," says the report.

In this space, the stats do not lie. According to Bank of England data cited by Celent, SDPs have overturned rapidly growing MDP volumes from several years ago to post 54% of all FX transaction volumes in the UK in 2012.

Comparatively, MDPs contributed 46% of all UK FX volumes so far this year, says the Celent report.

In 2013, Celent says the share of all UK FX volumes between SDPs and MDPs will either remain in favour of the single-dealer venues or shift further in their favour.
 

 SDPs vs. MDPs in the fight for FX volume share

 
 Source: Bank of England revised data; Celent

In September, Deutsche Bank unveiled a new API for its FX trading platform Autobahn called Rapid after three years of development.

Rapid is set to substantially increase client trading volumes, and the bank says it hopes to have between 50 and 100 clients using the facility by year-end.

In January, Citi launched the latest version of its SDP called Velocity 2.0 offering clients prices that update 92 milliseconds faster than on any other SDP.

Barclay’s is planning to release enhancements to its Barx platform later this year, sources say.

And UBS is developing a new SDP platform called Neo.

Meanwhile, the MDP space remains dominated by six players – FXall, Thomson Reuters, FX Connect, Reuters Dealing 3000, Direct and 360T – that provide 90% of the volumes, says Celent.

However, with the barriers to entry into the FX dealer platform space falling by 80% during the past seven years, there is more space than ever for new MDPs in the market, says the Celent report.

Between May and June, a plethora of new MDPs emerged, including FxSpotStream, traFXpure, Molten Markets, FastMatch, FTSE Curex, smartTrade Technologies’ LiquidityFX and JFX.com’s Jiffix Markets.

With competition in the MDP space tighter than ever, the Celent report says that a platform launch can only succeed if it builds volumes quickly – especially in spot FX flow.

However, success will breed envy among the incumbent platforms, and they will likely begin working soon to gobble up the competition where possible, says the Celent report.

This means that new MDP entrants must work to specialize where possible in bespoke services for FX options and other products, developing expertise that could guarantee their long-term survivability or attractiveness to potential buyers, the report concludes.