Electronification of Asian FX on the rise

By:
Paul Golden
Published on:

Fuelled by regional treasury centres, electronification of FX is gathering pace in Asia.

Research conducted last year by Greenwich Associates referred to a lull in electronic FX trading growth in Asia.

Although the amount of FX volume executed through electronic systems increased in 2013, the rate of growth was lower than for the overall FX market and the percentage of market participants using electronic systems remained unchanged from the previous year.

Abhi_Shroff-160x186
  There is naturally more need to use sell-side services in Asia

Abhi Shroff,
Greenwich Associates

Fast forward 12 months and Abhi Shroff, managing director head of Asia-Pacific and Middle East at Greenwich Associates, says electronically traded FX volumes in Asia are on the rise, particularly for vanilla FX, with 70% of total volumes among buy-side financial institutions and 26% of corporate volumes traded electronically.

Asian regional treasury centres of multinationals are helping increase the pace of electronic FX adoption, adds Jim Kwiatkowski, global head of transactional sales at Thomson Reuters.

"Asia will follow a similar development path to Europe, although as with all technology adoption in Asia, the pace of change should be faster," he says.

Jacqueline Liau, Asia-Pacific head of FX e-distribution and global head of FX prime services at HSBC, also refers to corporate regional treasurers who have been predominantly trading FX electronically in EMEA setting up treasury centres in Asia with a view to implementing electronic trading platforms.

"We are seeing increased demand for algorithmic execution products, and electronification has also created a growing need for transactional FX products," she says.

Electronic trading usage rates in Europe are higher, but Greenwich Associates expects Asia to close the gap, says Shroff, adding: "Given the fragmented market and local nuances, though, there is naturally more need to use sell-side services in Asia, where clients still want sales, research and trading support even if they are trading online.

"Most Asian clients tend to also do at least some volume over voice."

David Clark, chairman of the Wholesale Markets Brokers’ Association, suggests non-deliverable forward trading could be enhanced by electronic platforms.

However, while spot electronic FX trading in Asia is fairly well-established – approximately $408 billion per day in 2013 – Asia still lacks regional platforms along the lines of Bloomberg FXGO, FXall or 360T and this has slowed growth in outright forwards as well as electronification, even though the former has doubled in value since 2007.

Regional banks

That is the view of Javier Paz, senior analyst Aite Group, who says it is unclear who will take the largest market share in the process of electronification in Asia.

"Non-Asian players are busy revving up spending in the region to become better known, including setting up offices in Tokyo, Singapore and Hong Kong," he says.

"Meanwhile, regional banks are becoming more keenly aware of FX as a separate business and are taking steps to understand the tools and market knowledge required to compete."

The only regional banks to make the Euromoney 2015 FX survey e-trading top 20 were Nomura and National Australia Bank, with a market share of just 1.06% and 0.68% respectively.

Yet according to Shroff, increased electronic volumes create opportunities for regional banks in Asia to grab a bigger share of the FX market.

"Regional banks have more people on the ground and they are winning more business from corporates," he says. "On the flip side, they don’t have the global capability and scale and will therefore find it difficult to compete on electronic trading platforms with global banks."

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This suggests if regional banks are to make inroads into the dominance of Deutsche Bank and Citi, they will be depending on increased capital commitments under Basel III forcing global banks to re-evaluate their customer relationships with a view to return on capital employed.

In the scenario where global banks start to reduce the number of relationships they support in Asia, local banks should be able to pick up business, adds Thomson Reuters’ Kwiatkowski.

CME Group executive director of FX products Will Patrick refers to a 44% increase in average daily FX volume in the Asia region for his firm in 2015 compared with last year.

"Bank of China Hong Kong is a market-maker in our Chinese renminbi futures contract and we have a number of Asian-domiciled banks already active in our FX markets," he says.

As regulation around electronic FX trading of the Chinese onshore currency opens up, HSBC’s Liau expects to see regional banks trying to get into the space.

However, she acknowledges as the investment required to establish and support this type of technology is high, regional banks might consider white-labelling vendor platforms and will also need the larger banks to supply them with e-liquidity.