Single-dealer platforms (SDPs) increased their daily share of spot transactions by almost half between April 2019 and April 2020, according to the Bank of England’s semi-annual foreign exchange turnover survey.
In April 2019, SDPs accounted for 14.1% of these trades – just under $123 billion out of a daily total of more than $879 billion. This year that percentage rose to 21%, with SDPs trading a daily average of $163.6 billion out of a total of $776.2 billion.
Over the same period, the average daily volume of spot transactions conducted on multi-dealer platforms (MDPs) fell sharply, from more than $245 billion – 28% of the market – to just over $77 billion, or just 10% of daily volume. Even allowing for the reduction in volumes recorded in the latest survey, this is a significant drop.
“There are many factors contributing to the increased volume over SDPs and disclosed channels,” says Alan Schwarz, CEO FXSpotStream. “One of these is the migration from anonymous channels driven by concerns with respect to market impact and information leakage. Another significant factor is the ongoing focus on reducing the cost of execution for liquidity providers.”
Selective onboarding
The market dislocation in March also played a significant role in the change in volumes. “The global shock of the pandemic, the subsequent macroeconomic stimulus and oil market volatility saw a flurry of initial activity, which was followed by a period of relative quiet on MDPs,” says EBS’s global head of liquidity management, Hugh Whelan. “The main reason for this was that the majority of hedging had been executed in March and market participants appeared to be waiting for the market to stabilize.”
There really is no benefit to a bank seeing a client over many channels
Alan Schwarz, FXSpotStream
“The more risk the banks are willing to hold [the more they choose to internalize], the greater the activity on SDPs,” he says.
“In reality, the buy-side clients choose where and how to trade and the dealers only have so much leverage to force them to trade on SDPs, given the numerous alternatives,” says the head of one multi-dealer platform.
He adds that he is not aware of any movement on MDP brokerage fees, although he refers to a lack of transparency on pricing among many platforms. “As for whether other dealers will follow the lead of Citi and terminate some of their multi-dealer platform connections, the market has become so fragmented that at some point firms will have to be selective.”
Market participants agree that dealers have become more selective when onboarding new platforms. “There really is no benefit to a bank seeing a client over many channels,” claims Schwarz. “If a bank liquidity provider has access to a service that offers more for less and allows it to service its clients as needed, why not reduce the number of channels it has to integrate to and maintain? If Citi is looking to reduce the costs to its business and this results in a lower execution price for the taker, I would expect similarly situated liquidity providers to evaluate the platforms they connect to.”
SDPs can offer innovative client solutions and unique content
Simon Jones, 360T
Whelan suggests the platform connections banks maintain will vary depending on the regions they operate in and the preferred trading style of their clients. “For example, if volatility returns to the market, executable streaming price and request for quotation trading will be increasingly important as clients look to secure liquidity,” he says.
360T chief growth officer Simon Jones acknowledges that dealers such as Citi are taking a hard look at how they interact with their clients and deciding that only those who have invested in areas such as code compliance and contingency planning can represent their access point to their client.
However, he says growing volumes on his platform indicate that single- and multi-dealer platforms can co-exist. “While pricing will always be better in an aggregated form, SDPs can offer innovative client solutions and unique content which an MDP simply can’t match.”
