The electronification of FX is of huge benefit to clients globally who need to deal in the Australian time zone.
“Automated price making and electronic distribution of pricing is better suited to deal with the vagaries of Monday morning open and mid-week illiquidity during the Australian morning session, as much as it hurts an old trader to admit that,” says Gavin White, CEO of Sydney-based multi-asset brokerage and prime services provider Invast Global.
Yet Vinay Trivedi, FlexTrade’s senior vice-president, strategic initiatives, suggests Australian banks have failed to capture a market share that reflects their status as natural Australian and New Zealand dollar market makers due to relatively weak eFX offerings.
He says Australian banks have only sharpened their focus on electronification in the past couple of years and that the impact has been much greater among business-to-business and business-to-consumer brokers. “Quite a few fund managers actively trade FX as an asset class, but accessing liquidity from banks is expensive,” says Trivedi.
“Australian FX brokers have filled this gap by using end-to-end FX technology solutions to give clients access to eFX liquidity at a lower cost, help manage credit (against cash collateral), provide risk-management tools and help generate clients statements.”
Domestic banks face strong competition from non-bank market makers.
A study of the global business spot FX market published by market analysts East & Partners in October found that while non-bank providers accounted for around 11% of business spot FX globally, 25% of businesses in Australia primarily used a non-bank provider to execute their spot FX transactions.
Trivedi suggests non-banks’ share of the market has grown rapidly during the past two years.
“Most of the non-banks have been getting flows in Australia via FX dark pools/ECNs, but defensive pricing stands by the banks have allowed some of these non-bank players to reach out to clients on a direct basis with clearing via prime brokers,” he says.
According to Invast Global’s White, non-banks such as XTX are coming to the fore during periods of illiquidity as their systems and risk appetite appear well developed for warehousing risk.
“The biggest banks are still crucial players across the industry, but some of the smaller ones are responding to the changes by specializing their offering, and in some instances this is leading to a focus on emerging market and regional currencies,” he says.
“The large Australian banks seem to have realised they are better suited focusing on being good at Australian and New Zealand dollars and leaving the other pairs to the non-banks and the large global banks.”
Michael Go, head of FX market development, Asia-Pacific at Thomson Reuters, agrees that non-bank providers are penetrating the market with smart technology and new, client-focused business models.
“Multi-bank platforms, white-labelling and outsourced infrastructure have also been on the increase as regulatory, investor and capital demands begin to impact business and compliance models,” he adds.
In early 2015, Greg Medcraft, chairman of the Australian Securities & Investments Commission (ASIC) expressed concern that Australia was being “picked off” by FX brokerages because of its tolerance of high levels of leverage.
Natallia Hunik, global head of sales at Fortex, observes that ASIC is mulling over further leverage reduction changes and the implementation of maximum leverage caps with regard to contracts-for-difference in particular.
Natallia Hunik, Fortex
“This could lead to a shrinking of the market and may force Australian firms to expand overseas where rules are less stringent,” she says. “It is likely that Australian firms would look to Asia (and southeast Asia in particular) as possible areas for expansion.”
White is more bullish, though, suggesting the impact on the market might be less severe than anticipated in some quarters.
“The Australian retail market is not inherently reliant on high leverage – 100-1 seems to be the norm – well shy of the 500-1 or even 1,000-1 offered in other jurisdictions,” he says.
“New limits would impact volumes, but if the reaction to margin changes in Japan in 2009 is any guide, we could simply see those who cannot afford to put more money in trade smaller sizes more frequently.”
Adam Gazzoli, R5’s business development manager, describes the AUD/RMB cross as the “next big thing” in the Australian FX market, despite data from Peter Lee Associates’ annual FX survey showing that AUD/USD accounts for 89% of FX activity amongst the country’s highest volume customers.
“Australian banks are seeing more Indian rupee flows as trade and investment picks up between the two countries,” he says. “Perhaps that is not such a surprise since Perth is closer to Calcutta than it is to Sydney or Melbourne.
“However, Indian rupee still has a long way to go before it catches up with the China relationship. The Australian dollar is a good proxy for world sentiment on China.”