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Foreign Exchange

FX trading shifts to disclosed platforms as volume falls

Record low volatility in G10 currencies has driven down volume on large FX trading platforms, but a structural market shift is also pushing liquidity providers to quote prices to disclosed rather than anonymous platforms.

Foreign-exchange trading is moving towards platforms that match buyers and sellers in a disclosed environment, as record low volatility has driven an accelerating decline of volume on anonymous platforms, such as EBS Market and Thomson Reuters Matching, according to senior traders.

“As a group of market makers, we are generally now providing more liquidity on a disclosed basis than on an anonymous basis because there is much more visibility on where you are putting prices and who you are trading with,” says Stéphane Malrait, global head of fixed income and currencies e-commerce at Société Générale (SG).

By extension, second- and third-tier banks are more likely to seek prices from disclosed platforms where liquidity is now deeper, he adds.

The structural shift towards disclosed liquidity was brought into sharp focus by Thomson Reuters’ trading volume in April 2014.

Average daily spot volume on its traditional platforms, including Thomson Reuters Matching, plummeted to a multi-year low of $90 billion, but FXall achieved its best-ever performance in the same month, with an average daily volume of $132.3 billion – up 22% year-on-year.

FXall, which Thomson Reuters acquired in 2012, has seen steadily rising volumes during the past year, at a time when its parent company’s traditional FX business has seen mixed fortunes.

FXall’s relationship-based model has a strong footprint among corporates and it claims more of them – as well as institutional clients – are now choosing to connect electronically, which is driving volume growth.

“The number of banks is not going up, but the number of buy-side customers connecting electronically is going up,” says Phil Weisberg, global head of foreign exchange at Thomson Reuters and former chief executive of FXall.

“As execution processes are more heavily scrutinized, there is a general trend to move trading off phones – where it’s incredibly difficult to measure execution quality – to electronic channels where that’s just much easier. That trend has benefited FXall and other dealer-to-client platforms.”

Of the handful of publicly reporting FX platforms, the decline in volume has been most apparent on Icap’s EBS, which saw peak volumes of close to $275 billion per day at the height of the financial crisis in 2008. After steady month-on-month declines since mid-2012, its average daily volume dipped to a record low of $68.5 billion in April.

It was an awareness of the growing demand for disclosed relationship-based liquidity that led EBS to develop its own offering, EBS Direct, which went live last year. The benefits of such platforms apply to market makers and takers, and they are not limited to transparency – cost also plays a big part.

“Cost is becoming increasingly important and everyone wants to find better liquidity at cheaper cost – disclosed platforms, single-dealer platforms and direct bank APIs tend to be cheaper for liquidity consumers because they don’t have to pay brokerage as they do on anonymous platforms,” says SG’s Malrait.

Record low volatility in G10 currencies has undoubtedly also played its part in the dramatic decline of EBS and Thomson Reuters Matching, but while macroeconomic factors might eventually reverse the tide, it seems unlikely anonymous platforms will be able to achieve the dominance they once held in the market.

“We see more and more clients using electronic platforms, so I think this trend will only continue,” says Giovanni Pillitteri, global head of FX electronic trading at Morgan Stanley.

“Record low volatility in major currencies also reduces the need for banks to hedge on the primary platforms, but it doesn’t reduce our clients’ need to trade FX – so volume on interbank platforms is naturally more cyclical than on client-facing platforms.”

Another trend that has made life tougher for anonymous platforms is the increasing propensity of top-tier banks to match trades internally, in effect creating their own internal liquidity pools. That practice is made easier when volatility is lower and banks don’t stand to suffer from sudden price movements if they hold on to a trade for longer than usual.

“Internalization has increased in relative terms as large banks have used technology to analyze all of their incoming activity and the correlation between the flow, finding ways to offset and cross internally where possible,” says Thomson Reuters’ Weisberg.

“But banks need a critical mass of liquidity to be able to internalize effectively, because if the flows coming in don’t offset in a relatively short amount of time, it becomes more efficient to go out to the public market. This is why internalization is more likely to be prevalent in highly liquid currency pairs, such as EUR/JPY.”

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