All-to-all spot FX trading sees progress

In 2013, capital markets consultancy GreySpark Partners suggested the blurring of the lines between the inter-dealer FX market and the dealer-to-customer FX market would create an all-to-all trading model in which non-bank participants would trade among themselves.

Managing partner Frederic Ponzo pointed to Thomson Reuters’ acquisition of FXall as a precursor to the development of one all-encompassing trading venue, with EBS’s development of trading rules to satisfy banks’ concerns over high-frequency trading opening up the platform to buy-side firms.

He also said that dealer-to-customer venues were likely to move towards the all-to-all trading model, allowing banks to source, not just provide liquidity, and predicted that around half a dozen all-to-all platforms would emerge.

Russell Dinnage, GreySpark Partners

Two years on, GreySpark senior consultant Russell Dinnage – co-author with Ponzo of new report Trends in FX Trading 2015: The Decline and Rebirth of the Inter-dealer Spot Market – observes that in the case of the spot FX market, the prediction that the structure of the market would evolve into an all-to-all model has come true.

“In the context of trading platforms in general, all-to-all is defined as an equities-like market in which all counterparties share unrestricted access to a liquidity pool either anonymously or non-anonymously,” he says.

“It remains true that there are no pure-play spot FX trading venues yet, but through the increasing use of prime brokerage relationships and prime brokerage technology platforms, the leading inter-dealer platforms and many dealer-to-client spot FX trading platforms are offering users access to liquidity pools wherein they can trade on: anonymous bank-to-bank liquidity and pricing; anonymous, disclosed or relationship-based all-to-all liquidity; and anonymous or relationship-based client-to-client liquidity.”

However, as for the prediction that all-to-all would be the dominant market model no later than the end of next year, ITG director Jim Cochrane observes that while it is possible to trade between buy-side clients, there still needs to be an intermediary such as a prime broker.

Jim Cochrane, ITG

“Banks are trying to avoid acting as a principal in transactions, which makes the possibility of the proposed blurring much easier to believe,” says Cochrane. “Matching and dark pool trading already exist and buy-side firms can make markets in FX. Will they become the norm by 2017? Probably not, but great advances will be made in the next year or two.”

FX remains very much an over-the-counter trading environment, says FastMatch CEO Dmitri Galinov, adding: “Unless there is significant pressure from regulators globally for FX dealer community to migrate to an all-to-all model, I do not see a natural migration by 2017.”

If the number of banks and brokers moving to agency roles rather than principals materially increases, the progression to all-to-all trading could occur more quickly, says Bill Goodbody, senior vice-president, head of FX at Bats Global Markets.

However, he also feels that having a choice of all-to-all, many-to-many, one-to-many or single-dealer/point-to-point models is important.

“As we have seen in equities, a purely all-to-all market has a tendency to bring down trade sizes, which is not something FX market participants necessarily want,” he says. “We think a hybrid model where platforms adapt liquidity to suit the customer and their trading intentions are the best placed to sit in the middle of that environment.”

Bill Goodbody, Bats

GreySpark’s Dinnage acknowledges all-to-all is not a reality in FX options and non-deliverable forward (NDF) markets, adding: “FX options remains a principal-only business warehoused almost entirely on bank balance sheets. There is also no dealer-to-dealer market for FX options, although some innovative technology platforms such as Dion Global Solutions' differentia system represent attempts to develop market share in that space. 

“There is also a dearth of non-bank FX options liquidity providers, with only a few hedge funds offering FX options liquidity to the buy side.”

With NDFs, there is no all-to-all market structure for trading the contracts, but the level of e-trading of the instruments is expected to grow in the future, Dinnage concludes.

“Long term, a large percentage of current levels of NDF liquidity traded OTC will be transferred into future markets wherein the contracts will become standardized and exchange-traded,” he says.