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.
“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|
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.