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Non-bank FX market makers grow in Asia

Curbs on risk-based activities and internalization of client trades are pushing growth in non-bank market making in Asia, but such activity is not without challenges.

Research published by East & Partners in December found that leading non-bank providers had made notable market-share and wallet-share gains in the Asian FX market.

The Asian Business Foreign Exchange Markets (ABFX) report showed that Asian corporates in four key markets had significantly decreased the percentage of FX business they did with nominated primary providers.

The sharpest decline was recorded in Hong Kong – where average spot FX wallet share for primary providers fell from 27.1% in August 2013 to 22.1% in August 2015 – although the lowest market share (18.6%) was recorded in Singapore.

Non-bank market makers have yet to grab meaningful market share across Asia as a whole, with the Euromoney FX Survey 2016 noting the top 10 players in Asia remain banks, while non-bank FX player XTX Markets secured a place in the top 10 in the overall market share.

Arin Ray-160x186

Arin Ray, Celent

The players in Asian markets – local subsidiaries of global or regional institutions or competitors of international banks – are mature in terms of their trading strategies and technology practices, observes Arin Ray, an analyst with Celent’s securities & investments practice.

Therefore, he says, they are more likely to be agnostic about liquidity sources as long as they can access liquidity and trade at lower cost and faster turnaround time.

Simon Winn, head of sales Asia-Pacific at EBS BrokerTec, acknowledges there are a growing number of non-bank players contributing liquidity in the G3 (US, Japan and the EU) space who are starting to look at Asian currencies as an additional area of revenue.

However, while they might eventually become market makers and add liquidity, he warns that their pricing ability is dependent upon a bifurcated market where data points from different sources are simultaneously available.

Non-banks are keen to capitalize on demand for local liquidity from clients looking to minimize latency and access better execution, but to gain major market share within the Asian market they need to work on improving internal order processing time, reject ratios and their overall depth of book, suggests Natallia Hunik, global head of sales at Fortex.

Natallia Hunik, Fortex

“Retail traders don’t care about the source of their liquidity,” she adds. “However, that is not the case where Asian brokerages are concerned – they are extremely focused on liquidity and pricing. The vast majority of margin FX brokers in the region are internalizing their client flow and use a mix of bank and non-bank sources to optimize results.”

According to R5 CEO Jon Vollemaere, while non-bank market makers in Asia are more aggressive market makers than banks, they face the challenge of the more conservative nature of Asian markets for new technology adoption, coupled with a general dislike of last look.

“In the major currencies, they will be able to adopt the same strategies they have used in the rest of the world – in a commoditized market a significant proportion of customers will trade on best price, irrespective of both the region and whether it comes from a bank or a non-bank,” he says.

“This is more difficult in emerging-market FX, where the markets have traditionally been dominated by voice traders. In a market where prices can gap, clients expect their relationship banks to step up to provide them with a price.”

Many Asian-based bank traders do not like the idea of non-bank market makers coming onto their patch – meaning they can be reluctant to connect – and there is also the technical hurdle of getting liquidity to local users.


Jon Vollemaere, R5

FX trading in Asia is much more about relationships, and while the market will slowly change as technology and business models evolve, Vollemaere says this will not happen in the same way as the US or Europe.

Celent’s Ray adds that large banks moving out of the market, adoption of electronic trading and lower cost of technology development are also helping local and regional banks to develop their own e-FX trading portals and build their franchise – sometimes in competition with global banks and at other times to pick up the businesses left by their global counterparts.

“These regional banks are likely to give good competition to non-bank FX platforms,” he says. “We are likely to see the emergence of all-to-all trading platforms where the traditional distinctions blur and increasing participation of all types of players – banks, dealers, asset managers and hedge funds – as counterparties to these platforms looking for optimal pricing and execution options.”

China is the big prize that everyone is targeting, concludes R5’s Vollemaere.

“I expect China to create its own model of trading and settlement,” he says. “The Chinese liquidity map is going to change this year as various long-term projects come to fruition and as part of this I expect to see the first Chinese-based – or Chinese-backed – non-bank market maker.”

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