Electronic trading shows scope for FX growth in Middle East
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Foreign Exchange

Electronic trading shows scope for FX growth in Middle East

Despite a substantial fall in trading volumes in Bahrain during the past three years and the ability of Saudi Arabia to defend its currency peg, increased electronic trading volumes suggest the Middle East FX market has scope for further development.

The Middle East has always been an active gateway for trading – accounting for around 8% of global daily FX trading.

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Tod Van Name,

Hedging and transaction demand from import-export and investment firms will ensure this continues to be the case, despite the shift in oil-generated business flow, according to Tod Van Name, global head of electronic trading for foreign exchange and commodities at Bloomberg. The region has been affected by the global decline in FX trading. The Bank for International Settlements’ 2016 triennial central bank FX survey shows that average daily trading in Bahrain fell from $9 billion in April 2013 to $6 billion in April 2016, while volumes in Israel and Saudi Arabia remained static.

Traders have also been frustrated in their efforts to exert pressure on the Saudi riyal. Saudi Arabia is keen to diversify its heavily oil-dependent economy, and financial market liberalization is a key element in this strategy.

By opening equity markets and encouraging foreign investment, the country hopes to offset record spending and declining oil revenue, which has turned its current-account surplus into a deficit.

“Since the Saudi currency is pegged to the USD, it is unlikely that the current environment will fuel a significant increase in FX flow, though,” observes Van Name.

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Alex Johnson,

However, while most of the FX trading in the region is vanilla, with spot, outright forwards and swaps accounting for the lion’s share of the market, expanding electronification is fuelling growth, notes 360T Middle East regional sales manager Alex Johnson. “Most banks and large corporates trade electronically [the majority using multi-bank portals] and there is increased interest from midsize corporates in optimizing their execution workflows,” he says.

Bloomberg has seen a steady increase in electronic trading activity across the region.

“The number of users of our electronic FX trading platform increased by 30% in the Middle East last year – almost twice the rate of growth across our global user base,” explains Van Name.

“We have also seen high double-digit growth in volumes in the Middle East, with an 80% increase in the number of trades over the past two years.”

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Vishal Kapadia,

Most leading corporates in the Middle East have multiple bank relationships and like to see all FX prices aggregated from different counterparties on a single platform as part of a drive for better execution, agrees Vishal Kapadia, FlexTrade’s vice-president, business development for the Middle East and Asia.

“Most of the big corporates who have multiple banking relationships are getting streaming FX prices over multi-bank portals,” he says. “Banks and brokers also prefer to distribute FX spot liquidity electronically – since vanilla FX transactions are automated, the banks can focus on higher margins on structured products.

“Additionally, these systems are connected to the risk and internal systems of the banks and come with pre- and post-trade analytical tools.”

Kapadia also notes the growth in retail FX, with margin trading and FX brokers providing liquidity electronically over platforms for retail traders.

According to Nima Siar, director of client relationships at easyMarkets (formerly easyForex), Saudi traders are quite sophisticated as a result of their experience in local equity markets.

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Nima Siar,

“They have a healthy risk appetite and are interested in diversifying and hedging their portfolios,” he says. “There is a solid market and technology infrastructure in place, and the region spans the major trading sessions – EU, US and Asia.” Bloomberg’s Van Name refers to growing demand for Shariah forward transactions as the market seeks more cost-effective tools for managing FX risk, with appetite for these services coming from a broad range of clients including sovereign wealth funds, government agencies, corporations and asset managers.

Orbex general manager Osama Shanaa says he has noticed increased demand for Shariah compliant forward FX transactions from non-Muslim clients, adding: “We have experienced increased interest in swap-free accounts from our Chinese and European traders, who consider that they pay more for swaps than they make from trading.”

Since Islamic banks are prohibited from charging interest, traditional forwards have not been practical and instead the market uses wa’ad arrangements, says Van Name.

“However, now that these arrangements have been standardized, it will be possible to slowly introduce automation,” he concludes.

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