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FX: When is a market like treacle?

...when it's perfectly transparent, but not very liquid. The rise of electronic trading systems in the forex market has had some unexpected consequences.

"EBS [Electronic Broking Service] is an unfortunate thing," says the chief spot trader at one important market-making bank. "Too much information is being given to the market."

EBS was set up in 1992 by a consortium of 13 banks headed by Citibank when it seemed that Reuters would gain a stranglehold on foreign exchange dealing technology. To that extent, EBS has succeeded. There are still more Reuters screens offering electronic brokerage than EBS screens, but at the major banks, EBS has become shorthand for "electronic brokerage", just as "Reuters" is synonymous with "trading-room screen".

So why the discontent? The refrain is the same from bond, equity, loan and derivatives markets: liquidity, transparency and turnover are going up; but margins, fees, bid-offer spreads and profitability are falling.

Dollar/Deutschmark bid-offer spreads have tumbled from five-hundredths of a pfennig two or three years ago to two-hundredths of a pfennig now. The number of active players quoting continuous two-way prices has fallen to fewer than 15. Big banks now have to trade up to $1 billion at a time, in a market with a daily turnover of $1.2 trillion in the global forex markets.


Both Reuters and EBS offer electronic brokerage, a trading system in which banks and brokers deal over screens displaying the best available bid and offer prices in a number of different currency pairs.

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