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Market structure: Getting bigger all the time

In two new reports, TowerGroup makes the easy prediction that daily volumes in FX will soon surpass $3 trillion. But making sense of whether the market will consolidate has proved harder to predict for the consultancy firm.

Recent research from TowerGroup* has highlighted many of the obvious contradictions in the FX market. TowerGroup senior analyst Tom Price points out that as the market grows, it has increasingly embraced electronic trading. Obviously this has resulted in a decrease in trading on the telephone but, as Price notes, voice communication is still commonly used in emerging market dealing, which is very much expanding.

Price observes that the market has certainly leant towards greater electronic trading and that competition has encouraged fragmentation. This is much the same as what happened with US equities in the 1990s. He asks the question, however, whether the fragmented marketplace can survive.

What has happened, says Price, is that different portals have been able to carve out niche roles. But he asks whether the various portals will remain viable as the market becomes increasingly commoditized. Again using US equities as an example, Price asks whether it is now time for the FX market to consolidate. “TowerGroup believes that the FX marketplace is maturing and that consolidation of FX execution venues will occur over the next two to three years. When markets mature, the number of execution venues contracts. For evidence, we need only look at the equity markets,” says Price.

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