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FX: Is there life beyond the bulge?

Is a high level of consolidation in the FX market sustainable? And what of the hundreds of banks that fall outside the bulge bracket?

The emergence of a clear bulge bracket in foreign exchange should raise questions for all participants in the industry. According to Euromoney’s 2007 FX poll, just five banks now account for around 61% of client activity. This is up sharply from even just a year ago, when the top five had a 54% market share. In 2002, it was around 45% and a decade ago it was less than 29%.

Such consolidation in a financial market intuitively seems unsustainable. It suggests that the smaller players will struggle to gain sufficient flow to run viable businesses, and that ultimately the bulge-bracket banks will find that they cannot get out of the positions they accumulate from their dominance of the market.

Clearly, though, most of the hundreds of banks that are active in foreign exchange outside of the bulge bracket are not offering the product as a giveaway service. In other words, decent profitability is not as dependent on market share as has frequently been suggested. A recent paper* by J Scott Armstrong, a marketing professor at the Wharton School of the University of Pennsylvania, suggests that too often businesses focus on beating their competitors and the measurement they use to judge success is market share.

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