The back office, as Euromoney wrote in 2006, has not only become a business differentiator, but has also possibly become a barrier to entry (see Centrally cleared FX: More players for FXMarketSpace, Euromoney, November 2006).
According to consultancy company McLagan (Z/Yen), the internal costs of processing an FX trade, which include operations and IT charges, ranged between $1.50 and $9.25 for tier-1 and 2 banks at the end of 2006. Those figures, which exclude other charges such as brokerage and settlement fees, will have since come down because the cost of maintaining a back office is largely fixed. This means that a greater number of tickets pushed through must result in a lower per ticket cost. But, with such wafer-thin margins, there is a danger that many smaller banks are being priced out of the market by their post-trade expenses.
Given the present wave of consolidation in the industry, this should cause concern, even to the large players that have been able to use their volumes, and subsequent lower processing costs, to gain a competitive advantage. The liquidity that has been added to the market by the banks that are now disappearing has to be replaced.