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FX: Non-bank market makers crowded out


Paul Golden
Published on:

Are non-bank market makers simply repackaging existing liquidity or are they genuinely adding to market flows?

Research published by Greenwich Associates stated that, “contrary to popular opinion”, non-bank liquidity providers were not taking meaningful share from the bulge-bracket banks and that regional banks with local expertise were emerging as useful partners to even the largest asset managers who still need service in those markets.

Henry Wilkes, founder of Institutional FX Advisory Partners (IFXAP), is just one of those who suggests that there are too many independent FX platforms and that the market would benefit from consolidation.

“Technology has levelled the playing field by allowing tier-two and three- banks and newcomers to create independent platforms, but they tend to be copycat solutions,” he says.

“In addition, with the use of prime broker relationships and third-party liquidity aggregators, newcomers can create their own customized ECNs [electronic communication networks] or public trading venues. New entrants are using the economic efficiencies of improved technology to aggregate primary liquidity and resell it in their customized solutions to existing bank clients.”


From a liquidity aggregator’s perspective, it would be beneficial to have fewer recyclers and more genuine providers or internalizers.

Gavin_White 160x186
Gavin White,
Invast Global
Gavin White, CEO of Invast Global, suggests that market participants would be surprised to learn that some of the most established names in the industry have become the most notorious for simply recycling liquidity.

“We have identified these banks and no longer have a relationship with them, which has led to a marked improvement in the quality of the aggregated streams we provide to clients,” he says.

“The non-bank specialist liquidity providers who have entered the FX industry in the past few years have definitely added genuine liquidity – the speed at which they have grown their market share is testament to that.”

David Ullrich, FlexTrade’s senior vice-president, execution strategies, agrees that a number of non-bank market makers have differentiated themselves and steadily gained market share, mostly at the expense of traditional buy-side firms.

“The market can always benefit from new sources of FX flows and liquidity, although simply repackaging existing liquidity does little to improve the quality of pricing,” he adds.

“Price is important, but in an aggregated liquidity structure, higher hit ratios and flow internalization are becoming the key components to success, and to drive that ratio any new platform must develop sources of non-correlated flows.”

Curtis Pfeiffer,
Pragma Securities

An existing platform could create new functionality or change its business model to add more value to the marketplace, notes Pragma Securities’ chief business officer Curtis Pfeiffer.

“There doesn’t necessarily always need to be a new platform in order for innovation to be introduced to the market,” he says. “Based on anecdotal feedback from our clients, there is no overwhelming desire for additional trading venues and we haven’t heard any complaints about a lack of choice.”

Those that have had some success have focused on reduced fees or better credit access for a broader client base where growth has come from bilateral trading relationships. That is the view of Steve Reich, head of FX and commodity liquidity solutions at GTS, who says his firm is ready to step in and provide a unique liquidity offering.

“This model requires a solid capital base and appetite for risk, a requirement that will impact many liquidity providers who simply mirror prices across venues,” he adds.

Earlier this month, Flow Traders announced it was opening up as a liquidity provider, partnering with MarketFactory to enable direct FX trading on multiple venues.

According to Robbert Sijbrandij, head of FX at Flow Traders, regulatory discussions around issues such as last look will encourage more independent market makers to come to the market, and banks are going to either restrict capital tied to trading or accept greater competition.


Steve Reich, GTS

As for the issue of non-bank market makers’ compliance with the Markets in Financial Instruments Directive II (Mifid II) and/or the global FX code, C-View founder and chief investment officer Paul Chappell paints a mixed picture. 

“There are some that have joined the mainstream, but others are using their technological capacities to game the market,” he says.

“The implementation of Mifid II and strengthening of principle 17 in the code will bear down on this activity.” Principle 17 of the global FX code states that market participants employing last look should be transparent about its use and “provide appropriate disclosures to clients”.

Chappell’s assessment that there are only a limited number of true principal market makers and that their liquidity is being widely recycled – leaving the market vulnerable to a squeeze on primary liquidity – is shared by IFXAP’s Wilkes, who refers to a plethora of market participants recycling market primary liquidity creating a false impression of a healthy market.

David Ullrich,

White at Invast Global reckons some form of regulatory/official encouragement or support of genuine liquidity providers – whether bank or non-bank – would be beneficial for the industry, while FlexTrade’s Ullrich suggests the possibility is increasing that second-tier banks or less effective non-bank market makers will drop off the radar.

“Some may specialize more directly in currency pairs backed by an inherent geographical advantage, or by a captive client base,” adds Ullrich.

“The reality is that further concentration towards the top-tier firms with increasingly important credit facilities is much more likely. Regardless, when one’s book of business gets hurt, liquidity providers are forced to reconsider their underlying business model and the management of the streams and risk profiles.”

The non-bank market remains vulnerable, according to Diego Baptista, CEO of Solid FX.

“However, risk appetite between banks and non-banks can differ substantially, resulting in reduced market disturbance during less-liquid times in the primary markets,” he concludes.