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Structure of FX market to fundamentally change in next three years?

GreySpark Partners, a London-based capital markets consultancy, 'Trends in FX Trading 2013' report examines how e-commerce trends, macroeconomic forces and new capital markets regulations in the EU and US are challenging the investment bank-dominated FX market. These forces are giving buyside customers more choice and control than they have ever had before in their FX trading activities.

Since 2010, the proliferation of so-called dealer-to-client (D2C) multi-dealer platforms (MDPs) has meant that the buyside has enjoyed more choice in where they trade FX than ever before. As the number of these platforms – many of which will be registered in the US as swap execution facilities – grows, GreySpark concluded that FX liquidity will naturally fragment away from the concentrated, bank-to-bank dealer-to-dealer (D2D) platforms onto the new D2C platforms.

They believe that spot and forward spreads between major currency pairs in the D2D venues will grow increasingly tight every year as a result of the decimalisation of pricing introduced in 2012. Moreover, since 2010, banks began directing increasingly larger amounts of proprietary and client FX liquidity onto D2C venues in an effort to make currencies dealing an integral part of their capital markets business following the 2008/2009 global financial crisis. This movement of currencies liquidity away from the D2D platforms is a clear indicator that the long-standing FX market model of bank-to-bank trading venues housing the majority of global liquidity is under threat.

All-to-All FX markets will emerge
In the next three years, GreySpark's research anticipates that the lines will become blurred between the characteristics of D2D and D2C venues, and an all-to-all (A2A) market for FX liquidity will arise. An A2A FX trading venue is an equities-like market in which all counter-parties share unrestricted access to currencies liquidity. The emergence of A2A venues will continue from 2017 onward as the blurring of the divide between the characteristics of D2D and D2C FX trading venues continues.

GreySpark believes that banks must be prepared to adapt to this shift in the FX market's structure in an effort to retain client business that could be lost as the A2A market encourages buyside FX investors to trade directly with one another, breaking the mould of their traditional relationships with inter-dealer brokers. The GreySpark report, Trends in FX Trading 2013, examines this theme and also looks in detail at the existing currencies dealing models at banks, analysing how each type of model can be adapted to become client-centric to offset the emergence of the A2A market.


If A2A FX platforms do really dominate: with whom are corporate treasurers going to buy/sell their FX with? How are corporate treasurers going to manage their counter-party exposure? How are will they carryout their FX settlement? The only certainty is that the new FX trading platforms will provide both problems and opportunities.

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