Electronic Trading Improving FX

Electronic trading is making the global foreign exchange markets more efficient, according to two recent reports by Greenwich Associates. Increased competition among banks and improved technology are leading to more aggressive quoting and improved FX services for customers, the reports say.

In the first report, titled “Five Projections for Global Foreign Exchange Markets,” Greenwich found that six banks—Barclays, Deutsche Bank, Citi, UBS, HSBC and JPMorgan—make up the top tier of global FX dealers. However, other dealers, including Morgan Stanley, Royal Bank of Scotland and Nomura, have been gaining market share.

“We expect this ‘flattening’ trend to continue as a large number of banks improve the capabilities and reach of their platforms,” Greenwich consultant Frank Feenstra said in the report. “With a growing number of committed banks competing against the market leaders for volume and market share, customers will reap the benefits.”

This increased competition will lead to more intensive service, upgraded systems and better pricing, Feenstra added.

Banks have already increased offerings of algorithmic trading products for FX, and many of the respondents Greenwich surveyed said they expect FX algos to attract increased demand in the months and years ahead. Currently, 16 percent of the largest FX traders employ algorithmic strategies.

There is still strong growth in electronic FX trading, even though that growth has been somewhat slower than in previous years. In 2011, electronic trading accounted for 61 percent of all FX volume—up from 57 percent the year before.

In the second report, titled “Electronic Trading Tops 60% of Global FX Trading Volume,” Greenwich noted that while electronic trading did not attract new users last year, there has been a pickup in the share of total FX volume routed to electronic systems by existing users.

Only about half of FX market participants in the Asia Pacific region use electronic systems, but in the U.S., 76 percent of participants trade electronically. The United Kingdom is even further ahead, with 80 percent of participants using electronic systems. Overall, the biggest market participants have led the push into electronic trading, Greenwich found.

Though the industry is embracing electronic trading, the use of algos for FX has still lagged. The report said that many banks are looking to algos, however, to better compete.

“As FX evolves into a mainly electronic marketplace, competition is taking place in milliseconds as opposed to minutes or hours,” Greenwich consultant Peter D’Amario said in the report. “In such an environment, algorithmic trading strategies will play a much bigger role for both investors and banks.”

In addition to banks, retail aggregators are increasingly important in FX trading. These aggregators generated 18 percent of global FX trading in 2011, up from 10 percent in 2010. Hedge funds accounted for about 11 percent of FX trading volume last year, according to Greenwich.

The strongest growth in FX trading volume recently has occurred in the Americas, with trades excluding short-dated transactions increasing 34 percent in the United States last year.

Greenwich surveyed 1,632 top-tier users of FX between September and November of last year to compile the data for the reports.