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GreySpark: Inter-dealer and retail forex blur

Study says that by 2017, forex market will be less fragmented, with banks, dealers and investors trading directly with each other

Study says that by 2017, forex market will be less fragmented, with banks, dealers and investors trading directly with each other

Since 2010, there has been a steady increase in the number of retail forex platforms, causing the majority of forex deals to move away from inter-deal trading towards dealer-to-client trades.

Now that trend is likely to see the forex market becoming increasingly unrestricted, with both banks and traders accessing clients directly. According to a report by capital market consultancy firm GreySpark Partners, titled ‘Trends in FX Trading 2013’, this will lead to challenges for institutional investors that have benefited from the fees they charge clients, but will ultimately mean increased competition and better prices for consumers.

GreySpark’s managing partner, Frederic Ponzo, says that banks entered the forex market in the aftermath of the economic downturn as a means to refocus their strategies towards “flow trading” and away from more structured investment products.

He says: “The big difference between a financial industry geared towards complex financial instruments, as opposed to being geared towards flow trading, is that flow business is less capital intensive in terms of balance-sheet usage, but a lot more capital intensive in terms of technology costs.”

As a result of these moves into forex markets by banks, along with the rise in retail platforms, there is more capacity than there is demand. While this may seem like a problem for institutional investors, it is good news for traders, who are seeing a price-war take place to help drive demand.

Ponzo believes that an all-to-all model will likely emerge at least by 2017, suggesting Thomson Reuter’s recent purchase of FXall as the first step towards such a platform. Elsewhere, EBS, the other leading inter-dealer platform and subsidiary of ICAP, has developed a series of trading rules that will likely encourage demand from both institutions and individual investors.

According to Ponzo, the result of this is that the clear lines between inter-dealer and dealer-to-client trading will blur: “As a consequence, the neat separation between the inter-dealer market, in which only banks trade with each other, and the dealer to client market, in which banks resell wholesale liquidity to investors with a margin, is challenged.”

The report says: “Banks must be prepared to adapt to this shift in the forex market’s structure in an effort to retain client business that could be lost as the all-to-all market encourages buyside forex investors to trade directly with one another, breaking the mould of their traditional relationships with inter-dealer brokers.”

Ponzo added: “In the FX market of the future, there is no one-size-fits-all solution for banks, as they look to adapt their currency dealing models to make them more suitable for an equities-like, electronically-traded FX environment.”

 

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