Electronic Platforms in Foreign Exchange Trading

by Axel Pierron, February 12, 2007


Paris, France February 12, 2007

Foreign exchange continues to grow, and adoption of electronic trading has been vigorous. Celent estimates that the market could grow from close to US$3 trillion to US$4 trillion of daily turnover by 2009-2010, with 75% of the interdealer spot market volume and 50% of the dealer-to-client volume traded electronically.

In a new report, , Celent analyses the state of the foreign exchange market in terms of volume growth, adoption of electronic trading, and drivers for evolution. The report, also, examines the interbank platforms Reuters Dealing 3000 and EBS and the dealer-to-client platforms FX Connect, FXall, Currenex, and Hotspot FX. A collaborative effort between Reuters and the Chicago Mercantile Exchange branded FXMarketSpace is discussed briefly in that report as well.

Despite the overall growth of the FX market, a detailed look reveals more nuances. The "real money" trading, notably from corporations covering the currency risk of their international trade business, has experienced an important but smaller increase compared to the volume of speculative trading from the hedge fund industry. Although everyone is concerned about hedge funds, the term covers a more diverse reality. Hedge funds can trade using different strategies from model trading, direction trading, momentum trading, etc. Therefore, their needs will vary widely according to their trading strategy, as will their favorite trading venues and functionalities.

According to Axel Pierron, Celent analyst and author of the report, "The importance of new market participants on the buy side and their ability to improve and generate liquidity is blowing the wind of change in FX markets. The segregation of the market between interdealer and dealer-to-client is already being attacked, with the two major interdealer platforms breaching the wall to attract these profitable new customers. The question to ask is not whether the FX market will adopt an exchange model, but when."

The development of interdealer electronic platforms has driven the smallest banks out of the market because it has generated visibility on the market and less volatility, narrowing the margins. Today the FX market is a business of high volume and low margins, which only leaves room for very large institutions and specialists. Celent estimates that 75% of the interdealer spot market volume and 50% of the dealer-to-client volume is traded electronically.

Pierron adds, "The acquisition of Currenex by State Street could signal a wave of consolidation in FX e-trading platforms, but I doubt it. This acquisition is a specific answer to State Street / FX Connect issues, such as outdated technology and expansion into new customer segments. In fact, there are many projects to develop FX platforms such as Lava plan to launch an interdealer FX platform and FXAll, a new dealer-to-client platform. The market is large, with various customer segments and numerous single dealer platforms, so market participants will hold the consolidation mantra for a while. As ICAP's acquisition of EBS and Knight Capital's acquisition of HotSpotFX demonstrate, if consolidation happens it will be complementary, to provide multiasset trading facilities."

The 41-page report contains 14 figures and 3 tables. A table of contents is available online.

Members of Celent's Institutional Securities & Investments research service can download the report electronically by clicking on the icon to the left. Non-members should contact info@celent.com for more information.  

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned operating unit of Marsh & McLennan Companies [NYSE: MMC].

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Table of Contents

Paris, France February 12, 2007

Executive Summary 3
Cash FX Market Overview 6
Trends in FX Market 8
Interdealer Market Characteristics 11
Interdealer Trading Platform 13
  Reuters Dealing 3000 13
  Electronic Broking Service 17
Dealer-to-Client Market Characteristics 22
Dealer-to-Client Trading Platform 24
  Single-Dealer Platforms 24
  Multidealer Platforms 24
  FX Connect 27
  FXall 29
  Currenex 32
  Hotspot FX 35
Looking Forward 39
Objectivity & Methodology 40

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