An Overview of the Cash Foreign Exchange Markets

February 23, 2005


New York, NY, USA February 23, 2005


Celent Communications estimates that 60 percent of inter-dealer trading today is done on electronic platforms. The dealer-client market is less electronic, at 43 percent. We predict that electronic trading will grow to 90 percent in the inter-dealer market, and 70 percent in the dealer-to-client market, by 2007.The global forex markets are already huge, and growing at healthy rates. The most recent global market survey, conducted by the Bank of International Settlements, indicates that forex trades almost US$2 trillion each day. The forex markets are actually a collection of smaller markets: cash vs. derivatives, inter-dealer vs. dealer-institution vs. dealer睦etail investor, US vs. London vs. Asia, electronic vs. voice trading. In a new report, , Celent examines the inter-dealer and institutional cash forex markets, which include spot, forward, and swaps trading. The report examines the characteristics of the inter-dealer and dealer-to-client markets, including industry initiatives such as Continuous Linked Settlement. Although forex is a global market, there are differences in the major regions, some which are highlighted in the report. The report also examines barriers to electronic trading and future market trends. Celent has also released a related report, More Money, More Platforms: Profiling the E-Trading Vendors in the Cash Forex Markets, which profiles the electronic platforms serving the inter-dealer and dealer-to-client markets: EBS, Reuters, FXConnect, FXAll, Currenex, HotSpot FXi, 360T, eSpeed, and Lava FX. Celent predicts that electronic trading will grow to 90 percent in the inter-dealer market, and 70 percent in the dealer-to-client market, by 2007. The inter-dealer e-trading platforms are growing bigger and more liquid over time, which should attract trading interest from banks that are conducting their largest trades over the phone. Banks that trade over the phone do so for several reasons. For example, they may be looking to trade odd lots or broken dates, which they cannot do electronically, or they may want to trade anonymously. It is conceivable that the dominant electronic platforms will add this functionality to steal more volume from the inter-dealer brokers. In the dealer-to-client market, increased electronic trading adoption will be spurred by three catalysts. Increased standardization of forex technology through industry initiatives like Continuous Linked Settlement and FIX make it easier for institutions trading by voice to connect to one or many electronic platforms. Also, pre-and post-trade support from these platforms is improving, which should also attract interest from new customers. Finally, the hedge fund and CTA communities, which have the highest rates of electronic trading, are also the fastest-growing segments of the institutional customer base. According to Jodi Burns, senior analyst in Celent痴 Securities & Investments group and author of the report, "While almost 50 percent of institutions claim to have no interest in electronic trading, this attitude simply cannot persist. It is true that certain financial products are not ready to be traded electronically, such as complex credit derivatives and non-standardized interest rate derivatives, but forex is not one of them."

The 26-page report contains 14 figures. A table of contents is available online.

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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].

Media Contacts

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Michele Pace
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Europe (London)
Chris Williams
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Yumi Nagaoka
Tel.: +81 3 3500 3023

Table of Contents


New York, NY, USA February 23, 2005

Return to report Abstract

Executive Summary 3
Introduction 5
A Brief History 7
Cash Forex Market Overview 9
  Comparing Cash Forex by Geography 9
Why is Cash Forex still traded OTC? 13
Barriers to Electronic Trading 13
Characteristics of the Inter-Dealer Market 15
Characteristics of the Client-to-Dealer Market 18
Continuous Linked Settlement 20
Looking Forward 23



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