Electronification and digitalisation have come to the FX market, broadening the appeal of forex and affirming its legitimacy as an asset class for investors. At the same time, the trend is attracting a new set of tech-savvy clients to the market.
Although electronic trading in FX has been in use for more than a decade, it gained greater traction in the years following the financial crisis of 2008, and even more so recently as regulators began looking for more transparency in FX Trading. It has been helped by the widespread adoption of FIX, the financial information exchange protocol system first introduced in 1992 in the equity market, and now used as a standard. What’s more, as companies have felt the pressure to diversify away from their home country, the globalisation of markets has boosted foreign-exchange activity.
Yet technology itself has been the real game-changer in the global FX space—the largest financial market in the world—sparking the transition from a largely voice-traded market to an electronic one. “By the early 90’s, there was a USD 1.2 trillion OTC market in spot FX that was predominately voice-traded1, and it’s now more than a USD 5.2 trillion market that’s 70 per cent electronically traded,” observes Paul Scott, Head of Spot and eFX Risk at Commerzbank Corporates & Markets, where traditional voice-trading and electronic eFX trading is one unit. “By 2019, it’s projected to be an USD 8 trillion market, with electronification expected to increase to 85 per cent.”2
*1BIS - Bank for International Settlements survey
One reason for the further electronification and digitisation of the FX market will be the new regulatory environment with its emphasis on transparency, but another will be the expanded level of activity, accompanied by the fragmentation of transactions. “There is more volume today,” says John Juer, Head of eProduct for Fixed Income and Currency Trading at Commerzbank Corporates & Markets. “But all of the tickets are broken down into much smaller sizes, as everyone is trying to get the best possible overall spread.”
The irony is that the very fragmented market of the late 1980s and early 1990s became centralised by the mid-90s, only to revert to greater fragmentation today, thanks in part to the presence of numerous intermediaries. As Scott notes, “The new paradigm is almost a replica of the old paradigm, but just in electronic form.”
While e-trading offers clients more transparency and liquidity, and at lower service costs, it also brings them closer to the transactions—through online streaming, on-screen pricing and other real-time information, for example—and closer to the bankers they work with. Meanwhile, the financial institutions and companies that have invested in technology and developed infrastructures and e-platforms to facilitate automated trading are now in strong positions to capitalise on the e-trading trend.
Commerzbank is one such institution. Ten years ago, the bank developed the first version of Commander, a customisable global e-trading platform for individual traders. But it’s not enough just to develop a platform. Maintaining a technological edge in the global marketplace is also critical for the top FX service providers. “You have to be at the right level in order to be able to provide clients with the service they expect,” Juer says. “You have to continuously develop and innovate in order to do that. We’re all used to having to upgrade our phones—that’s the way the world is today—and all of us in FX are trying to do the same thing, whether it is infrastructure to provide the best possible price, flexibility and ease in managing FX cash flows or intelligence and analytics to understand flow and improve the client service.”
Four years ago, Commerzbank launched the Commander Kristall platform, which allows real-time collaboration between financial institutions and clients through same-screen sharing of information, and speeds up the trading process for FX options and FX Structured products. The new platform also allows the bank’s internal sales teams and employees worldwide to access pricing and data.
Success in the flow FX space remains dependent on five key components—a pricing engine, distribution platform, risk management platform, execution aggregator and analytics—Commerzbank has developed a platform that includes all of those. 2015 Commerzbank was honoured for its innovations by FX Week, which named the company one of the top three Best Banks for FX in the Eurozone for Bank Clients and ranked the company among Highly Commended banks for its Best e-FX Platform for Corporates.
As a result of the ease of access and greater transparency arising from electronic trading, what was once almost purely an institutional and corporate business based on hedging risk, has shifted to encompass new client segments, such as the retail market and asset managers who treat FX as another asset class like equity. “That market really didn’t exist in FX in the 1990s,” Juer says, adding that retail is particularly strong in Asia. “But also impacted are the real money managers and pension funds.”
Where will electronification take the market six months from now? “That’s very short-term,” says Scott. “Most significant changes to our platform and technology can take up to 18 to 24 months to implement so it is important to focus on a longer time frame for key developments. However in the short term I envisage an increasing uptake and use of client and trade analytics to improve the trading process especially given the increasing market volatility”
Within that frame of time, he and his colleagues foresee less available credit and decreased flow from institutions; liquidity becoming more valuable; thinner markets; and remaining volatility. But it’s not all bad news. “There’s probably a lot of upside for real money managers and companies as they start to digitalise their overlaying management,” Scott predicts. “We’ll see a slight change from the dependency on institutional and retail growth in FX to the real money managers, both from a technology, trading and franchise concept.”
There are also infrastructure and distance issues that need to be resolved, particularly in Asia, according to Juer. “You obviously still need strong infrastructure to do electronic trading,” he says, “and Asia is still a long way away.”
What isn’t likely to change, however, is the basis for FX transactions, which has been with us since the Sumerians first traded tokens for goods. “No matter how fragmented we become, and no matter the changing technologies or the increase in electronification, relationships still matter, and e-trading brings us closer to our clients,” Scott emphasises. “In the ’80s and early ’90s, when trading was voice-dominated, the client relationship management was very much a sales focus and trading took care of the market. Today, we’re seeing both sales and trading engaged with the client.”
Juer adds: “With electronification clients are also interacting in a very direct way with the technology of a bank—detailed analysis can help get the best from the relationship. It’s now about collaboration. It’s about connectivity.”
1BIS - Bank for International Settlements survey
By Bloomberg Custom Content
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