Some interesting diagrams and conclusions from Boston Consulting Group (BCG) research into the scale advantages in eFX, and impact of regulation.
The report states that:
For flow providers, electronic trading will continue to play a major role, since scale needs high volumes and low costs.
While electronic-trading volume drives negligible scale in revenue, it drives significant scale in costs.
I wouldn’t agree that ‘electronic-trading volume drives negligible scale in revenue’. For the top FX ‘flow monsters’, the sheer size of their electronic-trading volumes is what enables them to effectively internalise flows, which is highly profitable.
Research from Boston Consulting Group on scale advantages in eFX
The report goes on to state:
We estimate that scale players can gain a cost-per-trade advantage of up to 29 percent over the average player. (See the exhibit below.) By contrast, subscale players will be greatly disadvantaged.
Investment in the electronic business will therefore be crucial, continuing to represent a relatively high percentage of both run-the-bank and change-the-bank budgets.
The technical focus will be on proprietary platform development, automated risk management, stability, capacity, and speed.
Report available here