Internalisation of FX flows

Earlier this week I looked at how the adoption of eFX was accelerating and commented on the huge increase in the e-FX ratios at RBS in particular, which has risen from 8% of flows being electronic in 2010 to some 53% in 2013. A whopping 511% increase in their e-FX ratios.

So, it’s interesting to see in today’s FX week an article talking about how RBS is now ‘internalising’ upwards of 90% of their FX flows in EURUSD and between 70-88% of their flows in cable (GBPUSD).

Outside the top traded currencies, the ability to internalise flows is of course reduced, although large regional banks with strong client franchises and more flow in their regional currencies also tend to have a similar advantage in terms of their ability to offering deeper more consistent liquidity to their clients.

I discussed the value of internalising FX flows, a while ago, and looked at how the ability of major banks to internalise their FX flows was enabling them to offer deeper and more consistent liquidity to their clients, as they were less dependent on external ‘wholesale’ market platforms such as EBS and Reuters matching to unwind their positions.

A recent report from the The Bank of International Settlements (BIS), looked at factors that has impacted the inter-dealer share of the FX market, and concluded that:

The inter-dealer share is now down to only 39% in 2013, much lower than the 63% in the late 1990s. The primary reason is that major dealing banks net more trades internally. Due to higher industry concentration, top-tier dealers are able to match more customer trades directly on their own books. This reduces the need to offload inventory imbalances and hedge risk via the traditional inter-dealer market.

These themes seem to be confirmed, according to Jeremy Smart head of electronic distribution at RBS:

“since early last year, the volume going through the top 10 banks’ internal flow is more than the core market venues, and that customers can benefit from increased internalised flows”

Jeremy also highlights the value to the client of dealing directly with the bank on their own single-dealer platform rather than via an external platform:

“It’s better for our customers to execute directly via this internal pool of liquidity because it is far cheaper, as there is no brokerage cost to factor into any price,

It’s therefore important that all banks consider the value vs cost of FX liquidity provision to clients across various channels.

FX Week article here (password required)

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