Will top FX banks continue to lose market share to regional banks

The FX technology arms race continues unabated, with the top banks jockeying for position in the global FX rankings.

Leading banks in the global FX business are highly innovative, with a deep understanding of their clients risk management requirements. They also have the ‘luxury of large budgets’ and correspondingly large and talented in-house technical competence required to develop and deploy highly sophisticated functionality spanning the full trade life cycle from pre-trade, execution, through to rich post trade reporting tools targeted to specific client segments.

It’s also the case, that Continue reading

Is Deutsche Bank calling the top on Retail FX?

Deutsche Bank is exiting the Retail FX space by selling its hugely successful FX platform dbFX to Gain Capital, in order to focus on its core institutional FX business. The business was started in 2006, using technology provided by FXCM. However, this was no ordinary retail FX business, this was Deutsche Bank retail client FX flow. As such, the average account size of dbFX clients at $100k was some 40 times the average account size for in the retail FX business. Yet for the mighty Deutsche Bank, this is seen as a distraction to their core institutional FX business (full story here).

According to Bank of International Settlements Data (BIS), retail FX has been growing strongly, and has accounted for over 10% of global FX volumes (see here). Yet, not everyone is making money from retail FX. Goldman Sachs who bought a 10pct stake in CMC only three years ago, last year wrote down their $140mln investment to nearly zero (story here)

Personal View: Too early to tell whether Deutsche Bank is calling the top for Retail FX, and whether we will see other banks begin to exit this space, or (as I suspect) this is more a sign of the focus of the top global FX banks on their core institutional client business, and that even a profitable platform such as dbFX is seen as a distraction for Deutsche Bank to it’s core client franchise!

Also, the consolidation in retail trading platforms continues with the above deal, and also in the US, with trading platform TradeStation for Active Traders being sold for $411mln to the large Japanese Brokerage MONEX: story here

Top SDP FX vols up 200% according to latest BIS Data

Excellent analysis of the trends from the latest 2010 BIS Triennial FX Survey, much has been covered in this blog before, but lots to digest: (here)

A few picks from the data shows:

  • Top single-bank trading systems have increased by up to 200% over the past three years

The growth since 2007 is primarily due to the increased importance of single-bank trading systems.

  • Concentration of liquididty continuing in hands of top banks

The largest dealers have seen their FX business grow by investing heavily in their single-bank proprietary trading systems.

  • Internalisation of FX flows rises from 25% to over 80% in past three years for top dealers

See previous post on internalisation (here)

  • Increased volumes driven by algorithmic trading

Algo volumes on EBS now account for 45% of total spot compared to 2% in 2004. High Frequency Trading (HFT) may account for 25% of global daily FX volumes.

  • Retail FX estimated to account for 10% of FX flows, via retail aggregators

Importance of retail flows, and the use of the retail aggregators. Trading by households and small non-bank institutions has grown enormously, with market participants reporting that it now accounts for an estimated 8–10% of spot FX turnover globally ($125–150 billion per day).

Conclusion from report:

Electronic trading is transforming FX markets and encouraging greater trading by the category of “Other financial institutions”. This broad category includes smaller banks, mutual funds, money market funds, insurance companies, pension funds, hedge funds, currency funds and central banks, among others.

Higher trading by other financial institutions is responsible for 85% of the increase in daily average turnover between 2007 and 2010. Within this category, the main contribution appears to come from high-frequency traders, banks trading as clients of the biggest FX dealers and retail investors trading online.

While the top dealers report that in April 2007
less than 25% of trades were internalised in this way, by April 2010 they were
matching 80% or more of customer trades internally. These

Latest BIS FX data on Single Dealer Platforms

Single Dealer Platforms (SDPs) accounted for 28% of all eFX trading, according to detailed data just released from the Bank of International Settlements (BIS) 2010 Triennial survey (page 16) covering the Global FX Markets (compared to 30% in 2007), with Multi Dealer Platforms share being slightly lower at 27%.

BIS Data shows most CDS trades not be suitable for trading on a SEF

The Bank of International Settlements (BIS) today released data covering outstanding positions in the global OTC Derivatives markets.

Whilst overall outstanding OTC positions are down some 4% to $583 trillion, gross market value of existing OTC contracts rose by 15% to $25 trillion.

Notional amounts of Credit Default Swaps (CDS) outstanding declined for the 5th semiannual period (due to terminations of existing contracts).

Interesting to note that the BIS has for the first time included Central Counterparties (CCP) in the breakdown of outstanding contracts by counterparty for CDS positions. Although further reading shows that CCP accounted for only 11% of outstanding CDS positions. This relatively low figure reflecting the “non-standard” nature of much of the CDS positions captured by the BIS survey (see section 3.2 on page 6 of report).

So, if the vast majority of CDS positions are non-standard, and thus not suitable for clearing by CCP, does that not also imply that the vast majority of CDS trades would  therefore also be exempt from having to trade on a ‘SEF’?

Global FX daily turnover reaches $4trillion up 20% according to BIS Triennial Survey

The Bank of International Settlements (BIS), has just released the latest 2010 Triennial Survey survey of global FX market volumes (the most authoritative survey of global FX market activity)

Headline items from the survey are: (full  report available here)

  • Global FX turnover was 20% higher in April 2010 than in April 2007, with average daily turnover of $4.0 trillion compared to $3.3 trillion
  • Surge in Spot Activity: The increase was driven by the 48% growth in turnover of spot transactions, which represent 37% of foreign exchange market turnover. Spot turnover rose to $1.5 trillion in April 2010 from $1.0 trillion in April 2007
  • Bank to client volumes exceeded Bank to Bank volumes For the first time: Activity of reporting dealers with other financial institutions surpassed inter-dealer transactions (ie transactions between reporting dealers). Other Financial Institutions, a category that includes non-reporting banks, hedge funds, pension funds, mutual funds, insurance companies and central banks, grew by 42%

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