Evolution in the FX market

Introduction

This report looks at technology trends in the electronic trading of FX, how more ECNs are emerging for this purpose.

Scope

*FX trading technology

*ECNs, interbank market, institutional and retail markets

Highlights

Foreign exchange is a large and expanding market that is increasingly reliant on technology. FX has become an asset class in its own right and liquidity has undergone fragmentation, giving rise in the last few years to the kind of high-frequency trading (HFT) strategies that had already evolved in the equities market over the previous decade.

Reasons to Purchase

*Gain an insight as to how FX trading is becoming part of broader, multi-asset strategies

*See where there are opportunities to sell technology to support new trading strategies


Report Highlights
Foreign exchange is a large and expanding market that is increasingly reliant on technology. FX has become an asset class in its own right and liquidity has undergone fragmentation, giving rise in the last few years to the kind of high-frequency trading (HFT) strategies that had already evolved in the equities market over the previous decade.
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SUMMARY 1
Impact 1
Ovum View 1
Key Messages 1
FX is the largest capital market and the only one that is truly 24/7 1
FX has become an asset class in its own right 2
Fragmentation of liquidity drives increased uptake of technology 2
The retail market is growing in size and sophistication 2
Market fragmentation favors CEP technology 2
If HFT is attractive, firms must chose between brokers' algorithms or internal development 2
Tech vendors need to consider whether to target the buy or sell side first 2
business Focus: Liquidity fragments and spurs trade automation 3
FX is the largest capital market and the only one that is truly 24/7 3
Globalization of the physical economy drives demand for FX 3
Increased cross-border trading in equities also means growing FX requirements 4
FX has become an asset class in its own right 4
Market segmentation 4
The institutional market is expanding beyond the interbank providers 4
The interbank market is essentially a two-horse race 4
Single-bank portals favor banks' customer relationships 5
ECNs promote competition over close relationships with banks 6
Fragmentation of liquidity drives increased uptake of technology 8
The global financial crisis has sped adoption of FX as an asset class 8
The retail market is growing in size and sophistication 8
NetLink is a market response to the challenge of larger volumes of smaller trades 9
Netlink has now become relevant for the retail market 10
The advent of a retail FX ECN has become a real possibility 10
Technology FOCUS: automation creates opportunity for tech vendors 10
The institutional FX market has traditionally relied on homegrown platforms 11
Retail FX has been readier to use third-party software 11
Retail FX players are bringing third-party technology to the institutional market 11
Market fragmentation favors CEP technology 12
Algorithmic servers 12
Aggregation tools 12
Smart order routers 12
RECOMMENDATIONS 13
Recommendations for enterprises 13
1. Corporates should consider investing in FX for its own sake, as well as to support core business 13
2. Buy-side firms need to determine their appetite for risk 13
3. If HFT is attractive, firms must chose between brokers' algorithms or internal development 14
4. If you are mulling CEP technology, there are three players for your consideration 14
5. Define your own requirements clearly prior to selecting a CEP vendor 14
6. EMS platforms are an alternative to standalone CEP 15
Recommendations for vendors 15
1. Vendors should seek to leverage CEP technology 15
2. Tech vendors need to consider whether to target the buy or sell side first 16
Alternative views 16
APPENDIX 18
Ask the analyst 18
Definitions 18
Further reading 19
Disclaimer 20
List of Figures
Figure 1: The interbank model in FX trading 5
Figure 2: The single-bank portal model in FX 6
Figure 3: The ECN/multi-bank portal model in FX 7

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