Understanding this market Structure

J

jwecme

Ok everyone I would like to start a discussion relating to Forex and the developments that will be taking place over the next few years with an appraisal with where we are currently at. I have done some looking around on the internet and would appreciate everyone’s input so we can draw up a model of how this market currently works how we can get the best access and how things may go in the future.

It seems to me you have a few options when looking to trade forex at present. You can spend big money with large amount up front and go into an agreement with a tier one bank which will get you access to EBS Prime which is effectively the electronic portion of the interbank market.

You can sign up with a prime broker/bank or clearing firm and trade on an ECN such as
FX Connect
FX All
Currenex
Hotspot
FX market space

This will give you access to Tier 1, 2 bank quotes as well as other participants quotes independent of the interbank market, this may result in actually better prices and fills as you can trade between other parties beyond the tier one banks. Effectively then it is a more diverse liquidity pool and probably larger than EBS Prime overall.

You can access the market via a normal broker like IB or use Onada to have your quotes relayed to the 2 above systems.

You can trade via a bucket shop if a pikey retail client.

You can trade through normal broker using Futures on CME.

I just hope that FX market space becomes the default standard and that you can gain access to it via a normal broker such as Trade station or IB or any of the others the same way you trade all other products with centralised clearing through CME as surely this is the best course of action in the future. Everyone gets the best price as the spreads would have to be honoured.


Lots of input from everyone would be great so I can write this up and make available to anyone with questions.
 
There have been some interesting articles about FX dealing venues, market participants, discussions about what is "best execution" in FX (price is only a single factor in that), polls and comentary and outlooks on the current situation by industry leaders from the buy and sellside, structure of the retail vs. institutional markets and much more.

Sign up a trail account on euromoney.com and euromoneyfix.com and scan through the FX-section of the back issues. I found it highly interesting.

FX Marketspace seems to have a hard time takeing off, volume is non-exisitant for now. They advertise their centralized clearing, but clearing isnt the main concern of institutional clients. I think in the end it will boil down to if it is cheaper to deal through FX Marketspace than somewhere else.

There seems to be a consensus that your above mentioned multibank-platforms will have a hard time surviving. First because there are too many of them (the consolidation has already started with the recent takeovers), and second the bigger clients start doing their own aggregation of the liquidity-streams and save on the platform-commission. Why pay someone like FxAll if you can do this simple process yourself? The pendulum seems to swing back to singlebank platforms for now.
 
I think IB's IDEALPRO ECN offering is a huge breath of fresh air for FX traders. They've dropped the spreads way down. They are regularly adding more liquidity providers (banks). The sizes posted on bid/offer are deeper then advertised. I have a friend who trades quite big positions and have seen him take out the bid with a limit order and it immediately got replaced and filled the rest of his order. Plus to top it off, there is no dealing desk at IB. Great solution IMHO.

Best regards,
MK
 
EBS, started in the early 90s by a partnership of banks perceiving a threat by Reuters to dominate the market, is clearly the biggest interbank ECN. FXMarketSpace's primary pitch seems to be central clearing, but as noted, STP is more important to the banks than central clearing.

EBS was acquired by ICAP last year. Since the acquisition, ICAP hasn't broken out separate stats for EBS in FX, but back in 2004, the stats were:

"""
Every day, 2,000 dealers on over 800 dealing floors in more than 40 countries use EBS to trade:

An average of USD 145 billion in interbank spot foreign exchange
An average of 700,000 oz. in gold and 7 million oz in silver
"""

Not a lot in a market that is 1T+ on many days, but still the largest.

Also, ICAP has been integrating spot fx into the rest of its products, in particular forwards & rates. Maybe that will eventually increase marketshare as some bespoke arrangements involving spots/forwards/rates/swaps can go electronic. We will see.

Reuters Spot Matching (the traditional platform, not FXMarketSpace), Currenex (now part of State St) and new up&comer HotspotFX (now part of Knight) also appear to doing well.
 
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