Today’s FX market is almost entirely unrecognisable from the industry it was a mere four or five years ago.
In a very short space of time, we have seen the dominance of tier-one banks effectively challenged by the rise of leading electronic FX network providers such as EBS BrokerTec, Thomson Reuters or FastMatch.
By having established a presence in the key three global FX trading centres – London, New York and Tokyo – and offering low latency connectivity between these hubs, they are increasingly attracting lucrative flow from algo and HFT trading firms.
Coupled with this, we are also seeing more and more FX firms addressing the impact of two key trends in this space: the rising prominence of Asian currency markets and the rapid emergence of cryptocurrency trading.
So where are the main opportunities to be found in this rapidly shifting landscape and how can firms make sure they stay ahead of the curve?
MAKING THE MOVE
When the most recent BIS Triennial Central Bank Survey highlighted that Asia’s main trading centres had grown their FX market share from 15% to 21%, the data grabbed headlines. And in the two years since the last survey was published, we’ve seen strong indications that those main hubs of Tokyo, Hong Kong and Singapore are continuing to attract significant trading flows – with many Asian traders now dealing more on the Tokyo matching engines than New York or London.
In fact, FX trading does increasingly appear to be converging around Tokyo as the main data centre hub. The challenge for firms is to make sure they have the teams, strategies and infrastructure in place to enable FX trading from Singapore, Hong Kong, Australia etc. directly into Tokyo.
Yet while a nimble and reactive approach is possible for these more agile trading firms, for larger incumbent banks the process of change can cause significant upheaval at an organisational level.
But client demand for lower latency connectivity is now so great that over the past year we have suddenly seen significant interest from major tier-one banks also wishing to leverage our established routes towards Tokyo from London and New York.
Furthermore, we are seeing a notable shift in approach when it comes to trading FX. Until quite recently FX trading was mostly conducted in OTC spot and forwards, but now there are significant opportunities to be had in trading FX derivatives as well.
Many innovative exchange-traded instruments are garnering significant volumes, such as the robustly traded Indian rupee futures offered by Dubai Gold & Commodities Exchange (DGCX). But to take full advantage of the algo-trading opportunities these can offer, firms again need to ensure they are utilising robust, high-speed trading infrastructures.
The final key trend which we’re monitoring very closely at BSO is the rise of cryptocurrency trading and the moves now being made at the institutional level to facilitate trading in these digital currencies. This includes the launch of bitcoin futures by both CME and CBOE, while a number of other major institutions are also actively exploring how best to tap into this lucrative market.
Of course, any moves must also address the significant security and regulatory concerns while not infringing on the autonomous nature of cryptocurrencies, which is part of their main appeal.
The direction that cryptos and mainstream FX trading is of course directed by what, and where, clients want to trade. Facilitating these rapidly changing strategies also presents the main challenge for FX trading firms and institutions.
Yet at BSO, we repeatedly see the firms which took even tentative first steps into trading FX in Asia quickly reap the benefits – and then continue to grow their footprint even further.
And as more and more new FX markets open up, the opportunities are there for the taking. The winners as always will prove to be those that have the most resilient infrastructures in place in order to take advantage of these changes as they emerge.
To hear more on this topic, register for our upcoming panel discussion on “Taking the Leap into Asia and Cryptocurrencies: The Future for FX Trading?” to be held at the London Stock Exchange on 3rd May 2018.