Major FX players gain mkt share as e-trade expands-BIS

* High-frequency, retail trading also help lift FX growth

* Electronic trading helping to transform the FX industry

By Jessica Mortimer

LONDON, Dec 12 (BestGrowthStock) – Major players in foreign exchange
are gaining share in the industry as electronic trade transforms
the market, pushing aside smaller banks who cannot keep pace
with technology spending, the Bank for International Settlements
said.

The largest dealers — such as Deutsche Bank (DBKGn.DE: ), UBS
(UBSN.VX: ), Barclays (BARC.L: ) and Citi (C.N: ) — have seen their
FX businesses grow by investing heavily in their single-bank
proprietary trading systems, the BIS said in its quarterly
report.

“The tight bid-ask spreads and guaranteed market liquidity
on such platforms are making it unprofitable for smaller players
to compete for customers in the major currency pairs”.

BIS says its own data shows daily average trading volumes on
the top single-bank trading systems have increased by up to 200
percent over the last three years.

This has helped drive growth in FX volumes as smaller banks
become clients of the top dealers for major currency pairs,
concentrating instead on providing a market for local
currencies.

GROWTH IN HIGH-FREQUENCY TRADING

The BIS said growth in FX was driven by high-frequency
trading — an algorithmic strategy profiting from incremental
price movements with frequent, small trades executed in
milliseconds. This accounts for around 25 percent of spot
activity, it said, citing market estimates.

The emergence of retail trading, which now accounts for 8-10
percent of spot FX turnover globally, is also pushing up
volumes, as well as the increased trading by smaller banks as
clients of the larger ones.

“Electronic trading and electronic brokering are
transforming FX markets by reducing transaction costs and
increasing market liquidity. These changes, in turn, are
encouraging greater participation,” the BIS said.

The BIS’ latest triennial survey showed trade on global
currency markets jumped by a fifth in the three years to 2010 to
$4 trillion a day. [ID:nLDE67U26Q]

BIS said Greenwich Associates, a consultancy, estimates more
than 50 percent of total FX volume is being executed
electronically. It added that electronic trade could boost
volumes in countries outside the main financial centres like
London and New York in the coming years.

Electronic broking and multi-bank trading systems are more
important for spot trading, however, it added. Instruments such
as FX swaps, which embody counterparty risk, are harder to trade
electronically.

FINANCIAL CRISIS IMPACT

During the 2007-2009 global financial crisis most parts of
the FX markets “continued to function relatively smoothly”,
although FX swaps were “severely disrupted”.

The robustness of FX markets owes much to the role of CLS
Bank in eliminating settlement risk, the BIS said.

The financial crisis has changed the focus in FX markets and
attracted the attention of regulators.

Customers are reportedly relying more on bank credit lines
and central bank facilities instead of the FX swap market, while
regulators have increased capital requirements for retail FX
brokers and reduced the leverage available to individuals.

“Regulators are focused on reducing systemic risk and
increasing the robustness of electronic infrastructure by
increasing the use of central counterparties”.

(Reporting by Jessica Mortimer; Editing by Toby Chopra)

Major FX players gain mkt share as e-trade expands-BIS