The past few months have been a bumpy ride for currencies, and no more so than in August, when an emerging markets selloff caused foreign exchange trading volumes to surge.
But for FX traders, volatility often equals opportunity, and the unwinding of central banks’ massive balance sheets, coupled with renewed inflation expectations, is giving them plenty of drama to act upon. Brexit, Italy’s populist government, Trump and trade wars are likely to keep life interesting in the months ahead, as well.
The real change in the $5.3 trillion-a-day FX market, however, may involve where and how traders at financial institutions and corporations do business, rather than the current ups and downs of the market itself. Thanks to the expansion of electronic trading, buyers and sellers continue to shift significant volumes between and among trading venues, depending on style and region, according to a report by Greenwich Associates.
“On many trades, the most important question for traders now is not whether to trade electronically or call a dealer, but rather, which electronic venue to use for execution,” says Ken Monahan, senior analyst in the firm’s Market Structure and Technology practice.
As major dealers decide how to allocate their technology spend, they must choose between providing liquidity on their own single-dealer platforms and improving their presence on top multi-dealer platforms, Greenwich says. Both are critical to major dealer franchises.
“The bottom line is that the FX market is increasingly competitive,” says Kevin McPartland, head of market structure and technology research at Greenwich Associates, “and competition is always good for the market.”
Maybe. Hypercompetitive markets can drive an easing of ethical commitment. That’s not happening in FX. The world’s top FX banks have checked and rechecked their operations carefully to make sure they are complying with the spirit of the industry’s new global code of conduct.
Central banks and market participants from 16 countries and territories around the world collaborated in developing the FX Global Code, a set of global principles “to promote a robust, fair, liquid, open and appropriately transparent market.”
Participants are expected to behave in an ethical and professional manner to promote the fairness and integrity of the market. They must be aware of, and comply with, the laws, rules and regulations applicable to them and the FX market for each jurisdiction in which they do business. The code has no enforcement mechanism, however.
Technology has helped maintain a balance. FX investors continue to increase their trading on multidealer platforms, which create a more level playing field for liquidity providers. “The FX market is now one of the least concentrated over-the-counter markets in the world,” McPartland says. “Financial end users, regulators and emerging dealers all benefit from its growing diversity.”
In this, our 18th annual World’s Best Foreign Exchange Providers Awards, we selected winners in 104 countries and seven global regions. For the first time, we name the Best Banks for FX Trading Technology. We feature four global awards, including Best Global FX Bank.