Non-bank electronic market-makers have penetrated deeply into the foreign exchange market that was exclusive to bank dealers five years ago according to the latest Bank for International Settlements’ Triennial Survey.

The BIS survey said the share of principal trading firms in spot electronic trading with buy-side clients rose to 32%, up from 10% three years ago, citing the 2019 Euromoney survey.

“What differentiates these new players from traditional bank dealers is that they substitute speed for balance sheet,” added BIS. “As they have morphed into market-makers, alongside main FX dealing banks, they have become an integral part of FX intermediation and a key determinant of liquidity conditions, particularly in the spot market.”

"Electronification" advanced most rapidly in dealer-to-customer trading, while the electronic share of inter-dealer trading decreased #Electronification #FXmarket #TriennialSurvey https://t.co/3qAZdIsySC pic.twitter.com/xHYLrVtLHf

— Bank for International Settlements (@BIS_org) December 8, 2019

The survey continued that electronic trading in FX first took off in the inter-dealer market, but in recent years the dealer-to-customer segment has seen the strongest rise in electronification.

BIS continued that electronic execution allows for fast trading and therefore contributes to overall FX turnover growth.

“In aggregate, the share of FX trading done electronically edged up only slightly to 56% in 2019,” added BIS. “However, there are notable differences in the progress of electronification across instruments, and in inter-dealer versus dealer-to-customer market segments.”

Electronic platforms

Instinet, owned by Japanese bank Nomura, today announced the launch of Newport FX, an agency-model electronic trading platform for spot FX. Newport FX is a web-based desktop application for the buy side that can be accessed through the firm’s Newport execution management system platform, direct FIX API, or on a stand-alone basis.

Ralston Roberts, global chief executive of Instinet Incorporated, said in a statement: “Connecting counterparties, providing aggregated access to liquidity, and applying technology to increase efficiency have been our fundamental principles throughout Instinet’s 50-year history.”

Citi last week said it had appointed electronic trading platform provider Rapid Addition as one of its core FIX platform partners for foreign exchange trading. The bank continued that electronic trading has grown rapidly and now represents 80% of global customer FX trading volume due to demands for increased price transparency and automated workflow.

We are delighted to announce that Rapid Addition has been appointed by Citi as a core #FIX platform partner for FX #trading. Read the full press release here: https://t.co/50rhdTcU3w pic.twitter.com/FBzfIFgaTB

— Rapid Addition (@RapidAddition) December 4, 2019

Mark Meredith, global head of FX electronic trading and algorithmic execution at Citi, said in a statement: “It is vitally important that we are highly competitive in the field of API trading, and key factors contributing to that are latency and stability characteristics.”

Offshore trading

Electronic trading tends to be booked in a few major financial hubs and so has led to a greater share of offshore trading. The BIS said London accounts for 43% of global FX turnover, while the combined share of the top four trading centres, which also include New York, Singapore and Hong Kong SAR, amounts to 75%.

#Electronification spurred an even greater concentration of FX trading in a few financial hubs #FXMarkets #TriennialSurvey https://t.co/y6WYViTx8Y pic.twitter.com/3G2M1UvzRj

— Bank for International Settlements (@BIS_org) December 8, 2019

“In today’s currency markets that trade around the clock, offshore trading is the norm,” added the report” The share of offshore trading for the US dollar, euro and Japanese yen – the three most traded currencies – is 79%, 84% and 74%, respectively.”

Offshore trading has risen because it is much less costly to build counterparty and credit relationships with dealers and clients in just a handful of centres than in each country separately. Placing FX desks within the same location as banks’ other functions, such as money market and treasury units, also favours major financial centres.

“In particular, major dealers tend to consolidate their electronic trading business in one of the major FX hubs,” added the survey. “This concentration thus partly compensates for the decentralised OTC structure of FX markets.”

FX trading volumes

Greater electronification of customer trading helped boost global foreign exchange trading volumes to $6.6 trillion per day in April this year, up from $5.1 trillion per day three years ago.

Daily trading in global #FXMarkets reached $6.6 trn in April 2019 ? – we explore the evolution in their size and structure by drawing on the latest BIS #TriennialSurvey https://t.co/y6WYViTx8Y pic.twitter.com/pv0bnb1BUz

— Bank for International Settlements (@BIS_org) December 8, 2019

The largest single contributor to the overall FX turnover growth was an increase in trading of FX swaps, driven by the use of swaps in banks’ funding management according to BIS.

The survey said: “In particular, making NDFs tradable on electronic platforms has attracted greater volumes from hedge funds and principal trading firms.”