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The TRADE > News > Asset Classes > Foreign Exchange > TradeTech FX: Is the eFX
spot market on its way to an oligopoly?
Foreign Exchange September 29, 2022 2:35 PM GMT


TRADETECH FX: IS THE EFX SPOT MARKET ON ITS WAY TO AN OLIGOPOLY?

Panellists warned the top liquidity providers were now accounting for over 60%
of the market, with that number rising.

By Annabel Smith
 1. 
 2. 
 3. 
 4. 
 5. 

Speaking at a TradeTech FX panel, participants clashed over whether the eFX spot
market structure was leaning towards becoming an oligopoly.

“If we talk about the specific flows of the large buy-side clients, the top
three to five sell-side players have market share that is well above 50-60%.
That is increasing,” said one panellist.

However, others were quick to argue against this, claiming that competition in
this pace remained strong. While others suggested a lack of fixed pricing and a
tendency to under-price risk were not characteristic of an oligopolistic market.

“If you look at the Euromoney rankings, the level of concentration has been
consistent over the last 10 to 20 years and people go up and down the ladder,”
they said. “Maybe concentration levels are too high but there’s certainly
competition.”

All panellists noted increased volatility, poor and fragmented liquidity, but
unchanged spreads, with risk transfer remaining high in light of these
conditions.

“Most firms just want to externalise the risk and cross the spread for that in
line with their execution strategies,” said one panellist.

“Spreads are widening in line with volatility and people are looking for
opportunities to save on spread crossing costs and take a bit more execution
risk so they can be more exposed to execution risk but get some cross spread
savings be that through liquidity seeking algos but also on the principal side.
There is a choice between crossing the spread and risk transfer or actually
working orders in the market.”

Elsewhere it was noted that the foreign exchange markets had seen a wave of
internalisation by banks amid the volatility and uncertainty.

“Previously FX was heading down the equities route where you would see the
buy-side using algos to execute on exchanges. Instead of that we’ve seen the
opposite with banks increasingly internalising flow allowing them to reduce
market impact. It’s ironic because we went from the equitisation of FX to the
FX-isation of equities,” said one panellist.

Speakers were united in their agreement that the last year had altered the way
the buy-side interacts with liquidity providers, now choosing quality over
quantity and relying heavily on data and analytics to evaluate both observables
such as fil rate, reject rate, liquidity and non-observables such as market
impact.

“A few years ago, there could be up to 10 liquidity pools but a consensus is
emerging that five or six is more reasonable. Even for those buy-side traders
that need to use a network of banks, they’re trying to rotate which ones they
use so it’s not more than five or six at a time.”

Despite this, fragmentation of liquidity remains apparent with additional
channels such as peer-to-peer pools proving both to exacerbate this and go some
way to alleviating it.

The importance of relationships and changing roles of counterparties in the last
year has been a poignant theme throughout TradeTech FX 2022. According to
panellists, the increasingly fragmented liquidity landscape has meant that
buy-side clients are relying on liquidity providers as “liquidity partners”.

“They [the buy-side] want to understand more about liquidity pools. They want to
know what the difference between them are,” said one panellist. “They want to
know about internalisation. It’s been spoken about for years but it’s still a
big question mark. They want to know if they place an order into the market,
where do I get placed top of book. They want help evaluating how pools perform
vs an index.”

Tagged: TradeTech FX 2022


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The TRADE > News > Asset Classes > Foreign Exchange > TradeTech FX 2022 Round Up
Foreign Exchange September 29, 2022 12:21 PM GMT


TRADETECH FX 2022 ROUND UP

The TRADE’s managing editor Laurie McAughtry and senior reporter Annabel Smith
sit down together after a busy two days at TradeTech FX 2022 to discuss the key
themes of the event and key challenges facing the industry right now.

By Editors
 1. 
 2. 
 3. 
 4. 
 5. 

Catch up on the last two days at TradeTech FX 2022 in these two videos with The
TRADE’s managing editor Laurie McAughtry and senior reporter Annabel Smith – as
they discuss the key themes of the event, as well as the challenges currently
being faced by the industry.

Watch below:




Tagged: TradeTech FX

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