If the numbers are anything to go by, 2018 was a good year for OTC FX platforms, says Galen Stops.

2018 saw the spot volumes increase across all of the multidealer OTC FX platforms that report this data, something that has not happened once in the past five years. Talk to the platform providers about what they saw as the key drivers of trading volumes in 2018 and they largely cite the same factors, chief amongst these being a proper decoupling of US interest rates relative to the rest of the world.

After a decade of cheap money and big central bank balance sheets, 2018 saw an unwinding of this coupled with an unpredictable US president who has taken some aggressive stances on trade relationships with the rest of the world, which in turn got markets moving and created volatility in the FX world as firms sought to hedge their currency exposures.

“2018 was pretty much a story about spread watching and reacting to what Trump says and does and what effect that has on global trade and other economies,” says the head of one trading platform in New York.

Brexit, of course, was another driver of volatility in the currency markets as the pound whipsawed back and forth with every piece of news about the ongoing negotiations regarding Britain’s impending departure from the European Union.

The year started with a bang, with Refinitiv, EBS and CboeFX all recording their highest spot volumes of the year in January and February of 2018, with volatility in the US equity markets being one driver of this increase in trading activity. The year started with the US economy on a high following the tax cuts that were announced in December of 2017, whilst its financial markets were buoyant at the prospect of the regulatory rollback that was being touted by the Trump administration.

The result of this was evidenced by the fact that on January 2, 2018, the Nasdaq and S&P 500 both hit intraday and closing highs and continued to trend higher, despite a wobble at the end of the month driven by concerns about a Fed rate hike that caused the Cboe Volatility index (Vix) to rise 24.3%. Then came February, when the Dow plummeted more than 3,200 points, or 12%, in just two weeks, only for stocks to then roar back upwards, at one point recovering about three-quarters of those losses. During the final two days of February the Dow tumbled 680 points, leaving it down about 1,600 points from January’s record high, with both the Dow and the S&P 500 registering their worst month in two years.

Market activity slowed down at the start of Q2 as this volatility subsided and, following a slight bump in May, the volumes being reported by the OTC FX platforms followed the normal trend of declining through the summer months. December is also historically a slow month for FX trading volumes as markets slowdown in anticipation of the holidays, however, in 2018 trading activity appears to have been more robust than usual, seemingly driven by a combination of uncertainty around US interest rates, the ongoing trade wars and Brexit, in addition to concerns about a slowdown in the Chinese economy and an equities sell-off.

From all this increased activity, the average daily volume (ADV) for spot trading at Refinitiv was $99.7 billion, up 10.7% (year-on-year); on EBS it was $90.5 billion, up 9.5%; on CboeFX it was $37.4 billion, up 26.8%; on Fastmatch it was $20.1 billion, up 9.2% and FXSpotStream, which reports all data across all FX products, not just spot, it was $29.8 billion, up 52.8%.

This is a strong showing all around, although in percentage terms, FXSpotStream was obviously the standout performer of 2018. The first factor that the firm’s CEO, Alan Schwarz, attributes this to is a broader shift in the FX market that has taken place, with more activity moving from anonymous towards disclosed trading, although he concedes that this might not explain quite why the volume spike on the service was so high.

“If you look at the 2016 BIS survey there was a 3% migration from anonymous to disclosed trading, so although the trend is in our favour, this by itself doesn’t explain the increase in volumes that we saw last year. However, it’s worth pointing out that this 3% change might have had an out-sized effect on our volumes because today we’re supporting the most volume on a fully disclosed basis of any venue,” he says.

The second factor that Schwarz says caused this increase in trading activity is the firm’s pricing model.

“No one else is charging the banks a flat subscription based fee, and the effect of this is being realised. The banks that did the most volume on our service last year paid an effective rate that would be the lowest of any other venue, and when firms start seeing these cost reductions then they want to do more. It’s like when you use air miles to get to the next level of status, you’re going to use that airline more,” he comments.

Lastly, Schwarz says that the effort that his team has put in over the seven years of FXSpotStream’s existence is paying off, as firms that have been in its pipeline for many years are now starting to trade there.

It’s also worth reiterating a fairly important caveat here that about 90% of the volume reported by FXSpotStream is spot FX, so where it looks like it overtook CboeFX in terms of ADV at the end of last year it is a tad misleading, although there is no doubt that it closed the gap between them significantly, despite CboeFX recording its highest ever spot ADV in 2018. EBS and Refinitive will perhaps be heartened that 2018 saw them both arrest a multi-year decline in spot FX trading volumes on their platforms, while looking a little closer at the year-on-year change in percentage volumes on each platform reveals one interesting data point.

Looking back on a five-year time horizon, it becomes apparent that between 2013-2015 the spot volumes trends on these two venues not only didn’t track together, but went in opposite directions. In 2014, EBS saw a yearon-year ADV decline of 12.7%, while Refinitiv, then still branded as Thomson Reuters, recorded an increase of 7.9%, while the following year it was EBS that was up, with ADV increasing 2.5%, and Refinitiv that was down 6.25%. By contrast, in 2016 ADV on EBS and Refintiv declined by 9.5% and 10.8%, respectively. In 2017 they were down 3.72% and 9% and then in 2018 were both up, EBS by 9.6% and Refinitiv by 10.8%.

FastMatch saw good volume growth in percentage terms, but saw this growth slow significantly compared to the previous two years. The FX Tape that it launched in September 2017 did see a substantial increase in volumes though: in the first full month of its existence, the ADV on the Tape was $8.5 billion, by the end of June last year that figure had risen to $69 billion and for the month of November it was up to $95.3 billion. This represents impressive progress for a new market data product, although it remains to be seen if FastMatch can maintain its momentum – for the month of January, 2019, the ADV on the Tape was $66.5 billion and it’s currently unclear if this will prove to be an outlier or the start of a decline.

All in all, it seems as though 2018 was a good year for OTC FX platform providers, who will also no doubt be further buoyed by the fact that the data suggests that FX activity is increasingly moving towards the multi-dealer model.

Galen Stops

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