This is normally the column where I “entertain” you with my own semi-annual complaint about the FX committees’ semi-annual turnover reports all being different (perhaps this is a task for the GFXC – produce uniform reporting?) I have, though, given up on that crusade for a while and prefer to take the data for what it is – an interesting snapshot into the FX market on a regional basis.

The surveys in the UK and US are, thankfully, given they are the biggest two markets, the most comprehensive (but still structured differently!) and I wonder if we are starting to see evidence of the impact democratisation in FX markets – especially in the US where some of the bigger banks have often been less active than in Europe anyway.

It should not be a surprise that non-bank firms are making headway in the US, not only does this reflect the more risk-averse approach on the part of many banks but also the attitude of the banks towards the US authorities. Put simply, as one senior FX manager put it to me late last year, the risk (in terms of the level of fines if something should go wrong) is nowhere near compensated for by the rewards (as revenues and margins are squeezed further).

This is reinforced by some of the agreements put in place between non-bank market makers such as XTX, Jump and Virtu (others are available!) and some regional banks to support the latters’ customer franchises with pricing in G10 or the regional player’s non-specialist currency pairs. These agreements have meant that regional players have been better able to hang onto a greater share of the core customers’ business.

How else do we explain the 15% increase in market share of the Other Dealers segment in the US report and the rise of Other Banks in the UK survey?

At least part of that would seem to be explained by the aforementioned agreements.

I also thought it interesting that an indirect impact of the increase in non-bank market makers and liquidity recyclers can be found in the increased usage of single dealer platforms by Non-Financial Institutions. This segment is using single dealer platforms and direct APIs more than they were a year and two years ago and anecdotal evidence is that while they were enticed by the thought of being able to execute their business directly into the “inter-dealer market” (such as it exists) the reality is they have discovered the real meaning of slippage. Rather than pay more to execute at a slightly better top of book, it seems these firms are heading back into the arms of the banks and while this cannot exclusively be laid at the door of the non-bank segment, there is no doubt that the business and trading model of many “market makers” on the ECNs doesn’t go down well with your average corporate.

One thing I did find interesting in the reports that may well contradict my thesis – and I don’t have a convincing argument for why this has happened – is how e-ratios in the US have gone down in the past year, while in the UK they have gone in the opposite direction.

US e-ratios haven’t collapsed by any means but they are lower across the board, overall it is 56%, down 2.1%, while in spot it’s a fraction lower at 67%; outrights are some 4.5% lower at 61.3%; while swaps and options are both down about 3% from the previous year at 43.7% and 21.7% respectively.

In the UK, however, the overall e-ratio rose to 51.5% in October, up over 5% from the previous year. In spot the e-ratio is up over 4% to 66.4%; in outrights it is up more than 11% to 63.2% (NDF e-ratio is also up more than 4% to 44.1%); while in swaps the UK’s e-ratio is44.8%, up from 39.6% a year before; and FX options is 22.8%, up from 17.8% in October 2016.

Without detailed analysis of the raw data it is hard to say how accurate the reported numbers are – the UK, for instance, continues to break execution style down in part by Interdealer Direct and Customer Direct which suggest that this is all voice business. Given there is a segment for voice brokers, however, and the reluctance many banks have for allowing their dealers to talk to, or trade directly with, their peers, I struggle to understand how 30% of all FX business can be transacted directly between major dealers with no intermediary.

Ultimately, however, the impact of non-bank firms can best be found in the data segment in which their activity is most likely to exist – Other Financial Institutions.

Comparing the latest spot data in the UK and US (these firms are still predominantly in the spot market with some edging into other products) with that from five years ago in October 2012 and the change becomes evident.

This is a good comparison for volumes in the UK were almost identical in both months and in the US activity was just $17 billion higher in the latest survey compared to five years previously.

Not only is this food for thought for all those that have invested a huge amount in technology and regulatory processes in the intervening period (for a micro-share of $17 billion in turnover a day) but it is also worth a look by those seeking evidence of the rise of the non-bank player.

In the UK in October 2012, 24.2% of spot activity was with Reporting Dealers – the big banks – while 27.3% was with Other Banks and 41.9% was with Other Financial Institutions (OFI)s. The impact of the non-bank player was already evident in that data, but it becomes even more so in the latest survey where Reporting Dealers’ share has shrunk to 19.8% and Other Banks’ to 23.1% (and yes I know this does kind of shoot my earlier evidence down!) while OFIs now have a 50.3% share.

It is a similar picture in the US where Reporting Dealers’ share has fallen from 43.4% to 35.4% (still significant it has to be said), while Other Dealers handle 22.6% of volume, down from 23.6% in October 2012. OFIs on the other hand, now have a 39.1% share of spot activity, up more than 10% from October 2012.

I am not convinced the data is telling us anything we didn’t already know – or at least suspect – but the more of this type of data we get the easier it is for academics to construct a modern day demographic of the FX market using empirical measures.

There is a potential irony in this for me, however, for while I don’t think it is going to happen just yet, I still harbour a suspicion that risk warehousing will make a comeback in the eyes of customers and we will see a further bifurcation of the market along the lines of trades with alpha in them from “genuine” customers and what can only be described as “the rest” as participants throw themselves into the washing machine that is the FX market and try to come out cleaner!

We are likely to see more volatility in FX and that inevitably shakes out the weaker players from the stronger in terms of those willing to stand in and hold risk where necessary for the right counterparty. If that is the case then just as I am hailing the turnover surveys as highlighting the tremendous impact the non-bank sector has had on the FX market we could be witnessing the segment’s apogee.

It won’t be the case for all non-bank firms, but it will be an “evolve or die” situation. Put simply, these firms have to act more like banks did traditionally if they are to win some really valuable business to reinforce their other FX activities.

If they succeed in this, then there could be another job for the GFXC alongside uniform reporting of data. Perhaps, just perhaps, they might like to start thinking of the major non-bank firms as Reporting Dealers or even give them a segment of their own. Then we would really understand where the FX industry stands.

Twitter @lamboPnL

Twitter @Profit_and_Loss

Colin Lambert

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