Multi-Dealer Liquidity on the Rise

Although the latest FX committee turnover data hold no terrors for other channels, a longer term trend does seem to be confirmed that more volume is heading towards the multi-dealer model, especially those on a disclosed basis. Colin Lambert takes a look.

The historically clichéd method for a customer to execute an FX hedge was to call three or four banks and ask for a price. Surprisingly, even as relatively recently as late 2017 customers were still telling Profit & Loss and other industry surveys that they still preferred to pick up the phone, but more recent data suggest this is no longer the case and that customers are moving to the e-channel for their FX needs.

This may be because proving best execution is easier in an electronic environment, it may also indicate greater use of algos by clients, however one thing does appear to be clear – in the UK especially – and that is, providers of multi-dealer liquidity are thriving. In the latest turnover report from the UK’s FX Joint Standing Committee (JSC) the multi-dealer platform reinforced its position as the primary channel for FX trading with its share coming in at 21.5% of all activity. This is actually slightly down on October 2017’s data, but is up significantly from five years prior when in October 2013 its share stood at 12.2%.

The reason for the dip from last year lies in one of the stranger results from the latest data, involving one of the more traditional channels – voice broking. Time will tell whether the data is indeed an outlier, but increased volume down that channel has taken the gloss off what appears to have been a very good news story for the multi-dealer channels.

Remarkably, voice broker turnover rose to $604 billion per day in October 2018, up the small matter of 40.7% from the previous year’s data. This was not just a story of more activity going through the traditional stronghold of the voice brokers either – although FX swap volume via this channel did rise 28.3% over the year – for spot volumes were reported at $97.8 billion per day. To put this number into perspective, only once before, in April 2015 when ADV of $92 billion was reported, has the voice broking channel handled anywhere near this number, indeed the recent average over the past five years has been closer to $40 billion.

At four times the volume reported just two years ago, there are bound to be doubts over the correctness of the data, however time will, presumably, tell, in the voice broking company results. Broking sources spoken to about the surge in activity were unsurprised about the increase in the FX swap, options, outright and NDF product sets but did express surprise at the spot data. One source suggested it might be volume from banks submitted to brokers at the various fixes for possible netting, saying, “If there is a higher level of matching, that would boost volume numbers at the fix.”

If, as is suspected, the voice broker channel reverts to mean in the next report, which will coincide with the Bank for International Settlements’ Triennial Central Bank Survey, then the picture for the multi-dealer channel would appear to be even more positive. Across all FX products traded via this channel in the UK and US markets, ADV was $937.6 billion in October 2018, up 62.7% from the same month in 2013. There is a small caveat on the data in that the FXC only changed its reporting methodology three years ago and as such, the breakdown between single- and multi-dealer platforms prior to that is unavailable (believed to be around 65-35% in favour of the multi-dealer venues), but notwithstanding that, the increase is impressive. It is also reinforced by the e-ratio across all FX products in the UK and US rising in the five years to October 2018 from 45.6% to 51%.

As volume in the UK over electronic broking systems has remained steady over the same five-year period and the share of the single-dealer platforms has fallen to 10.6% from 13%, this would suggest that whilst disclosed trading is on the rise, as Profit & Loss reported in the Q3 2018 issue), the days of unilateral trading appear to be on the wane. In addition to the drop in single-dealer venues, the inter-dealer direct channel saw its share drop from 17.5% to 15.4% and the customer direct channel saw activity drift to 15.4% from 20.25% in October 2013.

Spot the Difference

While the five years to October 2018 were good for the Thomson Reuters non-spot business, the same cannot be said for its spot franchise, which, over the same period, saw activity decline by 13.8% to $94 billion. Overall though, this decline was not reflected in other platforms that have published data over the same period, EBS rose 15%, albeit from a relatively low base in October 2013, while CME’s futures and options on futures ADV rose by 12%. The standout platform from this period is HotspotFX, now CboeFX, which saw activity rise by 24%.

Across the broader market, spot activity also reflects the desire to put dealers in competition, with the multi-dealer channel grabbing a 30% share of spot volume in the UK in October 2018, compared to a much more modest 19.5% in October 2013. Again, this data may need to be reappraised due to the voice broking surge, as in October 2017 it was an even more impressive 35.2%.

Again, highlighting how customers are being more careful with their FX execution, the gains by this channel came largely at the expense of the customer direct channel, which saw activity almost halve from 23.2% in October 2013 to 12.5% in the latest survey. In the US, the percentage of spot volumes handled by the electronic broking systems and single- and multi-dealer platforms appears to have barely changed over the five-year period in the latest survey single dealers handled 14% of spot volume, while other disclosed channels handled 31.4% and the broking systems had a 15% share.

It does perhaps, reflect the more volatile markets of the past year or so that the greater activity via the disclosed multi-dealer channel has come at the expense of the anonymous ECNs, whose share of spot ADV fell to 18% in the UK in October 2018 from 24.8% five years earlier.

Combining the UK and US data indicates that spot activity rose to $439.1 billion via the multi-dealer platforms in October 2018, from $319.9 billion five years earlier – a 37.3% increase that now sees the channel handle just over 32.7% of all spot business in the world’s two busiest centres. Single-dealer platforms retained its share as a segment, rising slightly to 15.8% of activity in October 2018 from 15.4% five years earlier, however the news was not as good for the ECNs, their share falling from 22.2% to 18%.

New Direction

If there is a real success story for the ECNs it is away from their traditional stronghold of the spot markets, most strikingly, and perhaps unsurprisingly given EBS’s success in that market, in NDFs. The ECNs in the UK had a 13.1% share of NDF activity, up from 5.3% five years earlier (the FXC report does not break out NDF volumes). This compares to the single-dealer segment seeing its share fall to 3.9% from 6.5% and the multi-dealers’ from 24% to 18.5%.

In what is perhaps good news for the platform owners, who are largely seen as keen to expand their product set away from spot, the same trend is also evident in the vitally important FX swaps market, although in this case the multi-dealer platforms have also benefited from a change in behaviour on the part of market participants.

Just as EBS is a big part of the NDF story, so too is Refinitiv when it comes to non-spot activity, but across the broking systems the share of FX swap activity in the UK rose to 20% in October 2018, up from 14% five years earlier. Again, the surge in voice broking volumes has taken some of the shine off this data, for it is lower – by some 1.8% than October 2017. Single-dealer platforms have a 8.7% share of FX swap activity, down from 12.3% in October 2013, while the multi-dealer segment has 15.5% of activity in the latest survey in what remains the biggest product in FX markets, up from 6.3% five years earlier.

The only area in which the multi-dealers have failed to make an impression is FX options, a market that remains stubbornly voice and, most often, unilaterally direct driven. ECNs have a 7.2% share of activity in October 2018, up from 6.8% in October 2013 – over the same period the single-dealer channel’s share dropped slightly from 6.8% to 6.4% and the multi-dealers continue to languish in this market with a 2.5% share in the latest survey, down from 4% in 2013.

There has been evidence in recent years of the FX market moving towards a disclosed model at the expense of anonymous and the latest data would appear to confirm that. The combination of more clients having best execution requirements imposed on them and the availability of much better data to not only measure that execution quality but also to protect the dealer from predatory strategies, would appear to be developing a comfort zone for all participants.

This disclosed, competitive model would appear to be good news for those platforms operating that model, which, with the current ownership appears to be just about everyone. Any business running a pure ECN model is likely to struggle unless volatility really ramps up, but those, as has been noted in these pages before, with disclosed models are likely to see them take a leading role in future growth.

More than ever the key to growth for the platforms seems to be their ability to tap into what seems to be a growing trend of customers executing their non-spot products in a competitive environment. As more FX swaps trading in particular goes electronic, customers are likely to lean towards the single connectivity solution offered by the multi-dealer venues – and this is where the main battleground may be over the next five years.

Galen Stops

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