A new study from Greenwich Associates suggests that FX dealers are narrowing their focus in terms of which products and clients they will cover.
For the study, Greenwich says that it conducted interviews with 2,393 corporate and financial users of foreign exchange around the world about market trends and their relationships with their dealers.
The results showed that, for the second consecutive year, significant market share was redistributed among the dealers in the top ranks of the FX market in 2016, with some leading dealers adding as much as two full percentage points in market share and others ceding similar amounts.
Meanwhile, the number of banks within that top rank expanded by two. In 2016, six banks tied for the top five spots in Greenwich’s measure of global market share in FX trading.
In 2017, that list expands to eight. JP Morgan claims the top spot, followed by Citi, UBS and Deutsche Bank. Tied for fifth place are Bank of America Merrill Lynch, Barclays, HSBC and Goldman Sachs.
“Driving these major shifts in the competitive landscape is a single question: What’s the best way to make money in FX? Although that question is simple, the answer is not. In fact, banks are coming up with radically different answers about how best to generate profits in the space. For each bank, those answers depend on a range of variables including the bank’s size, footprint, balance sheet strength, overall strategy, and strengths in individual products, regions and customer segments, etc,” notes the study.
The study says that some of the world’s leading FX dealers are narrowing the scope of their coverage, but provides no concrete examples of which banks are doing so. For example, it says simply that “some banks are shying away from G10 swaps in favor of G10 spot trades”.
Likewise, the study observes that other banks “are focusing their strategies on particular clients, often targeting their resources toward banks, hedge funds and other financials, or to retail aggregators”.
And again: “Finally, some banks are becoming much more discerning about the channels in which they compete for business. These banks are not just differentiating between high-touch, higher margin trades and lower margin electronic execution. They are also differentiating among different types of electronic venues.”
“Banks have always segmented by client, but now, in setting strategy, banks are analysing not just the type of customer you are, but also your behaviour,” observes managing director, James Borger. “What products do you use, how often do you trade, how much do you trade, and where do you trade?”
The study does, however, note that banks such as JP Morgan, Citi and HSBC are maintaining broader approaches to their FX business, as opposed to focusing on relatively narrow areas of strength in order to maximise their profits.
Elsewhere, the study says that in recent years there has been a trend of FX volumes declining on single-dealer platforms (SDPs) and rising on multi-dealer platforms (MDPs), but that this trend has stalled somewhat over the past 12 months.
Greenwich says this is because although “the share of global FX market participants trading on multi-dealer platforms continued to grow last year, the share using single-dealer platforms held steady, while the share of customers using both types climbed”.
The study suggests that the reason why SDP volumes have stopped declining, at least temporarily, could be due to the fact that “some large banks have continued to make major investments in their proprietary FX trading platforms”.
“While some dealers are agnostic about where they find business and are happy to compete for business on price driven multi-dealer platforms, others are trying to drive business to proprietary, single-dealer platforms that are more conducive to longer-term, higher-value relationships,” says consultant Satnam Sohal.
According to the study, banks view algorithmic trading as a means of building sticky relationships within target segments of the market. It says that several US and European dealers have been investing heavily to build, improve and roll out algorithms to the buy side in FX.
“Accounts trading via algo execution tools trade at least 20% of their spot volume this way,” claims Greenwich consultant Thomas Jacques.