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The Year of Living Dangerously

Colin Lambert reports on what was generally a tough year for FX platforms

The dawning of 2013 could not come soon enough for the
FX trading platforms if the results published by those
transparent enough to do so are anything to go by. Only
FXall bucked the year-on-year trend by recording a rise in
average daily volumes of $92.3 billion during 2012, compared to
$83.3 billion in 2011.

Elsewhere, the picture was not a pretty one with EBS, CME
Group, Thomson Reuters and Hotspot FX all reporting a decline
in that precious lifeblood of a platform – volumes.

As expected, given the trend was already signalled half-way
through the year, EBS saw the biggest decline, averaging just over
$112 billion per day in 2012, compared to $158.9 in 2011. CME
also declined, from something like $124.5 billion per day in 2011
to around $105.4 billion in 2012 – CME’s data is often published
by contract volume, rather than notional, so the notional numbers
published here may be subject to minor changes.

Thomson Reuters, which aggregates average daily volumes
across three of its dealing services – Matching, Dealing 3000 and
RTFX – saw volumes drop to $128.2 billion from $150.7 billion.
At time of writing, Hotspot FX had not published December data,
but year-on-year to November it was sharply lower and there seems
little reason why this trend would not have continued in December.

Whilst FXall appears to be the success story of the year, as
indeed it is among those platforms that publish data, it needs to
be remembered that its data cannot be compared like-for-like to
the other platforms as they report spot turnover only, whereas
FXall’s data includes forward and FX swap transactions.
Nonetheless, FXall can be heartened by good growth.

2013 – The Year of Challenges

The full year data will increase the pressure on platforms to
bounce back from the decline, or at least to slow the downward
trend. As a wider benchmark for market activity, CLS Group full
year data shows the utility handled an average of $4.7 trillion per
day through 2012, compared to $4.78 trillion in 2011. Thus the
“magic number” for platforms is a drop of 1.7%% – volumes
down less than that mean you had a reasonable year, drop more
than 1.7% and the pressure is on because the volume has likely
gone elsewhere.

The challenges are unlikely to slow either, for whilst FXall had
a stellar year in 2012, it is likely to come under increased
pressure in 2013 from the growth of algorithmic execution
solutions. FXall’s backbone has been its relationship model,
whereby participants execute in a disclosed environment, by
aggregating liquidity providers’ price streams. The growth of
aggregation products is likely to pressure FXall, especially as it is
seen in some quarters as being the most expensive venue on
which to operate.

As aggregation takes hold in the market, so too will brokerage
pressures increase on the incumbents. FXall’s best defence is the
sheer breadth of its liquidity providers and the reliance many firms
have upon its post-trade services, however a distraction – at least
over the first six months of the year – is likely to be the integration
of FXall into Thomson Reuters’ infrastructure (see story page 25).

For EBS the challenge is to build a stable base from which it
can attempt to rebuild volumes. New services such as EBS Direct
may help here, but something that would no doubt be welcome in
EBS circles is a slightly steadier ADV chart. Throughout 2012,
EBS data was characterised by changes to the magnitude of $20
billion per day (in terms of monthly reported ADV data) and

while this to an extent reflected wider market activity, the
platform would hope to be able to establish a “core” volume in
the $120 billion per day area.

The picture for Thomson Reuters is a little similar, it too saw a
sharp decline in activity towards the end of 2012; however, the firm
has its global footprint as support. There will be a little uncertainty
as the FXall integration is completed, but in general terms, the firm
can rely upon business from areas relatively untouched by
competition, to provide a solid base. The problem for EBS is that
by being in the major centres and being seen as the platform for
EUR and JPY, it offers low hanging fruit to competitors. Thomson
Reuters, on the other hand, has strong relationships with core
liquidity providers in its strong currencies such as AUD, CAD and
the Scandis, and is on the ground in more remote areas – areas that
would prove expensive for several competitors.

The year ahead for CME offers a different challenge, although it
too reflected the general market slowdown. Spot FX remains
outside the scope of regulation therefore CME has to continue to
build an integrated execution to clearing model for a wider
audience. As the high frequency trading firms are pressured by the
wider market, some are drifting away from FX – and CME would
feel the brunt of that decline in interest. Like FXall, CME will
likely do well through its front-to-back offering. Increased open
interest at CME indicates a broader church of participants; however
it does not necessarily translate into increased brokerage income.

Underpinning the challenge to all incumbents – including
those that do not report monthly activity – is the impending
challenge from the new entrants. Not only will 2013 see
platforms such as TraFXpure – which is on schedule for a
launch at the start of February – seek to make their presence
felt, but several of those platforms that launched in the past year
will seek to scale up their operations.

All of this leads to a rush for business and, in all likelihood,
increased pressure on brokerage and data costs across the
industry. There is no escaping the nasty feeling that while 2012
may have been a tough year for the platforms, for many 2013
could prove even worse. 

Paul Gogliormella

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