Within the UK’s FX Joint Standing Committee (JSC) report on FX turnover, the data on execution styles suggests a return to trend on the part of the channels through which participants are trading. The last two reports from the UK have been notable for a significant surge in spot business executed via the voice channel, this appears to have been corrected in the latest report, suggesting the data was indeed an outlier, or, perhaps more likely, there was some misreporting of certain data.

In April 2019 there was some good news for the anonymous FX platforms in that the share of electronic broking systems’ in spot reversed what has been a steady decline in market share. The channel handled just shy of $199 billion per day in the UK for a 22.9% share of all spot activity, up from just 18.2% in April 2018. The increase could reflect data being reported differently, it is perhaps significant that activity via voice brokers fell by just over $50 billion per day, while electronic broking systems saw volume rise by just over $40 billion.

The multi-dealer channel remains the most popular in the UK as far as spot trading is concerned as customer put their dealers in competition, this channel handled $245.5 billion per day in April 2019, a very slight increase year-on-year in spite of the share of spot activity dipping to 28.2% from 28.4% in April 2018.

Interestingly, the inter-dealer direct channel, which registers direct trades between the 28 reporting dealers is the third busiest with a 17.6% share of activity ($153.3 billion per day), this itself represents a sizeable increase in both activity, from $128 billion in April 2018, and share of activity (14.9% in 2018). As is the case elsewhere in the world, a lot of this activity is likely to reflect the fact that almost half of the reporting dealers have bilateral relationships that allow them to offset non-core currencies with a top tier player.

With customer direct volumes remaining broadly steady at $112.8 billion per day (a 13% share) compared to $107 billion a year before (12.4%), the broad picture in spot is one of the volume previously reported as via a voice broker being spread out across other channels. In the last two report, the voice broker channel was accredited with around 11% of spot volume, this has fallen sharply in the latest report to what would be considered in most quarters a more realistic 4.24%

It is not all bad news for the voice brokers, however, for they still retain a strong position in one of their long-held strong suits, FX swaps. This channel handled just over half a trillion dollars per day in FX swaps in the UK, a 28.2% share of overall volume, followed closely by the inter-dealer direct channel at $465.7 billion per day, or 26.3%. There were some interesting swings in market share as far as FX swaps are concerned in the UK, not least that of reporting dealer, which saw its share of activity almost double from $238 billion in April 2018, or a 14.7% share. The customer direct channel handled 10.9% of volume (up from 9.59% in April 2018); the electronic broking systems 17.6% (21.5%); single dealer platforms 5.93% (10.8%) and the multi-dealer channels 11.1% (13.1%).

If there is an outlier in the FX swaps data it might be the single dealer platform share almost halving because anecdotally several banks have looked to up their game in terms of FX swaps on their proprietary platforms, although there is a chance that some of this volume is being reported as via the reporting dealers channel instead. Equally, the multi-dealer channel saw a decline in spite of customers apparently seeming to be keener to put banks into competition for their swaps business.

Proponents of the single dealer platform seeking to explain the apparent decline in the UK data will find little comfort in that from the New York Foreign Exchange Committee. In that committee’s report, in spot especially, the trend away from SDPs is also evident.

The latest data was also awaited by firms seeking to ascertain whether the jump seen in the October 2018 data regarding reporting dealer volumes in NDFs in the UK had been maintained – well the answer is that it has, although it should be noted that historically in FX committee data generally outliers have existed across two reports rather than one. In April the reporting dealer channel handled $50.5 billion in the UK, a 30.5% market share – in notional terms this is slightly down on the October 2018 data but in share terms it remains unchanged. Comparing it to April 2018, however shows a significantly different picture, in that survey month the reporting dealer channel handled $26.6 billion per day for just a 20% market share.

Given how again, the single dealer platform channel saw a decline (as it did in all products in fact), there is a suspicion that some firms are reporting volume traded electronically with reporting dealers in that section, rather than in the single dealer platform space. This in part will reflect the ubiquitous use of APIs to connect, so perhaps there is food for thought for the JSC in terms of how it asks participants to report data. Perhaps a clearer use of “voice” and electronic” will paint a more consistent picture. Across all products, the single dealer platform channel in the UK handled 8.6% of FX activity in April 2019 (down from 12.1% in April 2018). Elsewhere reporting dealers’ share was 23.4% (sharply up from 15.3% a year before); customer direct was 14.3% (13.9%); electronic broking systems had a 17.8% share (17.9%); multi-dealer channels 18.3% (19.4%); and voice brokers 17.6% (21.4%).

US Paints a Similar Picture

Proponents of the single dealer platform seeking to explain the apparent decline in the UK data will find little comfort in that from the New York Foreign Exchange Committee (FXC). In that committee’s report, in spot especially, the trend away from SDPs is also evident.

In April 2019 $132.3 billion per day was executed via the voice direct channel, as well as $12.1 billion via the indirect voice channel (largely the brokers). This represents a 35.9% share of spot business via this channel, compared to a 29.5% share just a year before that. The gain is largely at the expense of the single dealer channel, which saw activity collapse from $89.1 billion per day in April 2018 to $27.4 billion in the latest survey month. This represents a market share drop from 17.1% to just 6.8% in a year.

Generally speaking the other channels are slightly higher in market share terms (all are lower in notional terms) by around one or two percentage points, there was however, a small decline in the share and notional value executed via other electronic channels, widely thought to reflect API trading.

It is hard to escape the sense that the banks have seen their share of activity decline on their proprietary platforms. For while the UK data, as noted, may have been an anomaly, the US collation method makes it harder to misreport single dealer platform volumes as reporting dealers (mainly because the latter category no longer exists!) It is notable that in the US the single dealer channel lost market share across all FX product sets.

Overall, however, there may be two key factors at work to explain this shift in the data (assuming it is not an outlier). Firstly, FX markets are not exactly volatile at the moment, which means, as this column argued earlier this week, that activity is likely to drift towards the public platforms as participants try to squeeze out the final fraction of a pip in the FX execution. If volatility does return, the single dealer channel, offering generally deeper liquidity in these conditions, would most likely make a comeback.

The other fact at work could be the banks themselves as this data may reflect an ongoing cull of less profitable clients as banks look to meet them on public platforms as and when the bank wants to provide, or needs, liquidity. This would suggest that the banks are not unhappy to see their single dealer platform volume numbers drop because the dollars per million revenue is likely to be much higher. Of course, this may not be music to the ears of those who agreed to invest hundreds of millions of dollars in proprietary technology, but this could be but a bump on the highway. Time, and the next surveys, will tell.


Twitter @lamboPnL


Colin Lambert

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