Global FX Market Trends: The Multidealer Platforms

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30 November 2009


The foreign exchange market is the largest financial market in the world and the most liquid. While there was a substantial decrease in the FX market in early 2009, with US$2.9 trillion in average daily volume, Celent estimates that the market should exceed US$4.0 trillion in average daily turnover by 2010.

The FX market has emerged from its previous role of currency hedging to become a unique asset class. In a new report, Global FX Market Trends: The Multidealer Platforms, Celent looks at trends in the global FX market and discusses the various interdealer broker (IDB) and dealer-to-client (D2C) platforms. The FX market’s development is driving significant changes, increasing the role of buy side investors and pushing the adoption of more advanced trading technologies as well as the implementation of sophisticated trading strategies.

The FX market is composed of two main segments: the interdealer market and the dealer-to-client segment market. The interdealer market is smaller, covering 35% of the market, while the dealer-to-client market is bigger and more diverse in terms of participants. However, the interdealer market is more advanced with regard to electronic trading adoption, with 70% of the volume for all FX instruments being executed through e-trading platforms, while dealer-to-client side volume is evenly broken down between e-trading and voice trading. Today, multidealer platforms in the D2C space are starting to compete more aggressively with the historically interdealer platforms.

"Financial institutions dominate FX transaction volumes," says Sreekrishna Sankar, Celent analyst and coauthor of the report. "The share of reporting dealers in terms of FX volume has continuously decreased during the last decade, and now financial institutions are taking center stage and are counterparty to around 60% of all FX transactions."

In particular, hedge funds were the biggest driver for FX growth through volumes in 2006–2007. The reduction in FX activity in late 2008 and early 2009 by hedge funds has been the major factor impacting anonymous FX trading. However, the global macro players, the largest hedge fund source of FX turnover, continue to operate with the same returns. As a result, hedge fund activity will be much higher in 2010 compared to 2009 and might show the same levels as early 2008.

“With increasing liquidity coming from buy side institutions, fierce competition between the interdealer and dealer-to-client markets will not be segregated for long,” adds Axel Pierron, senior vice president at Celent and coauthor of the report. "When interdealer platforms allowed some large buy side firms to trade on their platforms through prime brokerage services, they opened Pandora's box by blurring the segregation between the interdealer market and the dealer-to-client one. They lost their pivotal role by letting some non-pairs enter the club, and the exclusivity was lost."