Are big FX banks need a new platform?

Another factor is that the market has consolidated over the past seven years - 11 banks now hold 75% of the turnover in the United States, compared with 20 in 1998. In another controversy, as occurred this consolidation, the market also suffered much fragmentation.

Consolidation in the banking industry is an obvious reason why the market share concentrated in a smaller number of participants. Technology has also played a role by introducing transparency and efficiency, and this has resulted in a reduction of the spread that it is now almost nonexistent. The erosion of the margin squeeze out effectively, many banks out of business. However, on the positive side, technology has made the market much more accessible and, of course, played a role in its growth.

Technology enabled the liquidity providers to disseminate their prices further and wider and efficiently handle smaller applications. No one knows the exact number of places serving web commerce on FX, but it is estimated the number of such places is in the range between 200 and 600. Currently, there is no reason to believe that this is the limit.

This fragmentation is probably the real reason why market participants feel the need to talk about the problem of liquidity spot market FX. The question is why the FX market made this fragmentation?

At least part of the reason is that as spreads narrowed, began to emerge a new business model of the spot market FX. To manage the business viable spot now required to have the ability to accumulate a substantial risk or have a sufficient share of the market allowing me to spread. Spread might be minimal, but the size of the market means that, if a sufficient flow going, spot FX market remains a viable enterprise for the sell side. Many banks, so we decided to supply liquidity to the largest possible number of platforms in order to attract the flow of applications.

However, the rapid spread of streaming prices led to the problem that Martin Mollett, chief dealer at the Bank of England, called the fine "mirage liquidity" in a speech at the ACI Congress in London in May 2004. There are hundreds of trading platforms, but they all show essentially the same price. This gives the appearance that the FX market is much bigger than it is. If some of the platforms are affected at the same time, market participants say that happens fairly regularly, selling party liquidity provider is likely to inherit a large position.

Although the FX market is not centralized on an exchange, it has at its center two electronic brokers - EBS and Reuters. Over the past five years, the Chicago Board also retooled to become a significant alternative way for business. EBS is the largest of these market centers reported an average daily turnover of $ 120 billion. This is extremely impressive, but the price of its screens are often given only in small amounts. According to the company, the average deal size EBS less than 3 million dollars.

If the bank had just inherited the position at $ 50 million, and then just make a deal on a $ 3 million when trying to exit the trade on EBS, no wonder he complains. However, these complaints are not common, and a veteran of the market has a slightly different view. "There is no liquidity problem as such, the only problem (liquidity) at specific prices," he says. In addition, all traders have a habit of storing transactions that do not go as planned.

Whatever the true situation, some of the largest banks in FX to check who they send their prices, knowing that some of the alternative platforms or abuse the system yourself or have clients who are abused. As a result, liquidity is definitely low in some places, but there is too much competition between banks, so you can imagine the expansion of spreads on a regular basis. In fact, the opposite occurs, and the spreads are still narrow.

Criticism cartel

The idea of creating an alternative platform to provide liquidity providers of liquidity may make some sense. However, at this stage, it seems unlikely that this will happen. This is the risk of being labeled as a cartel, though, as suggested by one dealer is easy to cost, if anyone can join, as long as they give a commitment to give the price of a large amount.

In addition, people are suspicious of the motives of a German bank. These suspicions are misplaced, and be caused by the Bank's success in the FX; German bank could well act altruistically for the greater good of the market.

But, in the end, the company will likely not lead to nothing, because the market for players is not clear that they will be able to benefit from this. "It probably will not work. Why do you need to quote the five other banks in large amounts? People will be more inclined to take a chance on EBS (to split the volume), "said the head of FX units of U.S. investment bank. "Why make it strong even stronger?"

The market share held by the leading FX banks
2005 2004 Change in Bank's market share of the market share
February 1 Deutsche Bank 16.72% 4.54%
February 1 UBS 12.47% 0.11%
March 3 Citigroup 7.50% -1.87%
May 4 HSBC 6.37% 1.48%
May 7 Barclays 5.85% 1.77%
June 10 Merrill Lynch 5.69% 2.20%
July 4 JPMorgan Chase 5.29% -0.49%