-- New trading system launches replicate boom era of 2001
-- But some fear this could split trading into too many venues, which
could hurt global volume growth
By Eva Szalay
In the engine rooms of the foreign-exchange market, it's back to 2001.
New trading systems with big ambitions are springing up at the fastest
clip in a decade. The aim: to reset the ways that banks trade with
each other, and with the fast-growing high-speed FX traders that are
already so prevalent in other markets.
But whereas the last gold rush in new trading platforms fueled a boom
in trading volumes and more free-flowing, cheaper trading for
everyone, this time looks set to be different. Some market insiders
fear the trend for highly specialized new systems aimed at separate
pockets of clients could end up splitting the liquidity that underpins
this $4 trillion-a-day market, making it harder to trade.
"There is a risk that there won't be enough volume to go around. It's
similar to what's happened in equity markets around the time of the
dot-com boom: large players have built at the peak. Now, much of that
infrastructure is unused," said Frederick Ponzo, a managing partner at
Greyspark, a capital markets research firm.
The highest-profile new launch is of traFXpure--a platform that aims
to reduce the importance of speed in trading, recreating many elements
of the trading environment that banks relied on before high-frequency
took root almost 10 years ago. Run by brokerage Tradition Tradition
(UK) Ltd., a subsidiary of Compagnie Financiere Tradition SA (CFT.EB),
the system is the first serious direct challenge to ICAP PLC
(IAP.LN)-owned EBS, which holds half of a duopoly in bank-to-bank
trading. The creation of traFXpure stems from deep dissatisfaction
among many old-school human bank traders with the way high-speed
newcomers operate, and with the tweaks to the system that EBS has made
over the years to make those newcomers welcome.
"The trading model aims to take any technological commercial advantage
out of the equation," said Campbell Adams, founder of FX Pure Ltd.,
the company that came up with the initial idea for the platform.
"There will be a single matching engine and everyone will get equal
opportunities to trade. Everyone will get the market data at the same
time and at cost," said Dan Marcus, a managing director at Tradition.
As if to emphasize the stark divergence in aims among players in the
FX market, another system launched at the same time is pulling in the
direct opposite direction. Credit Suisse Group AG (CS) and currency
brokerage FXCM Inc. (FXCM)--one of the world's largest currency
brokerage firms--said they are teaming up to start a new trading
system, which aims specifically to cater to high-speed trading firms
and address their concerns that banks have too much control in the
currencies market.
It is all reminiscent of a period around 10 years ago, when there was
a similar rush in new platforms as so-called electronic communication
networks started to gain prevalence. Out of the dozens of platforms
that popped up around the turn of the millennium, only a couple exist
today, including the recently listed FXalliance Inc. (FX).
Meanwhile, EBS--the incumbent--is redoubling its efforts to keep its
long-standing bank customers happy, but without excluding the
high-speed accounts that deliver large trading flows.
The largest currency-trading platform by volume is preparing to
announce a raft of measures that its bank customers have been pushing
for in the past couple of years. Gil Mandelzis, the platform's new
chief executive, said earlier this year that EBS will change the way
it quotes currency prices and there will be restrictions on how many
orders traders can send without the intention to truly trade.
This splurge of new systems, and new tactics from older ones, overlaid
on top of the already healthy range of systems aimed at banks,
companies, and investors all points to a growing trend towards
specialization in the way currencies are traded.
"Electronic trading in FX is getting very competitive...with platforms
and offerings increasingly serving specific customer segments and
becoming more niche," Greyspark's Mr. Ponzo said.
Rather than a one-size-fits-all model, banks are being forced to
engage with dozens of different systems that claim to capture
particular client groups.
"Banks' risk-management models haven't evolved fast enough to adapt to
this new type of liquidity where lots of different players trade for
different reasons," said Harpal Sandhu, the chief executive officer at
Integral--a firm that has built and developed currencies-trading
technology for banks for more than 10 years.
Some market participants said these recent developments could hit
global trading volumes across the platforms. Global trading volumes
have increased 20% between 2007 and 2011, hitting a daily average of
$4.5 trillion globally, according to the Bank for International
Settlements. Data showed that the biggest increase came from the
non-bank sector, as high-frequency trading offered attractive profits.
But some of these firms in search of juicy profits rely heavily on
trading on the same systems as slower players. Once the high-speed
accounts are lumped together, leaving them less able to pick off
slower price-makers, their volumes could drop.
"This market is heading back to how things were 10 years ago in my
opinion: lower volumes and far less high-frequency trading," said a
senior trader, who wished to remain anonymous.
Write to Eva Szalay at eva.szalay@dowjones.com
(END) Dow Jones Newswires
July 05, 2012 10:34 ET (14:34 GMT)
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