Market consolidation ‘not all bad’

"There is a pre-conceived negativity towards consolidation and the effects it has," he said. "It has had a big effect on liquidity, spreads and volatility, but not for the worse."

In the latest Bank for International Settlements survey, the most marked consolidation was in the US, where 13 banks carried out 75% of FX activity in 2001 -- down from 20 in 1998. But the ECB Triennial Review of FX Market Structure showed in March that most traders are not concerned about potential liquidity issues, and the banking sector does not view consolidation as a future threat to liquidity or efficiency.

One anticipated drawback of consolidation was that it would create liquidity gaps, but, said Monahan, "Most banks now offer global 24-hour books."

Consolidation has also contributed to the rise in volatility, he said. "Banks have changed their trading time horizons and increased FX arbitrage -- proprietary trading positions were once held for days or weeks, but now most prop trading is intraday."