Launches maintain rapid rate of change

Lava's entry into the interbank market could be the first of a number of bank-sponsored moves into that area. In a way, the market seems to have come full circle. Around the turn of the millennium, several venues that gave the buy-side access to interbank prices were launched, giving banks another source of liquidity. EBS followed suit somewhat belatedly last year with the launch of its prime offering.

However, while banks have been happy to take the flows that these have offered, they have been less enthusiastic about the opportunities for arbitrage that they have presented to the more aggressive market players. Banks have had to put significant resources into monitoring potentially 'toxic' flow. It looks as if banks have been able to do this relatively successfully – Deutsche Bank claimed it turned off $1 trillion of less-profitable flow last year while reporting that their overall volumes are higher than ever.

However, there does seem to be a desire by banks to take control of how their share of the huge pool of FX liquidity is traded, beyond merely monitoring what happens on external platforms. This appears to be the reason behind Lava's decision to launch an interbroker platform that caters exclusively to banks. The Citi-owned business launching a non-threatening venue for banks to trade with each other anonymously offers a new, potentially fail-safe model for large-scale FX trading.

So we are now back at a stage where banks want to trade directly with each other without the threat of predatory customers taking advantage of weak pricing. But there are signs that the biggest players are looking to adopt a twin approach going right down the value chain to retail investors. Deutsche Bank and Standard Chartered are going down this route now, while DrKW is understood to be discussing a launch.

It is likely that these forays into the retail market will succeed in bringing in significant flows with a healthy margin. However, banks need to keep focused on their bread and butter – the interbank business. Whether this continues to go predominantly through the existing channels of EBS and Reuters, or through new initiatives such as Lava's, will depend largely on how successful they are at luring banks with a service that is different from what they can get elsewhere.