More, not fewer, FX platforms perplexes dealers

When Citi took the bold step of cutting 90% of its ties with a range of spot foreign exchange vendors in 2020, many expected this would lead to an industry-wide culling of platforms by the banks.

Historically, dealers have been willing to connect to any platform that has some client demand, but this is largely out of reluctance. The build-up of brokerage fees charged by these venues, as well as the cost of connecting to the myriad services, has led to a hard pushback from some banks as they try to convince buy-side clients to trade on fewer platforms – or their own single-dealer platforms – instead.

Furthermore, many believed that after years of fragmented liquidity caused by so many spot trading venues, there would ultimately be a consolidation of the platforms.

But rather than seeing FX vendors closing their doors, more interbank platforms, dark pool matching platforms, liquidity aggregators and buy-side execution management systems are setting up shop at a fast rate.

Since Citi’s decision, TP Icap has launched an electronic spot FX matching venue to take on the primary venues, while Reactive Markets has built up its roster of liquidity providers as a competitor to FX Spotstream. There was also the go-live last year of Singapore Exchange’s new electronic communications network (ECN) CurrencyNode for Asia-Pacific spot and non-deliverable forwards trading, while Refinitiv is set to launch its own interbank venue/secondary ECN after its re-platforming in 2024.

The most recent entrant is from Abu Dhabi-based vendor T3 Technologies, which has gone live with a central limit order book that also facilitates peer-to-peer trading.

Some estimate that the number of FX trading venues available to firms could now lie upwards of 75, with the potential for even more as fintech firms specialising in API-based trading and artificial intelligence look to expand their solutions to FX.

Clients, then, have more choice than ever over the liquidity pools they access. The challenge lies with the dealers. The issue is that the slow-motion fragmentation of liquidity pools will only accelerate, and with so many new vendors cropping up, trying to absorb them could prove overwhelming for some dealers.

In a speech by the Bank of England’s Andrew Hauser in 2019, he put the cost of maintaining this network of platforms into context. Referencing a blog post on XTX Markets’ computing power – which at the time was said to have access to 42 petabytes of data storage – Hauser said this would cost around $10 million a year from Amazon Web Services at the basic standard rate.

A sophisticated firm like XTX, which has the resources to connect to an array of different liquidity pools and work out in real time the best way to deal, can easily take on such costs, but others would only have a fraction of the funds available to do so.

What this could lead to is even more cherry-picking of venues among dealers as they connect only to those platforms deemed necessary for their end-clients. There may also be a greater reliance on transaction cost analysis providers that can show liquidity providers and buy-side clients which platforms are the most effective to trade on.

For the new platforms themselves, while they may see plenty of trading volume during bouts of volatility, their challenge will lie in maintaining that activity when markets are calmer.

But technology is certainly making it easier to launch platforms, and the dominance of electronic trading in spot FX may see a new breed of venues in other instruments, such as FX options.

So, could there be 100 platforms active in five years’ time? Quite possibly. Will all of them be a success? I doubt it.