Technology in an Uncertain FX World

by Axel Pierron,  Sreekrishna Sankar, October 8, 2010
Product Trends/ Reviews
Global, Asia-Pacific, EMEA, Latin America, North America

Abstract

Foreign exchange has emerged as one of the fastest growing asset classes, reaching US$4 trillion daily average volumes. Driven mainly by the spot FX market, which grew 48% in the last three years, and increasing growth in the Asian markets, the FX market is a huge opportunity.

In this report, Technology in an Uncertain FX World, Celent identifies the key areas of focus for market participants. Main findings of the report include:

  • Spot FX is the key growth instrument, with swaps stagnant and options showing a negative growth rate.
  • Dealer platform growth is stagnant in London, but the big opportunity for e-FX market growth lies in Asia, specifically Tokyo but also Hong Kong and Singapore.
  • Single dealer platforms have reinvented themselves in the last few years by increasing their process offerings, providing superior technology for the front end, and aiding active investors with various tools (including algorithm offerings and aggregation facilities). They have grown and acquired market share from multidealer platforms.
  • FX prime brokerage (FXPB) is growing in stature, with the rise of the multiprime model. The three key aspects of its next stage of growth will be technology offerings, client servicing, and team expertise. Drivers of growth will include increasing process efficiency, improving the STP rates for options, and supporting scalability in transaction processing.
  • Algorithmic trading is rapidly growing in the execution arena. The percentage of active traders adopting FX algorithms has grown from one-third in 2008-2009 to around 50% in 2010. Celent estimates that, with comfort levels increasing, the growth rate will be sustained in 2011. This means that there are opportunities for algorithmic solution vendors. The next stage of algorithmic trading evolution will see growth of third party algorithm suites and IDE-driven customization of trader algorithms.

“Investment in the front end is on the rise. Migration from Java to RIA is the basic trend, with all the big players adopting one of the various RIA options,” says Axel Pierron, Senior Vice President at Celent and coauthor of the report. “With HTML 5.0 emerging, a rich user experience will depend on betting on the technology that fits the demands of the platform’s customers.”

“Superior execution algorithms as well as customization capabilities have led to opportunities. The market has moved away from the black box model,” adds Sreekrishna Sankar, Celent Analyst and coauthor of the report. “IDE-driven development suites have become essential for trader customization of algorithms, and a fully integrated system makes the trader’s life easier.”

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned subsidiary of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

North America
Michele Pace
mpace@celent.com
Tel: +1 212 345 1366

Europe (London)
Chris Williams
cwilliams@celent.com
Tel: +44 (0)782 448 3336

Asia (Tokyo)
Yumi Nagaoka
ynagaoka@celent.com
Tel.: +81 3 3500 3023

Table of Contents

Executive Summary

3

Introduction

6

Market Overview and Trends

7

 

The Crisis and Changing Risk Paradigms

7

 

Macrostructure of the Global FX Market

9

Technology Trends in the FX Market

17

 

E-FX Trading Entering a Phase of Severe Competition

17

 

United Kingdom: The Largest FX Marketplace

19

 

North America

22

 

Asia: High Growth Opportunity for E-FX

23

 

Future Trends in E-FX Platforms

28

Algorithmic Trading: Growth in the Execution Arena

31

 

Growth Drivers

32

 

Types of Algorithms in the Market

33

 

Potential Barriers to Adoption

35

 

FX Market Data: A Key Growth Opportunity

36

Conclusions

39

Leveraging Celent’s Expertise

41

 

Support for Financial Institutions

41

 

Support for Vendors

41

Related Celent Research

43

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