Did the Pandemic Drive Higher e-FX Volumes?

It may be a cynical view but when, last year, FX market participants starting talking up the increase in e-FX volumes as the pandemic hit, one could be forgiven for thinking, “well they would say that wouldn’t they?”

After all, hundreds of millions of dollars have been spent developing technology for people to use – some have been more successful than others in getting traction.

Intuitively, one would think that e-ratios would go higher – institutions are still to a degree scrambling to ensure that all surveillance and compliance loopholes are filled and the best way to achieve good oversight is through automation. The evidence however, when looking at the regional semi-annual surveys of FX turnover taken before the pandemic in October 2019 and then again in October 2020 is anything but universal

Not all FX committees report execution channel data, but of the four that do, the UK saw a surge in activity through electronic trading platforms, while the US, conversely, saw a decline. Just to muddy the waters further, Canada saw e-ratios go higher – mainly in spot trading, but Japan saw a sharp decrease.

This could reflect wider political considerations between the nations, the UK in particular has used lockdowns and limited peoples’ ability to get to the office, and this could be reflected in the greater use of technology, while the US has had a much less unified approach to battling Covid and as such could have been working more normally – whatever that word means now.

Banking sources say that e-ratios spiked after the vol shock in March globally, but then while they continued to climb in the UK, they fell back in the US. In October 2019 40.7% of all FX business in the UK was electronic, while in the latest survey in October 2020 it was 45.6%. In the US over the same period, the e-ratio fell from 55.9% to 55.4%. The fall was much more dramatic in Japan, where it fell from 54.7% in October 2019, to 42.9% a year later. This represents a diversion from the norm in Japan where e-ratios have historically been around the 50% mark.

$565 billion worth of business in the UK is executed via e-channels every day…

As always with data, the devil is in the detail and while in Japan the decline is almost exclusively because financial institutions shifted away from the e-channel, the survey does not break down volume across various products. Thus it is hard to know exactly where traders turned away from automation.

Thankfully the UK and US (and Canadian) reports do offer insight across product types and the decline in the US is largely down to the more “high touch” outrights and FX swaps markets, which fell from 57.4% to 55.7% and 55.7% to 50.7% respectively over the year. The good news in the US report is that spot e-ratios were actually up, from 61.1% to 63.4%, however there was a dip in the latest report from the April survey when the spot e-ratio was 64.2% (the drop in e-ratio in outright forwards, including NDFs, was even more dramatic from April, when it registered 65%).

In the UK the spot e-ratio climbed to 68.8% from 63.7% the year before, this represents some $565 billion worth of business every day, having been 65.5% in the April survey. The NDF e-ratio, unsurprisingly, also went higher, to 40.4% of business from 34.3%, representing $55 billion in notional value. Interestingly, the e-ratio for FX swaps also went higher in the UK, something that will hearten those firms seeking to elevate automation levels in that product, although it should be noted that the voice broker channel also saw an uptick in its share over the year, from 26.7% to 30.7%.

The FX option e-ratio rose slightly from 19.6% of turnover to 20.6%, however in outright forwards , the e-ratio actually went lower, from 60.7% to 28.2%.

Clients and Channels

The data suggest that over the course of the year between surveys, customers put more dealers in competition in some products, something that should not come as a surprise for one of the main advantages of the e-channel is the ability to connect with more firms than in a voice environment. Again though, there were very different readings from the UK and US.

In the UK report, the share of single dealer platform activity in spot markets fell fractionally from 19.7% to 19.6%, but that of multi-dealer platforms rose to 12.6% from 10.8% (ECN’s share also rose, from 33.4% to 36.6%). In the US meanwhile, single dealer platform activity fell to 7.2% of spot from 8.8%, while “Others” largely the multi-dealer platforms and aggregation venues, saw its share rise to 39.2% from 35.4% (ECNs were unchanged at 17%).

Across all products, single dealer platforms actually increased their share of activity in the UK, rising to 12.7% of volume from 11.8%, there were also rises for the multi-dealer platforms (from 9.1% to 11.3%) and ECNs (21.6% from 19.7%). In the US across FX products, the single dealers’ share dropped from 9.8% to 7.3%, while “Others” rose to 27.7% from 25.1% and ECNs declined slightly, from 20.9% to 20.4%.

In the UK report, the biggest uptake of e-trading was amongst non-financial institutions, which executed 55% of volume across all products electronically in October 2020, compared to 49.3% in October 2019. In the US, over the same period however, this sector’s e-ratio dropped from 58% to 50.9%.

It was a similar story – in reverse – for other financial institutions, where in the UK the e-ratio dropped from 64.4% to 62.9%, but in the US it rose from 64.8% to 67.9%. Breakdowns across product sets are not available, however this could reflect the greater influence in spot markets of non-bank firms in the US market after Europe closes.

Other banks, which often represent the largest “client” segment of the major players, used the e-channel more in both centres, in the UK the e-ratio was up to 48.8% from 45%, while in the US it went from 47% to 47.7%.

In terms of whether there was a push to the e-channels then, the jury is split. That said, with the UK being by far the biggest FX centre in the world, the data from there should be upweighted. Taking into account both UK and US volumes, the e-ratio in spot did indeed go up, from 62.8% to 66.9% or some $35 billion per day.

Taking the two largest centres into account then, suggests that e-ratios went higher, as indeed they probably did. The global picture may not be quite so clear cut, however, because the data from those platforms to report monthly volume paints a quite different picture.

CME Group’s EBS saw ADV decline by 10.4% over the October 2019-2020 period, while the Merc’s FX futures and options product suite saw turnover decline 11.9%. This represents $16.6 billion in notional value going elsewhere. Refinitiv’s spot volumes across Matching and FXall fell by 2.5% ($2 billion in notional value), while CboeFX also fell 2.5% ($800 million) and 360T by 2.8% ($600 million per day). The other platform to report spot volumes only, Euronext FX, was fractionally lower over the period ($100 million per day).

FXSpotStream and Integral, both of whom report across FX products, saw activity rise over the 12 months, by 16.5% ($5.5 billion) and 20.3% ($7.4 billion), however Refinitiv non-spot (-$17 billion or 4.8%) and 360T across all products (-$4.5 billion or 5.4%) both fell during the same timeframe.

Overall then, customers do seem to be increasing their use of the e-channel post-the vol shock of 2020. The channels they are using may be slightly different, and aggregation – anecdotally – seems the most popular, but automation not only continues to creep into markets, but was given a boost by the events of 2019.

Going forward, spot ratios will climb more slowly it seems, but the real interest will be in the largest FX product set – FX swaps. If automation takes off here, and the early signs from the semi-annual data is that it could, then broader e-ratios will increase quite sharply – and that will be good news for a lot of people, not least those responsible for monitoring activity.