The Last Look…

The recent data from the world’s FX committees highlighted what we all knew – spot FX volumes soared year-on-year in October, by some 10.2% collectively across the regions. There were some points within the data, as there always are, however, that might cause an uncomfortable thought or two at some dealers – and their customers.

As a rule I like to compare the change in volumes in the semi-annual surveys with the data published by those platforms who are confident enough in their business to do so, and this report round was no different. What was striking was, taking only those platforms who break out spot volumes, how similar the change was.

Across EBS, LSEG FX, FXSpotStream, Euronext FX, Cboe FX and 360T, the collective change in volumes was also 10.2%. This obviously suggests that these firms are growing with the wider market which is probably a good thing, however it hides the fact that in hard numbers a lot of volume is going somewhere else – more than $150 billion per day to be precise.

Spot volumes across the regions rose by around $186 billion (on a year-on-year basis) in October 2024, while the platforms added just over $29 billion. Additionally, CLS only saw a 2.6% rise over that time, or $13 billion per day. This leaves a lot of volume left on the table.

One thing does seem clear, using the UK and US data as a proxy (none of the other FX committee reports provide anywhere near the same granular detail), this volume is not going direct to the dealers – and is not between the dealers themselves.

In the UK, volumes between dealers as well as with customers direct, fell by some $29 billion and $26 billion per day respectively from the October 2023 survey. In contrast, volumes on electronic broking systems and single and multi-dealer venues (sadly the JSC report no longer breaks the latter two out), rose by some $55 billion and $64 billion respectively.

Of course, some of this may have gone through the single dealer platforms, but it is impossible to know. In the US, there was a surge in activity across the board in spot, but the FXC data seems corrupted somewhere as the execution channels report indicates spot turnover of three-times that actually reported, which suggests that there were reporting errors or duplications.

The confusion, or lack of detail in some circumstances, in the data could indicate that aggregation and bilateral disclosed are continuing to grow in popularity – and FXSpotStream was the quickest growing platform at 26.5%, and the $15 billion per day it added could be reflected across other venues that do not report – which makes for a potentially tricky situation.

I have the sense that the next 24 months could see a bit of a shake-up in the FX world in terms of how people deal

If the increase in volume is going across aggregation venues and these venues are not registered as an MTF (but they support NDFs and other products), then do customers have to think about where they are trading more if – and it’s a big ‘if’ – the European and UK authorities actually start to enforce the trading perimeter? Equally, will those venues be as competitive when they have to stump up $3 million-plus to register and then another buck a year to maintain it?

There is one other potential explanation here, of course, and it’s not really one the dealers want to hear. Bloomberg doesn’t publish volumes, but we all know it does a lot in FX, did the extra go down that firm’s various channels? If it did then that is also a potential challenge, given the firm’s intention to start charging brokerage later this year – a move that is being spoken of in some dealer circles as the straw that breaks the camel’s back.

What is certain, is that the spot FX market grew strongly and, pleasingly it must be said, the electronic channels picked up a great deal of the increase, thus providing reduced error rates if nothing else. What we don’t know, is exactly where the volume went – undoubtedly a lot ultimately went to the dealers (including non-bank firms, meaning the banks only see it via PB), but, and this is the core of the budding issue, a lot of these channels cost them money, at a time of rising costs generally.

I have the sense that the next 24 months could see a bit of a shake-up in the FX world in terms of how people deal. There are several issues bubbling along – regulation, fee levels, workflow solutions and investment levels to name just four – that could either force dealers to be more aggressive in where they meet their customers (and I note the repeated reports from MillTech FX that highlight the credit challenge – is this partly due to the channel the client is using?), and could make customers more wary of where they connect, or both.

There is no doubt that putting dealers in competition often works to reduce spreads to the customer, but we have to remember that the dealers need to make money as well – I have almost weekly conversations with people who are pondering the value of continuing to provide FX services.

Ultimately, the direction of travel seems to be more consolidation of serious volume into fewer LPs’ hands (I am, rightly or wrongly, discounting the smaller trades that go to the HFTs at top of book), but I am unconvinced this is a good thing. It would be ironic if the drive to put more dealers in competition actually results in less dealers in competition…

colin@thefullfx.com