The Last Look…

From scarcity to abundance – what a mindset!

In a few weeks’ time foreign exchange will receive its triannual update of how big a market it really is, an issue pertinent to the matter of how many people want to take a piece of the pie. Since the BIS’s temperature check took place during a period of highly-elevated volumes and volatility, it’s sensible to expect growth from the soon-to-be obsolete figure of $7.5 trillion-a day.

This, of course, provides rich hunting grounds for technology providers, market makers and banks who are all competing to increase their share of the overall client wallets and in turn, revenues. While the overall pie just keeps growing, it’s interesting to note that growth has by no means been linear: the first decade of the survey from 1996 onwards showed little expansion from the $1.2 trillion daily figure, only creeping up to $1.9 trillion by 2005. But volumes snowballed in the next ten years, pushing through $3 trillion in 2007, briefly peaking at $5.4 trillion in 2013 before hitting $7.5 trillion in 2023.

The obvious lesson seems to be that the more technology gets involved in the process, higher volumes go. This rather proves the whole point of automation, the spiel around which tends to focus on increased productivity and therefore, potential revenues. This bodes well for the future, especially since FX appears to be at the eye of the latest technological storm that is supposed to upgrade Wall Street to version 2.0.

The rise of prime brokerage contributed hugely to the monumental growth of the market, and so did the rise in the number of products and contracts that can be traded on the many different venues and platforms that are on offer today.

By all measures, currency trading is a thriving, hugely competitive and highly-efficient market that shows no signs of slowing down. And yet, as Colin noted in last week’s column, FX is a prime target for start-ups from the blockchain and digital asset universe, many of whom believe that billions of savings could be had every year or trillions of assets could be unlocked if the currencies market was just that bit more modern and ran on blockchain technology.

There is a contradiction here, of course, but one that’s not impossible to resolve: volumes show a growth in the sum total of speculative and real flows that are traded, but that doesn’t mean every step in the chain is as efficient as it should be. In other words, there is no reason for volumes not to be twice as big, if those efficiency gains take place and appetite and opportunity for speculation remains.

The intersection between crypto and trade will grow further and spark another golden age for FX

Bitcoin emerged as a speculative (and it turns out highly-lucrative) trade, launching thousands of cryptocurrencies that sprang-up from nowhere onto markets, offering products such as perpetual futures and a host of new types of contracts and combinations that those with risk appetite could punt around. Good times!

At the same time, blockchain technology, in one of its guises, crept into finance first via the backdoor of repo projects then onchain debt issuance and lately stablecoins and tokenisation, all of which are gaining traction. On its journey it’s also making some parts of the trade lifecycle more timely and efficient, achieving incremental change, or as some call it, market evolution.

Right now, traditional assets are being wrapped in crypto-native wrappers, while crypto assets are being sold as tradfi investments – take bitcoin ETFs and stablecoins disrupting payments and settlement as two examples. This intersection will grow further and spark another golden age for FX. Some of the changes will be sharp and painful for some, but overall the next 10 years look likely to bring strong volume growth and increasing revenues as technology unlocks new products, markets and opportunities, while making processes more efficient.

Despite its initial threat (or promise, depending on one’s PoV), digital assets are showing no signs of doing away with intermediaries, instead the technology is being adopted by the very banks and brokers it was supposed to wipe out. Meanwhile, the additional options for trading and speculation in the form of altcoins and perps (much of it running on good old, traditional technology, for now) has given both sides plenty of business and growth. The idea of 24/7 trading is also taking a foothold, expanding market open hours across asset classes.

Evidence pointing to this is accumulating, with recent examples including the joint decision from the SEC and the CFTC to allow spot crypto trading on registered exchanges; FX becoming the money spinner for tokenised equity providers like Robinhood; and Cboe launching continuous futures on bitcoin and ether in November.

The point I’m making was neatly expressed by Vladimir Tenev, the co-founder and CEO of Robinhood at a recent earnings call, during which Tenev faced questions about the economics of how the platform would offer tokenised US equities to European customers.

“The only fee that customers incur when they trade stock tokens in Europe is the 10-basis point foreign transaction fee, which is very, very competitive,” he said. “So, there’s no other spreads that Robinhood benefits from economically and the aim is to pass back the full value, again, outside of the foreign exchange transaction fee*, which is very competitive to our peers. So, we think it’s a great offering, great economics. We can scale it. And so far, customers seem to be loving it,” he enthused.

In crypto, people often talk about moving from a scarcity mindset to one of abundance, believing in the shared benefits of a growing pie rather than fighting over today’s offering. If the major players in FX are going to be a key driver of the merging market structures then they need to incorporate some of the new thinking into their plans. Around the turn of the century many of these players collaborated to build a new FX infrastructure in the multi-dealer platforms – is it time to revisit that mindset?

eszalay@thefullfx.com

* emphasis is the author’s