The Last Look…
Posted by Colin Lambert. Last updated: October 18, 2022
How realistic is the prospect of the “real” FX market moving to a 24/7 model? Obviously, there are places to trade FX during a weekend, one of the increasing number of crypto platforms offering fiat and, from the mainstream FX world, LMAX, with its Weekend service, but these are largely aimed at the retail and crypto crossover traders – liquidity just isn’t sufficient to support a full-blown market.
The argument against 24/7 FX trading has often revolved around the infrastructure, CLS, for example, would need to be up and running throughout, as would the numerous trading platforms – all of which would require additional resources. When things are booming in Forexland, as they are now, there is perhaps an increased chance of this happening, but in recent years these boom times haven’t lasted long enough – and even if they had, there hasn’t really been the will.
Personally, I still don’t think the will is there for 24/7 trading at major institutional level, but sometimes developments can drive change, rather than the will of the industry – after all, if it was down to the participants at the time, FX would have taken a lot longer to transform to an electronic business. The fact that the technology made such a convincing argument made change inevitable and I wonder if we are starting to see similar events start to transpire?
More and more trading is executed automatically with human oversight, rather than interaction, which means, of course, if the systems are up and running then markets can be traded. We have also proven the remote working model in trading, so I suppose there may not even be a need for those overseeing the business to even be in the office those two days?
I still think, in spite of this, that there are societal norms that would still need upending – yes people work at weekends in many fields, but there is still, when it comes to the conservative nature of the financial industry, largely a “9-5, Monday-to-Friday” mentality, even if so few actually work 9-5. Much is made by many institutions, sometimes risibly, about work-life balance, for parents especially, the weekend is when the kids are off school, if they were off, for example, Wednesday and Thursday, family life would be heavily impacted.
To go back to an earlier point, if the supporting infrastructure isn’t working, then how do markets? The answer is, naturally, they don’t.
Then, however, we look at an announcement that crossed my desk last week, not really to do with foreign exchange, but potentially one which could signify the start of change. Citi has announced it is offering clients 24/7 US dollar clearing and payments services.
If we have 24/7 payments and clearing services from the major banks, how long before those same institutions think about offering currency exchange services to their customers over the same period?
Clearly the bank has worked out how this can be done, and equally apparently, it sees a business benefit in it. How long before firstly other banks follow suit – history suggests not long – and before this service is potentially extended to other currencies? If we have 24/7 payments and clearing services from the major banks, how long before those same institutions think about offering currency exchange services to their customers over the same period?
In the case of the Citi service, this is likely to be aimed at a niche set of customers and is probably on a scale so the bank’s dollar reserves are more than adequate to manage the associated risks. Offering the service on a global scale may be a much more difficult task, but this is a step forward that few really foresaw outside of the crypto world.
If multiple banks were offering such a service there would need to be associated moves in the market’s infrastructure, but with Distributed Ledger Technology already being used to settle FX trades, how big a leap would it be? I understand that the crypto world believes it is inventing a market that doesn’t need banks, but the reality is most commerce and trading involves a degree of risk and someone has to have the monumental scale to support that risk. In a DeFi world where so much is resting upon individual parties with sometimes no oversight, there are simply, at the moment at least, too many risks the major institutions are unwilling to take unless there is a fully-funded, regulated bank on the other side.
The answer then lies with the banks to some degree and that is why the Citi announcement tweaked my antenna last week.
Personally, I still think we are a long way from a genuine 24/7 FX market; to be a success it would need a high critical mass, which will take a long time to build. That is not to say this won’t happen, however, not least because most big shifts in the tectonic plates of the financial world start with a series of small tremors that hardly anyone notices.