The Plethora of FX Platforms Makes the Pie Look Small

Far from the consolidation some expected, the FX platform world continues to expand and fragment, but what faces the new entrants, and what is competition doing to the wider industry?

Suddenly, there are new platforms and entrants in FX everywhere: BlueCrest launched BlueX and Jane Street has announced the expansion of its price distribution both on its own platform JX and elsewhere. Just a few months ago BGC went public with FMX, its new and combined trading venue for rates, futures and FX, and in the past few years we have seen ventures such as Reactive Markets emerge onto the scene.

What on earth is going on? Some market participants have been arguing that the industry is already too crowded with the number of venues that already exist and that there just isn’t enough liquidity to go around. To be fair, the proliferation this year comes a handful of years on from the shopping spree that exchanges went on in in the FX industry that saw nearly all the major platforms absorbed into the empires of equities or futures trading giants.

Volumes are growing, for sure, but are they growing in the right place? The Bank of England’s latest semi-annual report shows an 11% year-on-year rise in FX activity with spot up 29%, but within this Electronic Broking and Multi-Dealer Platforms saw their share of spot volume actually drop to 42.8% from 46.1%. The return of actual monetary policy with interest rates higher than zero, has driven expectations for future moves and plenty of hedging activity have boosted volumes on existing platforms, but they are not keeping pace in the bigger picture. That said, both bank dealers and non-banks are seemingly enjoying the return of volatility.

Technology also has a role to play in the story overall. One market source thinks hedge funds and others who used to be clients, are externalising the technology they’ve built over the years. In many cases, this also includes the monetisation of their relationships, for example when Millennium’s FX platform, MillTechFX leverages its own credit and pricing power for their client’s advantage – and why not?

But is there enough to go around? It’s doubtful, as making money is already a tricky task in the crowded and competitive platforms space, where margins are thin. “Definitely not. Very hard to gain traction in the first place,” this source adds.

In terms of revenues, FX platforms are still just a small share of their equity and derivatives exchange owners’ totals. Last year, Deutsche Borse made EUR 2.3 billion in total revenue from its trading and clearing business, with FX accounting for just shy of EUR 140 million, representing six percent of the total. For LSEG, FX trading accounts for 16% of its capital markets revenue.

Cboe Global Markets warned in its 2023 annual report that competition in the FX space is heating up, with “over 10 other venues” competing for market share on top of its own CboeFX offering in electronic spot trading. “The global FX market remains severely fragmented, with transparent automated marketplaces such as Cboe FX challenging a small number of similarly situated competitors,” Cboe Global Markets states in its 2023 report.

“While the global FX market has experienced a shift from competing interbank platforms to ECNs, the electronification of the spot and NDF FX market may encounter resistance from customers that still prefer to utilise the phone, instant chats, terminals and key banking relationships for price discovery and trading. Furthermore, electronification of the FX market appears to be experiencing more resistance outside the US,” the report adds.

Aside from the intense competition, platforms also have to look ahead – what about the clients of their existing clients? Where will dealers go next? It is notable that is the last UK FX Turnover survey, the Single-Dealer Platform channel saw its share of spot turnover rise strongly, by 4% to 21.7%, easily the highest share it has seen since the FX Joint Standing Committee started publishing the data in 2010.

More competition is, of course, more often than not a good thing, but there is always a saturation point. For the new entrants, folklore often says that poachers who turn gamekeepers usually also enjoy a kind outcome. The good news here is, we’ll probably find out if that’s true.