While the top 5 broker-dealers who trade in the foreign exchange markets haven’t ceded their top of the heap rankings, they have indeed been losing market share to their smaller, and perhaps more nimble tech savvy competitors.
With an aggregate share of 51 percent of global FX trading volume in 2014, the top five dealers – Citi, Deutsche Bank, UBS, Barclays, and J.P. Morgan still maintain a dominant grip on the market. However, that share was down from 53% in 2013.
This shift was among the key findings of a recent Greenwich Associates study of 1,612 top-tier users of global foreign exchange. Results of this study were released today in a new report, “Top FX Dealers Still Dominate but Cede Market Share to the Middle .”
For the full report, please click here.
“While the loss of market share appears small, two percentage points in a market with turnover measured in the hundreds of trillions is a big deal,” said Greenwich Associates consultant Woody Canaday.
So where did that 2 percent of volume go exactly?
According to Greenwich data, the trading business lost by the top-tier dealers was picked up by dealers that ranked 6-10 in terms of market share, which as a group captured 24% of global trading volume in 2014, up from 22% in 2013. Some market share was also picked up by dealers ranked 11-20, which saw aggregate share inch from 14% to 15%.
Technology Driving Competition for FX Trading Business
Technology is playing an outsized role in dealers’ competition for market share. Three-quarters of client volume in FX is done electronically, a ratio that has risen consistently since before the financial crisis. The movement of trading business to multidealer electronic platforms has broadened the market. The average number of dealers used for FX trading by buy-side clients has increased to more than eight in 2014 from 6.5 as recently as 2009. This level of counterparty expansion would not have been possible in a purely bilateral market.
But the top dealers haven’t given up their fight for market share – employing m,ore and more low-touch and technology-laden strategies to keep their existing share. The top four dealers have a market share in electronically traded FX that is on average 45% higher than their share in the voice-only market. In contrast, dealers 5-7 have an average voice market share 5% greater than their e-trading share, while dealers 8-10 have a voice share that is one-third higher than their electronic share.
“To be globally dominant in FX, an electronic trading franchise is of critical importance,” said Kevin McPartland,Greenwich’s head of market structure and technology research. “Connectivity to clients and multidealer platforms, aggressively priced streaming quotes, trading analytics, and a top-notch single-dealer platform are all needed.”
Top Banks will Stay Tops…For Now
The dominant positions of the top FX dealers remain secure, Greenwich wrote in its report.
“The scale needed to crack the top 10 means we won’t soon see any new entrants in the FX bulge bracket. Even with the collective volume traded by alternative liquidity providers having a greater impact on the market, clients continue to need the global reach of the largest money-center banks.”
Nevertheless, disruption to FX market structure, combined with an increasingly volatile currency market, is making room for the bottom half of the top 10 to wrestle away share slowly but surely both on the screen and on the phone. This is expected as a result of the forecast growth of multi-dealer platforms and their wrestling of trading away from phones.
