FX markets are experiencing a paradigm shift and many are hurting. Don’t be afraid. What you are experiencing are growing pains.


Reading industry-related headlines over the last eight months or so must have been scary. Volumes dipped to historic lows towards the end of last year and some major players including many market making banks and large ECNs have been experiencing internal reorganizations with the associated departure of high-profile executives. Let me state for the record that this is not an attempt to judge anyone as they are going through tough times. This is an attempt to put what is happening into perspective and provide FX market participants with a better understanding of what we are experiencing. Where many see only gloom and doom, I also see a story about opportunity and growth.

One-size-fits-all era is coming to an end

In a recent commentary on personnel changes at EBS, Colin Lambert, Profit & Loss (restricted access), puts the finger for the firm’s difficulties at “increasing competitive pressure” and suggest among other things that EBS is “feeling the squeeze from internalisation and more granular streaming from banks”.  I don’t want to make light of what this may mean for individuals affected by these restructurings, but for the industry as a whole, these changes are a positive sign. They prove that FX markets are maturing, that competition is increasing and that the one-size-fits-all area in FX is coming to an end. The future will see a much larger number of different business models, liquidity sources, risk management approaches, FX exchanges, all co-existing in an even larger market than FX is today.

When markets mature, the old guard that advanced the industry to that point either has to go through a painful realignment process, or will simply disappear. Look at the airline industry for reference. In the 1970s, there were a handful of airlines in business. Today, we have more than 70 airlines in the U.S. Some of the old guard like United and American have survived because they dramatically changed their business models. Others, like TWA and Pan Am, are history. More importantly, since the 1970s, the number of passengers has tripled. That is the positive sign I mentioned before.

Increased competition levels the playing field and lowers barriers to entry which allows newcomers to enter previously restricted markets more easily, test their innovative ideas more readily, and make money in a sustainable way. This leads to greater distribution of share within the market where the largest players while still large, are by far no longer as dominant.  For the consumers in that market, that means more choices at a lower price point, in short a more attractive marketplace. For the provider of goods and services, that again translates into market growth. Generally speaking, most everybody wins.

Be a winner by making sure you have the right tools

If you find yourself in a market that is going through such dramatic changes, your chances of survival are higher the more control you have over your own destiny. If only a few years ago, business was good with six counterparties at your disposal, and their names were Bank of America, Merrill Lynch, Bear Stearns, JPMorgan Chase, MF Global, and Lehman Brothers; in 2012 you are left with just two. In such a changing environment, you need to be in control of your business; and the tools at your disposal had better be extremely flexible. As markets shift, as counterparties change roles, you have to be able to keep up, or even better, stay a step ahead. This flexibility and control – at an extremely low cost point – is one of the biggest advantages of cloud-based services that Integral has been advancing for many years. If you are not in control of the key aspects of your FX business today (this includes liquidity, business model, risk management, customer base among other things), you had better change your ways because the turmoil we are experiencing will get worse before it gets better.

FX markets are maturing

While nobody has a crystal ball, here are five predictions for how things will look in the future:

  1. 99% of all the custom-trading platforms have been invented and are in use today. Nobody will spend the time and resources to create yet another one.
  2. The majority of trading will be conducted on what people today refer to as white-label platforms.
  3. These white-label platforms will morph from being primarily a way to aggregate and access liquidity into tools for market participants to design and build their customized businesses. (We are seeing this shift already today.)
  4. 80% of all trading will be done by people, who use third-party OTC trading systems that they won’t know anything about, in the same way, people today use the telephone but would have a hard time explaining how it really works.
  5. Oh, and yes, a $4 trillion day will be viewed as a slow day in FX markets.

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