Kathryn Zhao
Traders Magazine Online News

Five Pillars of Modern Electronic Trading

In this reprint from Global Trading, Cantor's Zhao describes the essential pillars of building a low-touch trading desk.

Traders Poll

Are you pleased that the SEC is delaying its Transaction Fee Pilot program due to exchange-brought litigation?

Free Site Registration

November 1, 2013

Increasing Volume & Opportunities

New trading venues, HFT and market volatility are fueling the asset class to the head of the pack. Here's why


Sang Lee

The global FX market, the world's largest and most liquid asset class, continues to grow and evolve. It has bucked the trend in volume declines over the past two years that were seen in other asset classes such as stocks and bonds - even with a bottoming in its own trading activity in Q3 2012, it has staged a strong comeback ever since.

Global FX trading volume has seen tremendous growth over the last decade. The most recent BIS figure indicates global FX volume of $5.3 trillion in average daily trade volume, representing a vibrant market compared with other asset classes. Electronic trading has become the main mode of trading in FX and now accounts for more than 60 percent of all trading done in the global FX market. Moreover, Aite Group expects to see electronic trading adoption to continue in the FX market, reaching 70 percent by the end of 2013.

Sang Lee

Over the last 12 to 18 months, the FX market has seen emergence of new FX trading venues that are attempting to take away market share away from incumbent players. There are numerous reasons for the entrance of new FX venues. Some of these reasons include:

Traditional electronic venues such as EBS and Reuters have been gradually losing market share to HFT-oriented market-making or proprietary trading firms, providing much-needed hope for new entrants to build attractive levels of liquidity unthinkable even three years ago.

Dealing banks have become increasingly dissatisfied with the current group of FX venues due to (1) what they perceive as certain practices that favor automated trading firms and (2) the outdated trading infrastructures of existing platforms. Both of these may lead to potential opportunities for new venues.

New participants from non-FX markets have entered the space looking for faster, more transparent FX trading venues similar to what they are used to in equities and futures markets.

Continuing regulatory changes in the OTC derivatives markets across different asset classes such as fixed income, commodities, and equities are leading to growing expectations from global FX market participants that similar obligations will be eventually applied to the FX market.

The existence of an FX ecosystem has drastically lowered the cost of entry for new market players.

There are many new emerging trends that will impact the health and dynamics of the global FX market in 2013 and beyond. First, as the FX market has gone more mainstream and FX has become accepted as a legitimate asset class, a genuine, industry-initiated effort seeks to introduce enhanced transparency into the market and provide a fair trading environment for both institutional and retail clients alike.

Second, fueled by these industry-led initiatives, the next phase of competition in electronic FX trading market has begun. Over the last 18 months, new FX venues have emerged at a rapid pace often touting increased transparency, low latency, and cost-effective trading as key characteristics of their competitive offerings.