The FX market is going through structural and secular shifts and absorbing regulatory and capital changes that have affected trading volumes. From an FX technology perspective, a highly fragmented market is looking for solutions to solve liquidity sourcing, trade execution, and access to markets. Many of these challenges are being addressed by innovation in technology in the front, middle, and back offices.
FX technology is digesting two countervailing trends; one is increased technology demands as the market fragments and digests new obligations put on the market by regulation and industry conduct. This trend is creating an ecosystem noted by strong growth in data and demand for new ways of measuring, transacting, sourcing liquidity, and cutting complexity and cost in middle and back office. The other is the explosive growth in FX trading over the two decades, and whether it will continue. Further, there has been a shift in the volume of FX products relative to spot. These two trends will drive the FX technology market for the next few years as it looks to bring efficiencies to spot, forwards, options, and swaps, and drive better executions and cross-margining, while wringing out costs along the operational cycle.
Major Themes in FX Technology
Trading volume is being dispersed and fragmented over a greater number of venues, driving the need for better and easier connectivity, aggregation, and access to collocation. Major FX trading firms continue to grow their distribution directly through their client portals or single-dealer platforms and via a multitude of other distributions.
Investment banks continue to invest in their institutional portals, taking lessons in customer engagement from the retail side, and applying them to a holistic offering for clients. Within FX, this is execution of spot and products, hedging, PnL, trade management, and margin requirements. In certain cases, banks are expanding to the full suite of services rates, treasury, etc.
Global regulation and best conduct in FX have driven a desire for transparency, fuelling new data providers, compliance tools, analytics, and next-generation Transaction Cost Analysis (TCA).
MiFID II and MiFIR have required considerable remapping of where executions for spots and the products sit, as well as logistic changes. This is a sprint to the finish. Demand is higher than ever for cross-asset functionality when client firms are selecting FX technology.
Legal ramifications from past scandals have altered trading and communication in FX, which is one of the factors driving a new wave of tools such as secure messaging, compliance-friendly IM platforms, and voice capture systems, as well as investment in more sophisticated and third-generation surveillance.
Non-bank liquidity providers are increasing their interaction with flow across the market and continue to become a more substantial component of trading volume, across the platform landscape and point-to-point liquidity spaces.
Regional banks continue to leverage technology, in many cases via full service (i.e., white-label or broker in a box solutions) to protect and grow their market share amongst their buy-side and corporate clients.
Middle and back office operations are seeing considerable innovation from FinTech and incumbent FX provides as they look for paths to drive efficiency by increasing automation in FX operations, with cloud-based delivery, or DLT solutions.
The FX market is becoming more technology and data focused and this will continue as firms seek capital efficiency, best execution and operational excellence.