As stock, bond and derivative markets have become increasingly globalized, more market participants need to buy and sell currencies to facilitate cross-border trading.

The foreign-exchange market structure is gradually adapting characteristics seen in the markets for U.S. Treasuries, German bunds, and shares of Apple and Samsung — electronic, high-speed, and transparent, with some centralized liquidity.

Specifically, the FX market is evolving from one where a limited universe of dealers sources most of the market’s bids and offers, to a more dispersed landscape with scores of electronic trading platforms competing for order flow. For large institutional investors, a consolidation of screens and a higher bar for performance are needed for efficient trading.

“With the proliferation of ECNs and connectivity from the dealers desks, we’re seeing demand from the buy side for the aggregation of liquidity into one trading system,” said Scott DePetris, president and chief operating officer of Portware. “‘Tier 1’ money managers want to be able to access their entire universe of dealer liquidity and ECN liquidity from a single platform that has the capabilities we’ve come to expect out of the equity-centric platforms.”

Portware’s Portware FX product is designed to provide traders with a real-time view of the entire fixed-income marketplace. Institutional investors “want to be able to interact with, and view liquidity in a depth-of-book format to see where the liquidity is, and how deep the market is,” DePetris told Markets Media.

Trading in foreign exchange averaged $5.3 trillion per day as of April 2013, including $2.2 trillion in FX swaps and $2 trillion in spot trading, according to the Bank for International Settlements. FX is the world’s largest market, and it is characterized by deep liquidity, geographic dispersion, and round-the-clock activity.

About two-thirds of FX transactions are executed electronically, and that fraction may be headed towards four-fifths, according to industry estimates. Market observers note that the FX market is not as electronic as equities, but more electronic than fixed income. “It’s an equity-like type of evolution, obviously with the major difference being that it is a dealer-driven community, so aggregating those dealer direct feeds is a little bit different than in equities,” DePetris said.

Institutional investors trade FX on behalf of end users such as beneficiaries of pension plans; there’s also a retail side of the market, which shares some similar challenges and opportunities.

“The FX market was previously dominated by a dealing-desk environment where firms would connect to a particular venue and execute just against that dealing desk,” said Don Roberts, managing director of futures and forex at TD Ameritrade, which offers FX trading services for more sophisticated retail traders. “But over the past few years with the advent of ECNs, the market is becoming more competitive on a bid-offer basis, essentially moving towards a better execution quality for the end customer.”

“For those of us who are old enough to remember ECNs on the stock side, there was tremendous competition, and we still see that,” Roberts said. “But it eventually migrated towards a central display and a best-execution capability, which I think the FX market should work to get to.”

DePetris said primary drivers of the FX market-structure evolution include a high correlation of markets across borders and asset classes; a heightened focus on global risk and regulation and an attendant need for robust, real-time risk models; and an ongoing need to contain costs.

“It’s much better to have a single multi-asset platform because the total cost of the ownership of the technology will go down,” DePetris said. “In addition to trimming costs, buy-side institutions are equally interested in gaining competitive advantage through technology and driving performance. Having a global, multi-asset, intelligently automated trading environment provides that advantage.”

A clearer and less dispersed market structure stands to benefit all participants, noted Roberts of TD Ameritrade. “Previously a lot of currency trades were done directly with a bank’s FX dealing desk,” he said.

“Now technology is providing electronic access, and the advent of ECNs that can aggregate bids and offers from different dealing desks/market makers, is providing much-needed transparency,” Roberts continued. “As that capability grows, I think we will see a much more defined market structure that will be advantageous to both retail and institutional customers.”

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