Will FX traders ever “have it so good” again?

As this era of flatlining volumes continues, Michael Ourabah of market infrastructure provider BSO, explains how market makers can seek out new profit opportunities in the midst of an unfamiliar FX trading paradigm.

Financial markets generally don’t do carefully crafted political soundbites, but if they did, then “we’ve never had it so good” best encapsulates Foreign exchange (FX) over the past two decades. But this punchy one-liner used by Tory PM Harold Macmillan to describe UK living standards in the late 50s, doesn’t resonate quite as well in today’s world of declining trading volumes.

According to the Bank of International Settlements (BIS), the average amount of currency trading carried out globally has fallen for the first time since the early 2000s, reaching $5.1tr last April, down from $5.4tr three years ago. After years of benefiting from endless liquidity, we are in a period of unforeseen FX trading conditions. Regulation, of course, has a big part to play, as lawmakers continue to enforce tighter measures on asset classes for which currencies are closely linked to. Also, there is nothing like a Libor rate rigging scandal to make remaining forex participants more reluctant to trade.

So by definition, if fewer people are trading, surely market participants must be pulling away from investing in FX trading? On the contrary, this pincer movement of increased regulation and reduced liquidity has actually driven firms to invest more in new technologies to capture any slim profit pickings. A recent TradeTech FX survey of 100 heads of European trading desks found algorithms, multi-asset electronic trading systems and market data, as the priority areas of spend.

While ploughing money into new front end tech is all well and good, the trouble is that FX is a highly fragmented marketplace. And as a result, speedy and accurate communication among disparate trading venues is one of the biggest hurdles firms need to overcome. Particularly for those harboring any hope of grabbing whatever limited liquidity is out there. There are around 200 venues in New York alone, not counting other emerging hubs.

Unsurprisingly, identifying these new emerging market opportunities is the number one priority for currency traders over the next year (source:TradeTech FX survey). It is not hard to see why. The Indian rupee, for example, is currently tied with the Russian ruble as the 18th most frequently traded currency in terms of FX turnover, valued at US$58 billion daily according to BIS. Although the rupee, like the ruble, is still outgunned by Chinese yuan when it comes to turnover.

With more firms looking for slim profit-making opportunities in these far corners of the globe, the spoils will ultimately go to those who can consistently reach their destination the fastest. However, this can only be achieved if the brand-new sink has solid plumbing underneath. This is why, in order to execute FX algo trades efficiently, firms aren’t just seeking the fastest access to pricing, but the most reliable and scalable underlining infrastructure to manage volumes whenever they start to pick up.

Despite Saxo bank reporting a small uptick in FX volumes last month, up to $242 billion from $235 billion in May, it is undeniable that the world’s largest and most democratised financial marketplace is now smaller than ever before. With this in mind, no trader will be thinking of a return to the good old days just yet. That said, as technology continues to infiltrate this $5 trillion market, those that underpin their new trading systems and algos with fast and reliable access to the fast-growing emerging markets, may just find that the good times come around sooner than expected.