FX Liquidity Moving Away from Banks
One of five institutional traders executes their FX orders using non-bank liquidity.
Thatâ€™s a healthy gain from the 16% of investors who used non-bank liquidity in 2015.
In a Greenwich Associates report, â€śDiversifying Liquidity: Attaining Best Execution in FX Trading,â€ť the consultancy said that the increase is rooted in macroeconomic and regulatory-driven changes that are spurring a new wave of change in global FX trading.Â As a result, investors are increasingly using sophisticated analytics to assess existing trading relationships and engage with new non-bank counterparties.
According to the Bank for International Settlements, trading in foreign exchange markets averages $5.3 trillion per day.
Greenwich analyst and market structure head Kevin McPartland said that the largest FX dealers in the world continue to execute nearly half of global buy-side FX volume and that the worldâ€™s largest money center banks will continue to play a huge role in facilitating the buy sideâ€™s FX needs. However, FX dealers are still adapting to new rules that change the economics of FX liquidity provision and find themselves increasingly competing for flow with non-bank liquidity providers.
â€śInvestors should work to gain access to multiple liquidity streams and ways of interacting with that liquidity,â€ť McPartland wrote in his report. â€śMaintaining deep relationships with a few bulge-bracket brokers is prudent, given the wide range of services they provide. But supplementing that with non-bank liquidity streams is now an important part of ensuring best execution.â€ť
The report is based on data gathered from 1,633 top-tier users of foreign exchange at large corporations and financial institutions in North America, Latin America, Europe, Asia, Australia, and Japan between September and November of 2015.
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