As alternative liquidity sources begin to gain more traction across the FX industry, discussions are now turning towards whether alternative options are contributing to fragmentation and the impact that greater choice is having on market structure.
For experts speaking at the liquidity and alternative liquidity panels at TradeTech FX 2025, finding ways to navigate between two distinct liquidity ecosystems spanning different access mechanisms and pricing models is a key challenge currently facing the FX market.
Specifically, the panellists highlighted a split in market structure, indicating that in the primary markets and futures space, spanning venues such as major electronic communications networks (ECNs), non-banks seem to dominate due to different operational models and risk management approaches, while alternatively, banks are taking the precedent over bilateral market liquidity, such as dark pools and single-dealer platforms.
Speaking to this, Jeremy Smart, global head of distribution at XTX Markets, said: “I think the biggest single change that I’ve seen across the FX market in the last few years is this bifurcation of liquidity between primary markets and secondary markets and financial liquidity.
“What you’re seeing is the question of how you translate this future to market liquidity, which I think is really quite deep and varied.”
Additionally, experts pointed towards how alternative liquidity sources are contributing to market fragmentation.
Blaise Sheppard, head of FX at OneChronos, said: “You’ve got to ask the question, is the venue solving a problem? Because if it’s just more of the same, then all that does is create more fragmentation and more places that you need to meet the same people.”
However, the premise that a wide selection of liquidity choices contributes to market fragmentation was not a fundamentally negative aspect for all panellists.
“There’s this interesting thing about fragmentation, and everyone says it like it’s a bad thing. Is it necessarily a bad thing?” Smart added.
“There are all of these different platforms, all these different ways of trading which have been created specifically so that you can get two pieces of matching interest to match in the best way that they possibly can. So all of these things are innovations which are designed to create better trading outcomes and better execution outcomes for people by not averaging things.”
Market volatility – an alternative driver?
Additionally, discussions turned toward the period of market volatility experienced earlier this year in April following Trump’s liberation day tariffs and the ensuing market activity that came from this.
Specifically, the panellists highlighted that during this period, banks and clients appeared to increasingly turn towards a direct basis, such as alternative, relationship-driven liquidity channels, rather than traditional anonymous ECN liquidity.
In April, UBS reported a 50% growth in direct client relationships and MVP (minimum variance portfolio) connections, while contrastingly, only a 15% increase was seen in the ECN space, indicating a strategic shift towards disclosed or bilateral relationships.
Commenting on this, Tgetg Roethlin, head of EFX principal trading EMEA at UBS, said: “One observation is that non-banks had stepped in, whereas our observation is slightly different. We’ve stepped back on ECN because we’re focusing on a direct basis, but I think the mix on a whole depends on what you have in your platform.”
As alternative liquidity becomes more and more prominent across the industry, the impact this will have on market structure and fragmentation appears to be one to watch as this continues to evolve.