An equities-like market in which the buy-side can trade foreign currency with one another is set to rise in the next three years, putting pressure on market-dominating banks, a recent study has found.
London-based capital markets consultancy, GreySpark Partners, this week published a report looking into how e-commerce trends, macroeconomic forces and new capital markets regulation are changing foreign exchange (FX) trading.
The research found the lines between the characteristics of dealer-to-dealer (D2D) and dealer-to-client (D2C) multi-dealer platforms are becoming blurred, leading to the emergence of an all-to-all (A2A) model, or equity-like market.
The report said all counterparties will be able to share unrestricted access to currencies liquidity, and banks must be prepared for the shift to retain client businesses.
"In the FX market of the future, there is no one-size-fits-all solution for banks as they look to adapt their currencies dealing models to make them more suitable for an equities-like, electronically-traded FX environment," Frederic Ponzo, GreySpark's managing partner and lead author of the report, said.
The buy-side has been enjoying more choice in the FX market since a growth in the use of D2C platforms, as new capital markets regulation has incentivised their use.
D2C platforms are now seeking registration as organised trading facilities or swap execution facilities in Europe and the US, respectively. As the numbers of these venues continue to increase, the report said FX liquidity would fragment away from the concentrated, D2D platforms, threatening the old bank-to-bank model.
With more liquidity per year moving into D2C venues, the divide between the traditional platforms and new or revamped venues is becoming unclear.
"GreySpark believes that an equities-like, A2A marketplace will emerge. Signs of this A2A marketplace are already appearing, and the early stages of the transition could be in effect by 2016," the report said.
The A2A market structure will allow for a more fluid model, requiring buy-side investors to interact with the market more independently than in the past.