Bobsguide - October 2006: FX trading is still dominated by the large dealing banks, yet exchange-like models fueling a bid-and-offer market are challenging the traditional request for quotes. With the appearance of new execution venues, it has become easier for traders to enter the FX market and reduce the risks associated with these transactions. “The types of players that engage in FX trading range from national central banks and dealer banks all the way down to day traders in an arcade,” said Tom Price, a senior analyst in the Securities & Capital Markets research service at TowerGroup. “These myriad players have many different reasons for participating in the FX marketplace, and their individual motivations determine their specific methods and venues for trading.”
Highlights of the research include:
· Technology, culture, and methodology have shifted FX trading from the telephone to the desktop keyboard. Whether the marketplace is a single-bank portal or a vendor platform, e-FX has increasingly become the method of choice for market participants.
· Hedge funds have had a considerable impact on all asset classes, and TowerGroup expects they will continue to be the driving force for technology innovation in the FX marketplace.
· TowerGroup expects consolidation of FX execution venues to occur over the next two to three years. Multibank portals will be the most affected by venue consolidation, and TowerGroup estimates that only two or three will remain once the consolidation dust settles.
· FX electronic communication networks (ECNs) represent the next stage in the evolution of the FX markets and will become the platform of choice for traders that treat FX as an asset class.
Price continued, “FX markets have matured and offer great potential as an asset class. Rather than being a disruptive force, e-FX has enabled both innovation and growth in the space. The players who adapt to the new FX model will be the ones who ultimately succeed.”
For those unfamiliar with ECN trading platforms, instead of offering a single quote per currency pair, traders see depth of market. Not only do they display multiple quotes from multiple liquidity providers, traders can actually post their own terms and, thereby, become mini marketmakers themselves.
If ECN trading is, indeed, the wave of the future, traders might well want to consider narrowing their search for a broker to those offering an ECN platform and get ahead of the game.
Recommended Additional Reading
Think You've Been Trading the Forex? Think Again
Advantages and Disadvantages of Non-Dealing Desk Trading
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