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Fall of the FX trader, in charts

FX trading market structure

Things aren’t what they used to be in sales and trading jobs in investment banks.. Salespeople are being superannuated by systems which allow clients to access markets directly. The few actual salespeople that are left are being rendered more efficient by customer relationship management systems which help them deal with huge numbers of clients. Only a few high-end salespeople have the luxury of calling lucrative clients to chat about the market.

In trading, meanwhile, humans are being displaced by algorithms and banks’ are being rendered superfluous as trading counterparties access third party trading venues directly.

Nowhere is this more the case than in FX trading. A new report from the Bank for International Settlements shows how much things have changed in FX in the space of just three years. Equally, it suggests that the FX market still values relationships and trust – but that human beings aren’t integral to this any more.

1. Big banks have become less important in FX trading

As the chart below shows, banks have been losing market share in FX trading since around 2013. Instead, trades are increasingly taking place through multilateral ‘electronic non-bank market makers’ like XTX Markets, Virtu Financial, Citadel Securities, GTS and Jump Trading.

These market makers are seizing share from banks despite having very few staff. XTX, famously, doesn’t use any human traders.  Instead, it has trading analysts who look at the performance of algorithms, algorithm writers and programmers. The average age of XTX’s 74 staff is just 27.

BIS trading by top dealers

Source: BIS

2. But banks are fighting back 

Banks are trying to win clients back – but not by hiring more traders. It’s all about electronic platforms. Within the FX electronic trading landscape specifically, the BIS notes that there’s now a shift in favour of bilateral trading platforms where a single bank matches up a dealer and counterparty. This is because banks are fighting back against multilateral platforms like XTX by enhancing the functionality of their own platforms with features like cross asset trading and pre-and post trade analysis.

3. Once upon a time, the FX market thrived on relationships between human voice brokers. Now, they only account for 15% of the total

As the chart below shows, only 15% of the FX market today is broked by human beings working the phones. A further 28% is matched by either a voice broker or an electronic matching system, and the remaining 55% is all about the electronic platforms.

The BIS suggests that the rise of single bank bilateral platforms (mentioned above) shows that relationships are still very important in FX trading. – It’s just that those relationships are now between clients and banks’ electronic trading platforms, rather than between clients and banks’ individual employees.

BIS relationship driven

4. Algorithmic trading has transformed the market in the past 12 years but may now have plateaued 

The BIS looked at the share of trades being executed by algorithms on BIS, one of the largest multilateral trading platforms, which is now part of ICAP. It found that the share soared from almost nothing in 2004 to around 70% in 2013, but that it’s since stalled. This is due to a decline in high frequency algorithmic trading as venues like EBS have introduced ‘latency floors’, or randomized pauses, as speed bumps to prevent high frequency traders running amok.

Algorithmic trading is therefore huge, but unlikely to get much bigger. In FX, at least, the BIS thinks the future likes in banks’ own bilateral trading platforms. If you’re an FX trader now, this looks like where you should aspire to work.

BIS EBS


Contact: sbutcher@efinancialcareers.com

 

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