CHALLENGES AHEAD

In the specific area of retail or professional trading, new e-brokers, having identified the retail opportunity early on, have emerged to capture significant volumes from the growing retail FX sector. The latest retail trading volumes are estimated to be in the region of US$50bn a day according to research firm ClientKnowledge.Healthy revenues of US$1bn annually are also predicted by the same firm. As volumes continue to grow and the banks continue to look for increased flow to increase profit margins, it is clear that the growth of retail trading will be the next significant area of interest for those banks. Indeed, many of the leading FX players have recently announced increased stakeholdings or investment in e-broker partnerships.

New demands for speed and sophisticated trading tools have been brought about through the investors’ thirst for returns. The sell-side’s existing infrastructure and systems for institutional investors were not designed to meet such demand for both speed and transaction volumes. As a result they are straining under the increased load. The sell-side must therefore look urgently to solutions that can plug the gap and provide the buy-side with the new tools, capacity and speed that are required for future trading challenges. The criterion for success in what is a highly competitive and profitable space, is continued investment in both software systems and technical infrastructure, so that they are sufficiently robust and scalable to manage increased volumes at higher speeds.

The investor also needs to stay one step ahead of the curve to find the best possible prices and execution venues. This will be achieved through the use of enhanced algorithms to sustain returns. Traders must therefore develop a greater understanding of the sophisticated trading tools that are being made available and then choose best of breed solutions to help boost their performance.

Additionally, with the recent increased flows through many liquidity aggregators, including multi-bank portals such as FXall, FX Connect and Hotspot FX, the sell-side is finding its prices subject to greater transparency. Against this back drop, it must equip itself with the tools to intelligently manage liquidity amongst a growing number of venues and at prices that are competitive whilst also being profitable.

In response to this, the sell-side is improving the accuracy, speed and delivery of prices and as it does this, arbitrage opportunities are becoming harder to find. As this decline accelerates, the buy-side will continually need to seek alternative opportunities for arbitrage in new financial products and markets.