Foreign exchange trading volumes are consolidating in the hands of the world’s biggest FX dealers — a trend that, if not offset by countervailing factors, could over time reduce the number of competitors in this massive and essential market.

According to a new report from Greenwich Associates, Biggest FX Dealers Amassing Dominant Market Share, a combination of a slowdown in trading volumes and the loss of market share to larger rivals is making it difficult for many dealers to sustain the level of volume required to support their costly infrastructures and maintain profitability.

The five largest FX dealers by market share are Deutsche Bank, UBS, Citi, Barclays, and J.P. Morgan. Together, these banks captured approximately 53% of global trading volume in 2013. That share was up from 48% in 2012 and 45% in 2011. As recently as 2005, the top five dealers controlled as little as 39% of global trading volume.

Many of these gains have come at the expense of the leading dealers’ closest competitors. The combined market share of dealers ranked 6–10 in the global market dropped to 22% in 2013 from a peak of 27% in 2011. Dealers ranked 11–20 also experienced significant declines.

“Several factors are contributing to the growing market share of the top dealers, including higher costs of capital, increasing incentives to clear, the breakdown of the traditional fixing process, and the expanding use of technology,” says Kevin McPartland, Head of Research for Market Structure and Technology at Greenwich Associates.

Concentration to Continue in the Short Term
The main trends driving business to the largest dealers—growth in electronic trading, increases in capital costs, growing incentives to clear—will remain in place over the short term and Greenwich Associates expects this concentration of FX trading to continue for at least the next 6–12 months.

While FX volumes have recently rebounded, it’s not clear yet whether volatility and volume improvement are here to stay. This remains the biggest wildcard for FX market structure change, and therefore changes to the competitive landscape. “A more active market means more dealer revenue to go around for everyone,” McPartland says.