September 21, 2021 | Stamford, CT — Although many FX traders turned away from their screens and picked up the telephone to get trades executed during the COVID-19 crisis, foreign exchange markets continued their march toward electronification as investors focused on optimizing performance on FX trades with order management systems, algorithmic trading strategies and other new tools.
As the global pandemic roiled markets last year, the share of FX market participants using the telephone to execute trades jumped to nearly two-thirds, from just 45% in 2019. Despite this uptick in voice trading, the share of FX trading volume executed electronically continued to rise, climbing to 73% in 2020 from 71% in 2019.
“Although the rate of growth for e-trading has slowed in recent years, electronification will continue because digital innovation is helping the buy side and corporates improve execution quality and manage their operational risk,” says Stephen Bruel, Senior Analyst for Coalition Greenwich Market Structure & Technology and author of FX Markets Keep an Eye on E-Trading while Expanding their Focus.
The sell side has every reason to continue pushing for digital innovation in FX. Coalition Greenwich estimates dealer FX revenue in 2020 at $37.3 billion, which represents a healthy 42% rise over the $26.2 billion earned in 2019. Despite this performance, regulatory pressures are compelling banks to increase their attention on the economics of all their businesses, including FX. At the same time, electronic capabilities are a competitive imperative, ranking third behind only voice execution/pricing and sales coverage and relationship management in terms of importance to buy-side market participants.
More than half of market participants in a recent Coalition Greenwich study plan to increase their use of algorithmic trading, and, as trade execution becomes more sophisticated, market participants are applying equal rigor to some of the key elements of the FX lifecycle that surround matching and execution—such as credit management, regulatory reporting, workflow, and collateral management.
Buy-side market participants in particular are working to optimize performance, minimize risk and wring out costs through automation initiatives spanning the trading cycle from front to back.
“None of these trends are in a vacuum, and, as one impacts another, we expect more integration—and electronification—of the entire lifecycle,” says Stephen Bruel.