Institutional investors with access to non-bank liquidity providers execute 20% of their volume through non-bank liquidity providers.

In a new Greenwich Report, Diversifying Liquidity: Attaining Best Execution in FX Trading, Greenwich Associates says macroeconomic and regulatory-driven events are spurring a new wave of change in global FX trading.  As a result, investors are increasingly focused on best execution by utilizing sophisticated analytics to analyze existing trading relationships and engage with new counterparties.  These results are based on 1,633 in-person interviews with top-tier foreign exchange users globally.

The largest FX dealers in the world continue to execute nearly half of global buy-side FX volume and Greenwich Associates believes that the world’s largest money center banks will continue to play a huge role in facilitating the buy side’s FX needs. However, FX dealers are still adapting to new rules that change the economics of FX liquidity provision and find themselves increasingly competing for flow with non-bank liquidity providers.

Since 2008, buy-side trading handled by multi-dealer trading platforms jumped 32%, while phone-trade volume is down 50%.  These changes occurred in tandem with an overall growth in investor electronic trading, which now accounts for 73% of volume executed annually.  The result is a market where technology acumen is critical to long term success.

“Investors should work to gain access to multiple liquidity streams and ways of interacting with that liquidity,” says Kevin McPartland, head of Market Structure & Technology Research at Greenwich Associates. “Maintaining deep relationships with a few bulge-bracket brokers is prudent, given the wide range of services they provide. But supplementing that with non-bank liquidity streams is now an important part of ensuring best execution.”