August 22, 2023 | Stamford, CT — Investments by dealers in increasingly sophisticated e-trading systems and growing liquidity on multidealer platforms have set the Japanese FX market on a course toward increasing electronification. 

At a global level, FX is the world’s most electronic market. Across North America, Europe and Asia, approximately 76% of cash FX trading volume is traded electronically, and that share has grown consistently over the past 20 years as institutions and corporates seeking the best pricing and maximum liquidity on FX trades, migrated to electronic platforms. The transition to electronic trading in FX has been slower and more muted in Japan, specifically among banks and insurers. Overall, about 60% of Japanese FX cash trading volume is executed electronically. 

Despite the gap, e-trading is gaining momentum in Japan, and further growth is anticipated driven by the increasing popularity of multidealer platforms and application programming interfaces (APIs).

“The growing popularity of multidealer electronic trading platforms and APIs is providing a foundation that could, over time, bring the market more in line with global trading practices that increasingly favor electronic execution,” says Seiji Ishii, Head of Japan at Coalition Greenwich and coauthor of Japanese FX Continues Progress on Multidealer Platforms and APIs.

Almost two-thirds (64%) Japanese banks now trade FX on multidealer platforms, up from less than half four years ago. As dealers improve their liquidity and pricing of G10 currency pairs on multidealer platforms, banks are realizing the cost efficiencies of trading FX electronically. This embrace of multidealer platforms by banks will drive growth in e-trading volumes, as recent adopters begin ramping up the share of their overall FX trading volume routed to this channel.

Despite the cost and transaction efficiencies of trading FX electronically, the unique characteristics of the Japanese market present some barriers to the development of e-trading. 

“Sales relationships are a key driver of FX flow allocation in Japan,” says Vignesh Srinivasan,  Research Manager in Asia-Pacific at Coalition Greenwich and co-author of the report. “As a result, Japanese investors will continue to allocate a significant chunk of their FX flows to their strongest sales relationships regardless of the cost efficiencies of e-trading.”
 

Japanese FX Continues Progress on Multidealer Platforms and APIs breaks down Japanese FX trading volume by type of market participant and execution channel, traces the rise of multidealer platforms and APIs, looks at the trading practices of Japanese retail aggregators, and examines the biggest barriers to the future growth of electronic FX in Japan.