Foreign exchange (FX) trading volumes are consolidating in the hands of the world’s biggest FX dealers, according to a report from Greenwich Associates. The company says that this is a trend that, if not offset by countervailing factors, could over time reduce the number of competitors in this massive and essential market.
The report says 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.
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.
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