Two key trends have come to the fore in the global currency markets, particularly in the last 12 to 18 months, with both potentially resulting in sweeping changes to how, where and even why FX is traded.
The first of these shifts, namely the growth of FX trading in Asia, was explored in greater depth by a panel of FX industry professionals held this May in The London Stock Exchange – hosted by The Realization Group and sponsored by BSO.
Facilitated by The Realization Group’s Mike O’Hara, the event began by discussing which new centres in Asia offer the greatest potential – and how demand for more established hubs such as Tokyo and Singapore has evolved.
Ramy Soliman, CEO at Stater Global Markets, explained that there is significant global demand for FX trading generally, with Australia seeing notable growth in the retail broker space. Hong Kong also continues to be a gateway to China in the retail FX business, he added. Soliman said:
“That’s driving the demand for currencies in these countries. It’s now much easier to do point-to-point liquidity provision from different centres: you can compete, you can price into venues – all of which has helped with the evolution of the market in Asia.”
Jon Vollemaere, CEO at R5FX, agreed, adding that Hong Kong has also re-established itself as an institutional FX centre in recent years, to compete with Singapore.
However, the real question for many firms is not between trading in Hong Kong or Singapore, rather when to move into Shanghai as that is the centre with the highest growth, Vollemaere argued.
“In terms of taking the leap into Asia, you cannot discount Shanghai, but it’s a difficult place to connect to. While everyone in the West thinks the Chinese are becoming more Western, the reality is the West will become more Chinese.”
Tom Higgins, CEO at Gold-i, also believed that Shanghai was growing faster than anywhere, but warned that this was also creating its own problems, such as the repatriation of profits or the fact that none of their Chinese clients could register that they were in China. Higgins explained:
“Everything we thought we knew about doing business in Shanghai was wrong. That was quite a big hurdle to overcome.”
While the regulators may have more work to do on this front, Higgins added that Asia is important for FX growth generally because of where it is in the development stage.
But while there is a clear split between Asia and China, in terms of how well Western firms are making in-roads into the various centres was a matter of debate among the panelists.
Stephane Malrait, Head of Market Structure and Innovation for Financial Markets at ING, warned that it has taken the industry some 20 years to realise there cannot be a central exchange in Asia as it is a huge, decentralised market. Stephane said:
“The other centres are too far away from Tokyo for that to be a centre as the latency is too big. There is no perfect solution – you need to have people in all these locations.”
Then in terms of establishing an FX business in China, the biggest issue for firms is the lack of protection against anti-money laundering, explained Eddie Tofpik, Head of Technical Analysis and Senior Markets Analyst at ADM Investor Services International.
China is also still centrally controlled and can decide to stop business at anytime, as Malaysia did when it stopped the NDF market with only two weeks’ notice, he added. Tofpik warned:
“You can’t count on one country being Asia. There are so many opportunities and it’s a huge market.”
The regulatory environment in many Asian countries further contributes to the level of uncertainty, with no consistency at all between regimes, added Michael Ourabah, our CEO. He explained:
“In the telecoms sector in particular, this can make running your business very difficult.”
On the technology side, however, the environment will improve further as the tier one banks start investing more in matching engines, he adds:
“FX is also not a pure FX play. It is correlated to the rest of the instruments that are being traded in Asia.”
In addition, having quants and data analysts is just one part of all the things you need to do to catch up, Ourabah concluded:
“There are a lot of things the market needs to do to get to where it should be technologically.”
To discover more on this topic, read our report on “Taking the Leap into Asia and Cryptocurrencies: The Future for FX Trading?”