The Growing Divergence of Increasing Liquidity Providers While Reducing Trading Venues

Within the past year, the FX market has witnessed increased market volatility, trading volumes, and profitability. In conjunction with this, we have seen a growing number of clients add additional liquidity providers (LPs) to their stack, particularly regional market makers who specialize in specific currencies. While most clients still want to and actively do trade with global tier one banks, their liquidity needs have expanded into more niche currencies as well.

As a result, buy-side risk takers have looked towards these regional specialists to help navigate the growing demand in both the non-deliverable and onshore (deliverable) markets. From what we have seen with multi-pod, multi-strategy firms, it is common to undergo multiple batches of LP onboarding. The first batch targets tier one banks while the subsequent batches target regional market makers, non-bank providers, and central limit order books (CLOB) — a trend that is well continuing into 2023.

Within the realm of regional FX liquidity, we are seeing a growing need for deeper liquidity amongst Latin American (LATAM) currencies. We have many clients trading for both alpha generation and hedging purposes which require NDF liquidity, but we’ve also witnessed a more recent uptick in the request for onshore delivery. Because of this, BidFX’s recent additions of specialized LATAM focused LPs should significantly augment our client’s ability to receive competitive LATAM electronic NDF streaming prices while also enabling clients access to deliverable onshore liquidity, if that is what they require. LATAM is not the only region with specialized focus, however.

We have also seen growing demand for Asian currencies such as SGD, KRW, TWD, INR, IDR, CNH, and THB. In addition to tier one banks, our clients currently access liquidity for these currencies through specialized regional market makers in Asia as well as SGX’s ECN  – CurrencyNode, where participants can receive top tier liquidity for EM/Asian pairs from the vast network of local providers. This access to liquidity is unique across Spot and NDF since clients do not have access to these LPs directly through their PB relationships or direct credit.

While some may argue that adding more LPs does not necessarily result in better profitability or long-term sustainability, it does seem that the regional providers are increasingly gaining interest and market share.

Although institutional clients are generally expanding the number of LPs in their stacks, we are also seeing a growing emphasis on reducing their amount of FX execution venues. While increased liquidity can reduce the risk of paying excess spreads, many traders and firms do not want the operational risk and burden associated with using multiple execution platforms, trade confirmation systems, etc.

As such, many clients are turning towards aggregators to be their “one stop shop” for trading needs, consolidating their eFX liquidity into one streamlined platform (both desktop and mobile). This provides the added advantages of proving best execution to end investors, reducing desktop real estate and, ultimately, disjointed liquidity.

As seen with the continuous development in the electronic NDF market, there is also a heightened focus from the buy-side across the FX spectrum to rely less on voice trading and outdated RFQ technology and more on electronic streaming liquidity across all deal types. Most recently, we have seen an increase in buyside requests for their liquidity providers to stream swap curves as well as outright Forward and NDF prices.

While numerous firms are looking to reduce the number of FX platforms they use, many are also reluctant to replace or add new Execution Management Systems/Order Management Systems unless the perceived value is significantly greater than their current benefit. With this comes the desire towards not only adopting and using a reliable platform with cutting edge functionality, but also choosing a platform that can be relied upon for the foreseeable future due to its innovation and consistent delivery of advanced features and best liquidity as the electronic FX market continues to mature and evolve.

Because of this, BidFX has stayed at the forefront of cutting-edge buyside FX technology and functionality, becoming a market leader in eNDF trading and becoming the preferred buyside venue for many FX traders, ultimately replacing their legacy connections.