The electronification of Asia’s FX markets is only just beginning


The electronification of global FX markets is continuing apace. Like equities before it, cost pressures and increasing regulation have changed the commercial landscape, directing trading volumes away from human traders to computers.While electronic trading volumes in Asia still lag behind the United States and Europe, this style of trading still represents a critical component of the market. Research from Greenwich Associates tells us that 67 percent of FX trades in Asia, excluding Japan, were transacted electronically in 2013.In Japan – in many ways the leading market for all types of electronic trading in Asia – the share of FX trading done electronically is even higher. After more than a year, ‘Abenomics’ is still driving demand for Japanese assets among global investors and in turn demand for currency pairs involving the yen. Meanwhile in China, the central bank’s push to widen the trading band of the renminbi is boosting traders’ interest in the currency. Over time, a more freely-tradable Chinese currency will have a tremendous impact on global FX volume given the country’s strong trading relationships, as well as the global ambitions of its financial institutions. These developments, along with the general trend of capital shifting from the west to the east, have prompted many of the large FX players to attach more importance to local trading flows across the Asia-Pacific region. Some are already well advanced in their plans to set-up matching engines in cities such as Tokyo and Singapore – given the high costs involved, to date this has been confined to the world’s major FX hubs such as London and New York. Such a move is an endorsement of the continued electronification of Asia’s FX markets. It is also significantly accelerating the technology investments being made by regional FX traders, ranging from large institutional investors to hedge funds and local brokers including those who serve the region’s legion of retail FX traders, such as the ubiquitous ‘Mrs. Watanabe’ stay-at-home currency traders. Demand for latency will prompt smaller players to co-locate around these new matching engines and in turn, seek cost-effective solutions to manage this. Cost will also be a key concern for time-sensitive global FX traders seeking to remain at the top of their game, given the additional distance and additional geographies involved. Being able to quickly trade FX across all time zones is expensive. Taking advantage of mutalised connectivity solutions allows firms to connect their setups in Europe and North America to Asia quickly and at a lower cost.Competition has already pushed many traders to increase their reliance on algorithms and electronic systems to drive down the costs of their FX trades. Recent regulatory probes into the setting of some FX benchmarks may also hasten the shift to electronic platforms as clients demand greater transparency around pricing. All of these challenges are sure to keep traders busy, but emerging opportunities will make it worthwhile.

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