Many ways to cater for the FX market

FXall is hedging its bets by adding anonymous trading to its existing platform, which currently allows banks to see where transactions are coming from. CME and Reuters seem sure that a central counterparty model is the way to go, and are betting significant resources that they are correct. Lava, meanwhile, is going down the interbank route, judging that this is where the real action is likely to remain.

How the market evolves will ultimately prove which one of these approaches reaps the most rewards. While there is no proven case that the central counterparty model is what the market has been waiting for, there are a number of good reasons for it to thrive. A single central counterparty intuitively sounds like it would be more efficient than the current scenario, which sees multiple prime brokers each providing credit lines.

Similarly, Lava's bid to move into the interbank space and FXall's focus on buy-side to buy-side activity with its new intiative, show that various platforms see value in models that others are employing.

The upshot of this is that the market is likely to remain a thoroughly fragmented place for some time to come. This is both good and bad for banks and their customers.

On the positive side, banks have multiple ways of getting to customers, each offering different benefits. They can target certain types of client by offering prices on the different platforms that exist. Customers can choose from a bewildering number of sources to get tight streaming prices. Competition is keeping everyone on their toes.

However, this choice has its drawbacks. Like schoolboys in a sweetshop, customers are dazzled by a seemingly ever-increasing number of ways to access liquidity. Whether they pick the right model for them is often more likely to be dictated by the effectiveness of the marketing operation behind the platform than whether it is suitable for that type of business.

Platform diversity also comes at a cost. Each individual platform costs money to operate. Whether this is met by fees from customers or increased spreads, it is indicative of a market that is not as efficient as it could be.

On balance, however, the variety offered by the platforms is to be welcomed. Perhaps it is inevitable that such a global and diverse market has so many different ways of reaching customers.