Fewer players to dominate foreign exchange industry: Barclays

The foreign exchange industry will be increasingly dominated by fewer larger players as tighter spreads mean banks must increase volumes consistently to maintain margins, a senior Barclays official said. Barclays Capital's global head of foreign exchange, Mike Bagguley, said electronic trading had led to a massive rise in FX volumes, but only banks with the advantage of scale could remain top players.
"Whilst in 2009 there were a lot of banks participating in FX, in 2010 we've seen a certain amount of consolidation towards the top players," he told Reuters in an interview.
"The margins are ever tighter, so banks must grow their volumes just to create the same revenues". Bagguley believes Barclays - rated the third biggest bank for FX in the 2010 Euromoney poll - is benefiting from this trend.
Barclays' third quarter earnings report flagged an improved performance in foreign exchange, even as it reported a 37 percent year-on-year fall in fixed income, currency and commodities revenues in the year to end-September.
Euromoney's 2010 poll showed Barclays had a market share of 11.08 percent, just behind UBS with 11.30 percent but still well behind Deutsche Bank at 18.06 percent. Barclays has leapt ahead since 2000, when it was rated just twelfth with 2.07 percent, and Bagguley said it aims to seal the top spot itself.
"Fundamentally growth in the FX market is related to the global economy - more pools of savings, more trade, more FX transactions for market participants and clients. "To the extent that those will continue growing we expect a larger volume in 2011. We expect continued consolidation with the top players so overall we expect to grow our volumes again next year."
Barclays has seen particularly strong growth in options and swaps this year, helped by the introduction of fully automated trading of exotic options on its BARX platform, which Bagguley said has been surprisingly popular.
"We've seen very significant growth this year, but in fact a large part of our growth has been in electronic swaps and electronic options". Barclays and Deutsche Bank have both introduced fully automated trading of exotic options this year. Electronic trading of options is much more complicated to develop than e-trading of spot given the complexity of some options structures and the need to match numerous variables.
Bagguley does not necessarily see electronic trading of FX options becoming dominant over voice trading, however. Clients may prefer a "hybrid experience", viewing products and prices on the platform before discussing them over the telephone. Barclays introduced live streaming of exotic options in April. This was enhanced in November to enable clients to structure and trade a broad range of FX derivatives.
Strong settlement and transparency are the most important factors for the FX industry, Bagguley said. CLS Bank, which settles FX transactions to reduce the risk of one counter party not honouring its obligation, has minimised settlement risk, while electronic trading has increased transparency. However, Bagguley believes a mechanism to track global currency trades would improve transparency further, especially in options.