NEW YORK (Reuters) – Foreign exchange trading through Internet-based or electronic systems is expected to grow sharply by 2007, according to a study released on Wednesday by research firm Celent Communications.
Electronic currency trading is split between the dealer-to-client segment, where banks trade with institutional customers, and the interbank market, where banks trade with each other.
The dealer-to-client sector has two types of participant — multi-bank platforms, which offer prices from a variety of dealers, and single-bank sites, which allow clients to view prices and trade with only one financial institution.
The interbank market, led by Reuters and EBS, takes about 48 percent of spot trading volume, according to Celent.
The New York-based firm expects electronic trading activity in the dealer-to-client segment to increase to 70 percent of volume by 2007, from the current 43 percent, with growth coming from hedge funds and commodity trading advisors (CTAs).
“The fastest-growing segment of forex trading by institution are hedge funds and CTAs, which happen to be the segments with the highest adoption of, and most comfort with, electronic trading,” said Celent.
Electronic trading has not been as widely adopted in the dealer-to-client market as in the interbank market, but once customers start using online platforms, they quickly use it for the majority of their trading.
Currenex, a multi-bank provider launched by a group of venture capital firms in 1999, has said new clients tend to conduct 5 percent of their trading on the platform in the first month, but execute 80 percent online by the next quarter.
FXall, another multi-bank platform owned by a consortium of investment banks, said clients do several trades a day at first but submit thousands of orders daily within a few months.
On the interbank market, which has turnover of about $301 billion per day, Celent expects electronic trading to rise to 90 percent of volume by 2007, from the current 60 percent.
“The interbank e-trading platforms are growing bigger and more liquid over time, which should attract trading interest from banks that are conducting their largest trades over the phone,” said Celent.
The interbank market generally has higher adoption rates of electronic trading than the dealer-to-client sector since technology is viewed as a necessary tool in trading with institutional customers.
However, Celent said some corporate treasurers have expressed reluctance to embrace online trading, citing bad experiences in the bond market.
When electronic trading took off in bonds, as many as 100 platforms competed but it eventually turned out to be a waste since “almost all of them no longer exist,” Celent said.
So some corporations are holding off on electronic forex trading as they wait to see which platforms survive before committing to one system.