Introduction

FX markets around the world have withstood the events of the past eighteen months surprisingly well. Prior to the fall of Lehman Brothers in September 2008, the total daily volume of FX trades had been steadily growing.

Key findings

• FX Business overview – The FX market experienced something of a boom throughout 2008 with trading volumes reaching previously unforeseen levels, largely due to increased interest from buy-side firms. FX businesses typically trade plain vanilla products such as spots, forwards, and swaps, as well as more exotic options, though research suggested that there would be something of a flight to simplicity in the current environment.
• Technology – With the inherently global nature of the FX market it is favourable for banks to have global systems. This point was demonstrated most clearly by one tier-1 European bank who said that the global nature of their systems enables them to quote the same price for a currency pair anywhere in the world. All of the banks that Lepus spoke to stated that they have global FX systems, though inevitably there are areas with certain discrepancies.
• Risk – As the landscape of risk management has changed as a result of the credit crisis, it is becoming increasingly important for all the stakeholders to be aware of the risks associated with trading certain products, including technologists. Promoting an all round risk aware culture is something that many organisations are keen to do. As such, while technologists would pay particular focus to operational risk, it is important to look at some of the other risks facing the FX business at present.
• Future trends – Research has shown that there is huge potential for growth in the FX market over the next few years. Has buy-side firms continue to show interest in this area, the nature of the market and the underlying technology will be forced to adapt.  Investment in building out the capabilities and stability of e-trading platforms is likely continue, but also, banks are likely to invest in their Back Office FX processing systems, to ensure they are able to keep up with the expected increase in traffic.

Conclusion

As the FX market evolves, it will cease to be the playground of the major investment banks. As volumes continue to grow, more and more players will be attracted to this highly liquid market and those failing to invest in the infrastructure required to process this high volume of electronic trades will be left by the wayside.

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Tagged with: 2009, FX, technology, Technology Research Report