SEFs and the FX market: As swap execution facilities begin to take their place in the grand scheme of global FX trading, banks are responding with bigger and better single-dealer platforms.
Authors: Russell Dinnage, Bradley Wood
Disintermediation within FX markets
The concept of disintermediation within FX markets is nothing new. As a trading term, ‘disintermediation’ in currency dealing occurs today when the middleman in a transaction is removed from the trade so that the liquidity provider can push the product directly to the consumer without a dealer interposed on the trade.
In the past, intermediation was most commonly seen in banks using their single-dealer platforms to corral buyside and real-money client flows and then process those flows into shadowy liquidity pools shared with other banks, leaving clients with the albeit pleasant choice of deciding which lender-suitor was a best fit for their FX needs. These liquidity pools are environments governed by neutral inter-dealer brokers like ICAP’s EBS or Tradition’s ParFX (formerly TraFXpure). And while the IDBs take a cut of every trade filled on their platforms via brokerage fees charged to the banks that then pass some of the cost back to the consumer by the widening of spreads, the banks (and their clients) essentially get what they pay for – surety of fill on every trade.
But the current global financial crisis and the resultant trend of new capital markets regulations endeavour to cast new light into these pools of FX and other derivative asset class liquidity. In doing so, they are creating a new dimension to disintermediation (and a new phrase) for FX boffins to wrap their heads around. That phrase is ‘liquidity fragmentation’.
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