Institutional Investor's Alpha Magazine - April 2008 - (Page 23)

efx By Richard Westlund A VARIETY OF ELECTRONIC PLATFORMS NOW ALLOW FX buyers and sellers to trade directly, if they wish. These exchange-based models are lowering market pricing and accelerating the pace of transactions. At the same time, banks are also investing in eFX platforms and offering trading options to their clients. “Until recently, every FX trade had a dealer on one side and a client on the other – 100 percent of trading was dealer to client,” says Xavier Alexandre, director of Hotspot Fxi in London, a subsidiary of Knight Capital Group. “Since we entered the market in 2004, we have seen client-to-client trades rise from about 2 percent to 50 percent of the overall market. The banks still put in their pricing but get half the deals, while the other half are clients dealing with each other.” Fund managers recognize that foreign exchange is the largest and most liquid market in the world. Average daily turnover in traditional FX markets was estimated at $3.21 trillion in the Bank for International Settlements (BIS) “Triennial Central Bank Survey 2007.” That study noted that the dollar was on one side of 89 percent of all FX transactions, followed by the euro (35 percent). Only 3 percent of all transactions in FX derivatives did not involve the euro or the dollar. A recent report by CME Group, “FX Market Growth and Trends,” notes that traditional trading practices are rapidly giving way to electronic trading. “This study conﬁrms that electronic trading venues need to provide state-of-the-art Electronic Platforms Reshaping Foreign Exchange Trading Markets Until recently, a fund manager seeking to trade foreign exchange (FX) would phone several banks in order to get the best pricing. Today, far more options are available that allow hedge fund managers, commodity trading advisers (CTAs) and other investors to pursue and execute FX-related strategies. execution and post-trade services,” says Derek Sammann, managing director for CME Group FX products. Driven by buy-side demand, FX traders are pushing electronic volumes signiﬁcantly higher, with anticipated usage of eFX expected to reach 80 percent in all categories by 2010, says the report. FX customers are motivated to direct their trades to electronic platforms apart from traditional voice-brokered systems for a variety of reasons, including: ease of access, multiple liquidity channels, central clearing (in the case of futures), transaction speed, reduced cost and straight-through processing As London-based Mark Robson, CEO of FXMarketSpace, a global FX platform for the over-the-counter (OTC) market, says, “Accessing the market efﬁciently – that’s where the electronic platforms come in. You get best execution with the electronic model, which is faster and less prone to errors. It’s a natural evolution.” Why eFX? For fund managers, the move to eFX and electronic communication network (ECN) market structures provides traders with more control over their activity. “A key beneﬁt for the institutional investor is that electronic trading can give them anonymity and access to greater pools of liquidity, which ideally helps them seek best execution more efﬁciently,” says Gary Stone at Bloomberg Tradebook, a leading ECN providing institutional traders and broker-dealers with direct access to more than 30 global exchanges. April 2008 • This Sponsored Report was prepared by the Special Projects Department of Alpha and written by Richard Westlund, a journalist based in Miami.

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - April 2008

Institutional Investor's Alpha Magazine - April 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Here to Eternity The Good Guys: Voice of Hope Cover Story: The Kings of Cash Where the Money Is Into the Light Interview: Proceeding with Caution Strategies: A Convenient Truth Alpha Bytes: Village Voice Unhedged: Commentary: No Time for Complacency

Institutional Investor's Alpha Magazine - April 2008

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