Competition heats up for anonymous FX action

LONDON (Reuters) - Banks and trading platforms are competing to get a bigger slice of the rapidly expanding business of anonymous currency trading, where investors buy and sell without revealing their identity to the market.

Electronic foreign exchange trading platform FXall is set to launch a new service later this month that will give aggressive investors like hedge funds the ability to remain anonymous.

The Chicago Mercantile Exchange and Reuters are joining forces to launch FXMarketSpace later this quarter, a trading platform that will also enable investors to trade interbank FX prices without having to reveal their identity.

Trading anonymously offers investors of all sizes a more level playing field in a marketplace dominated by investment banks, large hedge funds and central banks, analysts say.

"Demand for anonymous trading has exploded and it will continue to grow as foreign exchange is increasingly traded beyond the interbank market," said Mark Warms, general manager for Europe at FXall.

The proportion of volumes traded anonymously has grown from almost zero five years ago to a significant slice of the market.

"Anonymous trading now makes up 5-10 percent of a $600 billion per day spot market and the recent launches indicate that there is scope for further growth," said Justyn Trenner, chief executive of research firm ClientKnowledge.

The growth in demand for anonymous trading comes amid broader moves to introduce European legislation that will force banks to seek the best prices for their customers.

MORE PLAYERS

"Funds are increasingly thinking about how they execute and the MiFID directive will require them to look at best execution which will mean they will at least need to examine whether they should be trading anonymously," said a global head of prime brokerage at a major bank.

MiFID is a set of European financial market regulations taking effect in November which, among other goals, demands that firms operating in the European Union offer their customers the best price possible.

HotspotFX platform enables customers to trade anonymously and has a largely hedge fund client-base. Customers using Currenex, another platform that delivers a range of prices, can get access to prices under the name of the bank they lease credit from under a prime brokerage relationship.

Spot broker EBS now generates around 20 percent of the $145 billion per day volume traded on its platform from prime brokerage trading.

The launch of these platforms adds choice to an already vibrant market that has seen strong growth in recent years.

Overall volume on global currency markets is huge. The last figures from the Bank for International Settlements puts turnover at $2.1 trillion a day, but many analysts reckon it is closer to $3 trillion.

LEVEL PLAYING FIELD

And the growth in anonymous trading has attracted an increasingly wide range of clients and leveled the playing field for currency market participants.

For example, market-making banks would be less able to discriminate against counterparties by quoting one euro/dollar rate to one potential customer, and another price to another, which is often tempting to large banks when they know who they are dealing with.

Or, a hedge fund trading anonymously may be able to take advantage of rapid price moves by arbitraging one bank's price against another. The bank offering the less favorable pricing will be unaware who they lost out to and will be unable to prevent what are termed "toxic trades" from this customer in the future.

In addition, companies and funds looking to hedge currency exposure may also benefit from anonymity, which prevents more speculative market participants from taking positions against them when they make big trades.

Large players with deeper pockets may currently throw their weight behind a currency to move it in order to force the corporate or fund to pay up, before coming back into the market and cashing in.

Axel Pierron of Paris-based research consultancy Celent, notes that investors are becoming increasingly inventive at finding ways to disguise trading activity.

"Hedge funds are splitting big trades into a number of small tickets to hide their market impact," he said.