Banks tighten grip on FX market as algo trading rises - survey

Four thousand U.S. dollars are counted out by a banker at a bank in Westminster
Four thousand U.S. dollars are counted out by a banker counting currency at a bank in Westminster, Colorado November 3, 2009. REUTERS/Rick Wilking/File Photo

LONDON, July 8 (Reuters) - Top global banks consolidated their stranglehold on the $6.6 trillion a day global foreign exchange market last year, with new entrants ceding ground, a widely watched industry survey showed.

With a combined 30% share of the market in 2020, JP Morgan, UBS and Deutsche Bank took the top 3 positions in the widely watched Euromoney FX survey, as investors made a beeline for vendors offering more electronic trading and algorithmic tools in a year when the COVID-19 pandemic disrupted traditional trading arrangements.

A surge in market volatility due to the pandemic last March coincided with a disruption to trading, traditionally rooted in large trading floors at banks and hedge funds in Hong Kong, London and New York, as offices closed and workers were sent home.

That led to a rise in electronic and algorithmic trading and banks who had heavily invested in the space reaped rich rewards.

"Our investment in technology via our electronic and automated trading business was crucial," said Chi Nzelu, head of macro eCommerce at JP Morgan, which also held the top spot for 2019. "Algo trading also came to the fore last year, helping to manage cost and access liquidity efficiently."

The resurgence of the top banks comes at the cost of new entrants like XTX Markets, a dark pool operator, which had climbed steadily up the rankings to stand in third place in 2019, offering deeper trading liquidity and faster execution facilities.

The London-based market maker slipped to fourth place and also ceded market share.

The pandemic-induced volatility early last year widened bid-offer spreads to levels not seen since the global financial crisis, while reducing market depth even in currency pairs considered to be liquid.

While more widespread in equity markets, transacting via computers and high-powered algorithms has become increasingly popular in currency and bond markets in recent years with the pandemic accelerating the trend.

Banks have made heavy investments in algorithmic trading with top institutions offering a variety of solutions for trading currencies. For example, "adaptive algos", offered by many banks in recent months, can change their trading styles automatically depending on fluctuating market conditions.

A study by Coalition Greenwich last month found the disruptions caused by the pandemic may have long-term effects on the behaviour of FX market participants.

More than 40% of financial FX traders employed algo trading in 2020 with nearly the same share expecting their usage of FX algos to increase in the next year, the study said.

(This story corrects name of XTX Markets in 6th paragraph.)

Reporting by Saikat Chatterjee; Editing by Kirsten Donovan

Our Standards: The Thomson Reuters Trust Principles.