Placing Smart Bets on FX

Late April saw quite a stir in the foreign exchange waters, with some big-name players making moves into the FX space and rocking the boat. Interdealer broker ICAP announced last month the acquisition of London-based electronic FX trading vendor EBS Group, while Lava Trading several days later revealed what it calls a "major initiative" to introduce an interbank foreign exchange trading platform.

What's interesting about the EBS deal is that the company is owned by a consortium of 13 of the world's largest investment banks that sold their stakes in the company to ICAP. This group of shareholders included at least one institution you may know - Citigroup. Interestingly enough, Citigroup has owned and operated the now-enamored-with-FX Lava as an independent subsidiary since July 2004.

"I don't think it's a coincidence," says Harrell Smith, manager of Celent's securities and investments practice. "I think for them to be major shareholders in two interdealer platforms and to wholly own one of them would certainly be a conflict of interest," he adds.

It's clear that Citigroup and Lava brass are anticipating the considerable growth in electronic trading of FX to continue, and it looks like it might be a smart bet. Research out of consultancy Greenwich Associates suggests that total electronic foreign exchange volume is growing steadily. Volume among participants in the firm's annual global FX Research Study increased to nearly $17 trillion in 2005, up from $15.7 trillion in 2004.

FX Sees Growth

The majority of this growth, according to Greenwich Associates, is coming from fund managers and pension funds that increased their average electronic FX trading volume by 68 percent. But growing even more was the average volume of what the study classified as "other" financial institutions - organizations that are not banks, funds, hedge funds or insurance companies. This group, which Greenwich Associates says represents retail investors, increased its FX trading volume 70 percent from 2004 to 2005.

The FX market has become an attractive opportunity for financial institutions over the last several years. As the market attracts new business from influential segments such as hedge funds, investment managers and, increasingly, retail investors, it continues to grow and, in turn, bring in more business - a cycle that makes the future of FX look bright.

"I think a lot of that [growth] is because there are new entrants into the space that nobody necessarily predicted would be entrants," says Timothy Sangston, managing director of Greenwich Associates. "If you look at the characteristics of the market five or six years ago, you may be under the impression that it was a market in decline. On the contrary, it has been growing quite rapidly in that period."

This is an excerpt from Wall Street & Technology's blog. To read more opinions and blog entries, visit www.wallstreetandtech.com/blog.