Technology spending in the foreign exchange market is on the rise thanks to the growth of algorithmic trading and 'electronification' of the business, according to a report from Celent.
Algo trading and the growth of non-dealer and retail activity has seen the average spot FX ticket size fall from $4.3 million in 2004 to $1.8 million this year as the number of trades has grown from 86,000 a day to 498,000.
Meanwhile, electronic trading is gaining a greater share of transactions, especially among banks, who conducted 92% of transactions this way in 2009. The figures for asset management firms and corporate entities stood at 66% and 50% respectively.
These trends are expected to contribute to an increase in IT outlay across the buy and sell side, from around $1.2 billion last year to $1.8 billion in 2013.
In the pre-trade phase, the focus is on liquidity aggregation, enhanced analytics including complex event processing, transaction cost analysis and better user interfaces. Increasing trade volumes and falling ticket size have put huge pressures on the handling of market data as well as intelligent usage of it.
Single-dealer platforms are gaining popularity thanks to banks' technology investments. They provide greater speed and reliability of trade execution, because they create fewer hops from execution and low-latency technology, says Celent.
Unified post-trade STP technology is also in demand as trade size keeps falling and number of transactions keeps increasing. Cost reduction for the smaller players has driven demand for hosted-service models and shared services.
Says the report: "The success of FX is tied to higher IT spending. Competition for market share has resulted in larger banks scaling up their investments. Smaller banks have been pressed to come up with innovative approaches, and we see them moving towards providing niche offerings such as specializing in specific derivatives or currency pairs, or focus on specific segments of customers like hedge funds and asset managers."