By Paul Golden
Curbs on risk-based activities and internalization of client trades are pushing growth in non-bank market making in Asia, but such activity is not without challenges.
Non-bank market makers have yet to grab meaningful market share across Asia as a whole, with the Euromoney FX Survey 2016 noting the top 10 players in Asia remain banks, while non-bank FX player XTX Markets secured a place in the top 10 in the overall market share.
According to R5 CEO Jon Vollemaere, while non-banks are more aggressive market makers than banks, they face the challenge of the more conservative nature of Asian markets for new technology adoption, coupled with a general dislike of last look.
“In the major currencies, they will be able to adopt the same strategies they have used in the rest of the world – in a commoditized market a significant proportion of customers will trade on best price, irrespective of both the region and whether it comes from a bank or a non-bank,” he says.
“This is more difficult in emerging-market FX, where the markets have traditionally been dominated by voice traders. In a market where prices can gap, clients expect their relationship banks to step up to provide them with a price.”
Many Asian-based bank traders do not like the idea of non-bank market makers coming onto their patch – meaning they can be reluctant to connect – and there is also the technical hurdle of getting liquidity to local users.
China is the big prize that everyone is targeting, concludes R5’s Vollemaere.
“I expect China to create its own model of trading and settlement,” he says. “The Chinese liquidity map is going to change this year as various long-term projects come to fruition and as part of this I expect to see the first Chinese-based – or Chinese-backed – non-bank market maker.”