Growing Convergence between Retail and Wholesale FX
Wholesale and retail forex trade were clearly distinct up until the mid-1990s. While the forex market was exclusive to banks and institutions, retail clients did not exist. Now fast forward to 10 years later, wholesale FX and retail FX are actively collaborating, and even competing in some ways.
Leading FX banks have shown an increased interest in the retail space in recent years. Gaining traction through the large trade volumes they can receive from retail dealers, FX banks act as a conduit between their thousands of retail customers. It is important to
The retail forex market is fueled by consumer interest just like all emerging trends. Rather than compete directly with banks, retail dealers target a different clientele segment – hedge funds and personal investors. Retail dealers differentiated themselves from wholesalers and each other on two fronts; service and technology, from the get-go, to win over these individuals.
From a service perspective, both bank and non-bank dealers provide 24-hour liquidity, provide pricing and execution services, and act as counterparties in customer transactions. Retail forex dealers, taking a cue from the online equity brokers, sought to make FX trading more efficient and realistic.
Retail dealers have introduced two significant improvements to their services:
- Leverage as high as 100:1 or more for lower margin requirements
- Transaction costs are reduced due to the commission-free trading and competitive dealing spreads.
The convenience of one-stop shopping is also a benefit to retail customers. In addition to playing the roles of credit intermediary, liquidity aggregator, market maker, clearing firm, and technology provider, non-bank dealers perform many other functions as well. Retail dealers are often more efficient than their banking counterparts at performing these functions.
To support the operational and administrative functions of money manager clients, major retail firms developed proprietary back-office solutions. The retail dealer’s role in money manager operations ranges from application processing and account setup to providing real-time customer and client reporting.
These kinds of innovations spurred money managers’ interest, which is why the hedge fund industry has mushroomed in recent years, whereas foreign exchange is becoming an increasingly popular asset class.
There were no improvements in price discovery, execution, or STP for first generation banks’ platforms. The retail industry, however, was quick to recognize the advantages of sophisticated technologies and reap the opportunities.
Retail platforms introduced improved price transparency as one of their early innovations. Today, smaller forex traders are able not only to participate in FX trading but also to be on the same level as larger institutional customers.
A significant number of retail dealers are now offering clients execution options and services that are not available to traditional bank customers. In most cases, customer market orders are now executed in under one second, including a margin check.
A wide range of technological tools and services available from a dealer-side perspective allow traders to manage customer transactions, gain real-time insight into position risk, monitor and execute pending customer orders effectively, and hedge with bank liquidity providers electronically.