FOREX RISING TO THE EAST.

By Matthew Lempriere, Telstra.

Foreign exchange trading has long been concentrated in the financial hubs of London, New York and Tokyo, but as major western markets face up to structural and macro-economic challenges, turnover is beginning to shift further to Singapore, Hong Kong and Shanghai. Consideration should now be given to the importance of having the necessary infrastructure and connectivity in place in order to capitalise on these movements.

In 2001, the average daily turnover in Foreign Exchange (FX) was $1.2 trillion according to the Bank of International Settlements (BIS) and this has risen to a high of $5.4 trillion in 2013. This significant growth was fuelled by globalisation, currency hedging and speculation.

However, latest figures from 2016 show that daily turnover has declined to $5.1 trillion, representing the first drop in activity in more than 10 years. There are several possible explanations. Firstly, banks were traditionally the greatest source of liquidity in FX trading but stricter financial regulations have forced them to cut back. While other liquidity providers have emerged, they’ve failed to make up the shortfall so far. Then there are macroeconomic factors that have reduced volatility in the FX markets, such as slow economic growth and low interest rates across the globe.

Shift to Asia

Changes are afoot. One of the these is the potential shift of FX trading activity to Asian financial centres like Tokyo, Hong Kong and Singapore. This shouldn’t come as a surprise, as many emerging market currencies are backed by strong fundamentals and Asian financial regulators generally opt for a lighter touch than their western counterparts.

To put this in perspective, London – historically the global FX trading hub given its location and concentration of financial institutions – has seen its share of the FX market fall from 40.8% in 2013 to 37.1% in 2016 according to the BIS. And that is before the possible effects of Brexit kick in.

In contrast, the combined share of Tokyo, Hong Kong and Singapore increased from 15% in 2013 to 21% in 2016. The biggest jump was in Singapore, an up-and-coming player in electronic trading. Meanwhile, the Chinese market share rose from 0.7% in 2013 to 1.1% in 2016 with Shanghai emerging as a possible challenger to the traditional North Asia FX hub of Hong Kong.

Singapore

All three Asian centres – Tokyo, Hong Kong and Singapore – increased their share of FX trading in this year’s survey, but perhaps the most significant was Singapore, where average daily turnover grew from $383 billion in 2013 to $517 billion in 2016, giving it a market share of 7.9%, up from 5.7%. With a well-developed financial centre and strong location to capitalise on South-East Asian flows, Singapore is well-positioned to benefit from a further shift in FX trading to the east. An interesting development is that the Monetary Authority of Singapore (MAS) has recently awarded a grant to Spark Systems, the latest FX trading platform to be launched in Singapore, aimed at making FX trading cheaper and faster in the region.

Hong Kong and China

While Hong Kong has traditionally been the main hub for north Asian FX flows, the rise of China could well see some movement towards Shanghai. The growth of China’s economy and the internationalisation of the renminbi is certainly expected to be one of the most transformative trends in foreign exchange in the years to come. Since 2010, the Chinese government has embarked on a steady process of liberalising its currency for international investment, which has sparked significant interest from financial institutions wanting to carve out market share in the new currency.

Access to liquidity

Banks and investment firms should be aware of these trends and start planning how to take advantage of them. The key thing to remember is that FX trading is bilateral, with no central exchange, so proximity to other market participants is critical. Across the globe FX participants tend to congregate in communities, in established FX data centres. These include Telstra’s data centres, several of which are offered in partnership with the Equinix International Business Exchange (IBX®), which enables firms to share time-sensitive information with partners and gain proximity to the region’s financial exchanges. For the best chance of success new entrants should ensure that their infrastructure and connectivity is integrated with these ecosystems in order to access liquidity and gain market share.

Infrastructure and connectivity

Recognising the importance of these Asian growth opportunities Telstra has taken steps to boost its Asian network with the acquisition of Pacnet, a provider of connectivity, managed services and data centres in the region. This acquisition not only gave Telstra a greater presence in Asia, but also through a joint venture with PBS, a license to provide customers with network and internet data centre services in China. Through its partnership with Equinix, Telstra has made similar data centre investments in the region to provide financial firms with fully managed FX solutions from hardware through to ecosystem hosting and connectivity

Also, in today’s environment, it is often important for banks to be able to move things off their balance sheet, so anything enabling them to operate in the region via an OpEx model, rather than a CapEx one, is positive. Either way, working with an established partner with an existing footprint in Asia is the most sensible approach. That way, a financial firm can feel confident it’s receiving the same standard of service as a Western hub at a reasonable cost, and will give itself the best chance of capitalising on the FX shift to Asia.

To learn more, take a look at “Forex flows to the East” – a Financial Markets Insight from The Realization Group and Telstra and Equinix.

©BestExecution 2017

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