Forex specialists predict consolidation

Foreign exchange markets will experience further consolidation in 2009, while larger banks will continue to dominate algorithmic trading, according to a panel of industry experts speaking at the FX Week Europe conference in London yesterday.

Jeremy Smart, head of electronic foreign exchange sales at Morgan Stanley, said: "Whenever you get market dislocations like this you see a period of consolidation afterwards and I think that will happen this time round too, in 18 months' time there will be fewer people in the forex market." Marco Pelizzoli, co-head of global foreign exchange e-solutions at Bank of America agreed, commenting that "there will be fewer organisations".

Smart suggested the remaining smaller banks would "revert to type and do what they do best, the niche players will trade on lots of corporate revenues". Stacey Williams, HSBC's director of quantitative strategy and risk advisory for global markets, agreed, commenting: "The second-tier banks are often very strong in a particular currency or are a very dominant regional bank, but they are not global players."

The panel also predicted greater technological domination by the largest institutions. "The bigger banks will continue to invest in technology and will get further ahead and therefore will control the market going forward," said Smart.

Similarly, little democratisation of algorithmic trading will occur, as market conditions make the cost prohibitive to smaller market participants. "Unless you're already there, it is a difficult time to jump in," Williams said.

See also: Forex experts: no need for central clearing house
FX volumes 'set to drop in 2009'