With the introduction of fast electronic foreign exchange trading, it’s no wonder that big banks are feeling the rising competition. To combat this, several banks are now outsourcing their foreign exchange enterprises. The big banks hope that they continue to hold the same amount of power in world currency trade.
The foreign exchange market is an ever-active place with over $6.6 trillion exchange per day.
Since foreign exchange is incredibly important to corporations, banks would never voluntarily reduce FX operations. It’s another thing that they would choose to reduce equities trading. With rising competition, it looks like several banks are pushing back and trying to secure their corporate clients.
Simon Manwaring, a currency trading expert from NatWest Markets, states that the big banks in Europe are looking to strengthen their position in the FX market. It’s natural that they are looking to create partnerships and subcontract some of their operations.
European Banks Looking To Subcontract Parts Of Their Foreign Exchange Operations
This can mean that several banks will be willing to access each other’s liquidity. Or, this could also mean that multiple banks will go into formal deals upon specific currencies and particular time during a trading day.
While outsourcing part of a bank’s operation would mean a decrease in their trade volume, it won’t matter much if it is done strategically. For example, a bank can outsource its foreign exchange operations for a particular currency where they don’t have much regional presence.
Since the FX market is quite opaque in nature, the strategy’s practice cannot be accurately assessed at the moment. However, what we currently know is that currency trading concentration has increased significantly. The five top banks have witnessed a whopping 41 percent increase in the first quarter of 2020. As per Coalition data, the numbers were at a 37 percent increase in 2016.
Outsourcing: A Result Of Increasingly Sophisticated Technology
Svante Hedin, The Global head of FX, told media sources that Sweden’s SEB tries to find competing banks for liquidity, computer-run trading execution, and for particular foreign exchange products. Furthermore, Hedin added that since technology has seen tremendous growth in the past few years, outsourcing has become more effective, which has accelerated this trend.
There are several other factors that have led to this shift. The FX market is notoriously volatile. Additionally, the COVID-19 pandemic has further put stress on it. As the global economy struggles to find its feet, it was only a matter of time before the banks took this step. Another factor is the shrinking regulations and slowing profit margins.
It’s common knowledge now that FX deals secured through third-parties are much easier.
The big banks also dismissed concerns that outsourcing would heighten their grip and dominance in the foreign exchange market.