A widening probe of the foreign-exchange market is roiling an industry already under pressure to reduce costs as computer platforms displace human traders.
Electronic dealing, which accounted for 66 percent of all currency transactions in 2013 and 20 percent in 2001, will increase to 76 percent within five years, according to Aite Group LLC, a Boston-based consulting firm that reviewed Bank for International Settlements data. About 81 percent of spot trading—the buying and selling of currency for immediate delivery—will be electronic by 2018, Aite said.
Banks’ income from foreign exchange already has been squeezed. Volatility, a key driver of revenue, is declining as concern that Europe’s sovereign-debt crisis would trigger the breakup of the euro eased and central banks provided unprecedented liquidity to stabilize markets.
Deutsche Bank’s Currency Volatility Index, which measures the market’s expectation of future price swings for nine currency pairs, slumped to 7.53 percent on Feb. 17. The index was as high as 15.8 percent in September 2011.
Officials at Barclays, Deutsche Bank, and Citigroup declined to comment on their trading operations. Bloomberg LP, the parent company of Bloomberg News, competes with Thomson Reuters and EBS in providing news, information and currency-trading systems.
In October, Switzerland’s largest bank started UBS Neo, a platform that replaced almost 100 internal systems with one that allows institutional clients to trade a range of asset classes. The system, which enables clients to connect with traders and salespeople, mimics the way Twitter lets users to follow one another.