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Regulatory uncertainty, technological change and traders behaving badly have collided in a perfect storm for banks’ foreign exchange operations. There are signs, however, that the worst has passed, and the return of more-normal times could be just around the corner. More volatile trading conditions, if sustained, could help to keep the business profitable.

Alain Kamagi, co-founder and managing partner of UNTL Capital and a member of Global Finance’s Panel of Experts for our Foreign Exchange Providers Awards, says: “The FX market has gone through some major changes since the 2008 market crisis. The new regulation, though well-intentioned, has created uncertainty, as the rules are still being written or implemented. Similar to the evolution of the equity market, foreign exchange has been moving quickly into an electronic marketplace, and the negative news has helped make the transition quicker and more pronounced.”

Not all of the changes have been for the worse, he says. “On the positive side, electronic pricing has created better price discovery, more transparency, more competition, tighter spreads and better economies of scale,” Kamagi says. “On a negative note, the evolution of electronic trading has made it more challenging for liquidity providers to analyze the flow and has forced them to evaluate relationships based on management information systems reporting, and less through direct conversation with customers. Expect the next few years to be both exciting and challenging, as the market finds its balance,” he says.

David Gilmore, partner and economist at Foreign Exchange Analytics and also a member of our judging panel, says: “Zero-interest-rate policies in place at many developed-market central banks, reflecting low inflation and low growth, have yielded an unprecedented period of low volatility in foreign exchange and interest rates. This environment has taken a toll on transaction business at major banks globally. In addition, technological innovations have altered the landscape, with systemic or model-driven trading, often away from banks, taking a large slice of the daily volume in FX.”

A confluence of these two developments has undermined the profitability of FX trading at the banks, Gilmore says. However, with the ending of the Federal Reserve’s quantitative easing, and the Fed and the Bank of England both considering when to raise rates, while the European Central Bank moves closer to full-blown QE and the Bank of Japan engages in more QE, the volumes and volatility in the FX market have started to recover, Gilmore says.

Moreover, the volume of FX trading run through computer models appears to be declining, he adds, which may in part reflect greater regulatory scrutiny of high-frequency trading. “My belief is that the FX business largely associated with major banks is recovering rapidly from a depressed state,” Gilmore says. “I am optimistic that as some central banks seek to normalize policies as their economies improve, while others seek to engage in even more unconventional strategies to spur growth, the return of volatility and volumes are probable and would be a healthy development for this sector.”

In our annual World’s Best Foreign Exchange Providers awards, Global Finance has identified the best foreign exchange banks—the ones that best handle the currency hedging and transaction needs of major corporations. We chose the leading foreign exchange banks in 99 countries and nine regions, as well as the best online trading systems; the best firm for foreign exchange research; and winners for fundamental research, technical analysis, currency forecasts, and strategy and hedging.

With input from industry analysts, corporate executives and technology experts, Global Finance has selected the winners based on objective and subjective factors. Our criteria included transaction volume, market share, global coverage, customer service, competitive pricing and technology. Decisions were informed by provider submissions, and with input from our Panel of Experts.

FX Awards Panel of Experts

David Gilmore is partner and economist at Essex, Connecticut‑based Foreign Exchange Analytics. Prior to founding the FX advisory service for institutional traders in 1994, he spent seven years providing online commentary with MCM/CurrencyWatch and MMSInternational. Gilmore holds an MSc in economics from the London School of Economics and a BA in history from the University of California at Berkeley.
Alain Kamagi is co-founder and managing partner at UNTL Capital. He previously was a managing director at HSBC Bank USA, where he assembled a team responsible for cross-selling FX and fixed-income products. Prior to that he held various senior positions at Republic National Bank. Kamagi holds an MBA from Bauer College of Business at the University of Houston, from which he also has a BA in finance.
Mark Taylor is dean and professor of finance at Warwick Business School at Warwick University in the UK. He is one of the most highly cited economists in the world for his work on exchange rates and international financial markets. Previously, he was a managing director at BlackRock, an economist at the Bank of England, and a senior economist at the International Monetary Fund. He began his career as a trader in London.


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