Why retail FX should be taken seriously

According to research from client strategy firm ClientKnowledge, profits from retail FX traders can be anywhere between $1 billion to $2 billion a year.

That figure represents 2%, or $50 billion, in daily volumes out of the $2.5 trillion FX market. With the number of banks looking to get into the market alongside the existing retail aggregators, it should be interesting to see how this all gets split up.

It's interesting that many banks think they should be partnering with an existing online FX trading company. That would make sense given that wholesale banks, by nature, were never set up to target retail clients. The research said retail and wealth management divisions are mostly separate and are dealt with by the FX business as a generic client.

The internal divide within banks is entrenched, and IT projects with the same basic aims (credit management of clients, deal capture) become completely separate initiatives, therefore reinforcing the divide. Client confidentiality and necessary Chinese walls also maintain this separation.

"Finally, but not of least consequence, there is the inbuilt prejudice of the wholesale division that retail has not been of consequence and therefore integration is very difficult to discuss as an agenda item," the research said. "Hence, the retail opportunity has slipped through the gaps of the traditional banking businesses and enabled a proliferation of independent operators to gain traction with a client base largely unknown to the banks."

Certainly, the fastest way to get in on the action would be to partner with these guys. That's what ABN Amro did with its marketindex platform. It's working with online FX trading company Oanada on the currency side of the multi-asset trading system. Others are also looking to do the same.

There are loads of online trading companies out there that are happy to do a white-label deals - and even those that may want to be acquired. But really it's a race against time to find the best of the breed. Not only are banks facing competition from each other but also private equity firms. In June 2005, for example, Saxo Bank sold a 25% stake for $126.5 million to private equity firm General Atlantic. The bank has an extremely successful retail trading platform. Income from FX trading activity grew across all client segments, with combined daily trading volumes totaling more than e1.050 trillion ($1.382 trillion) in 2006, compared with e725 billion in 2005.

Comments? Contact: Saima.farooqi@incisivemedia.com

Saima Farooqi, Editor