A new breed of trader is threatening the Wall Street establishment

Photo by Spencer Platt/Getty Images
  • More and more trading is conducted on electronic platforms, handing an opportunity to new, tech-savvy players
  • These “non-bank liquidity providers” account for 15% to 35% of volumes in spot foreign exchange and stock markets
  • They’re now pushing in to new markets, and could win $US2 billion to $US3 billion in revenues

Wall Streeters call it “electronification.”

Bustling trading floors, where traders for years elbowed each other out of the way to land a trade, gradually close down. Trading moves to electronic platforms, and new smarter, faster tech-savvy players emerge.

It’s already happened in foreign exchange and the stock market. According to Morgan Stanley and Oliver Wyman, non-bank liquidity providers ― the newer tech-savvy entrants ― now account for 15% to 35% of volumes in spot FX and developed listed equities markets.

“High frequency traders were first, but the new and more threatening class of entrant deploys capital and takes positions to support market making,” the two firms said in a joint report. “Non-banks benefit from lower regulatory costs, but most importantly they rely on market-leading algorithms and data interpretation rather than salespeople and traders to deliver tighter prices in the market.”

Right now, non-banks are most active in the low margin parts of the trading business, with Morgan Stanley and Oliver Wyman estimating that these firms only compete for ~15% of the fee pool.

The question, then, is which market will be the next target of these new players.

The chart above provides a handy guide to the markets where these players might make headway. Morgan Stanley and Oliver Wyman said swaps and bond trading is most likely to come next.

“Some non-banks will look to strike deals with smaller banks to effectively out-source market making,” the report said. “Others will look to rent technology to banks in a more traditional approach. Our analysis suggests that over the next 2-5 years non-banks could take $US2-3BN of revenues from the Wholesale Banks.”

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