Today's the day when regulators give the financial world a glimpse of how they reckon traders in the $5.3 trillion-a-day foreign-exchange market should behave.
The code of conduct, or rather voluntary guide, is welcome after the $9 billion in fines and settlements linked to market rigging. Yet banks aren't likely to wait until 2017 -- when the full handbook is released -- to decide their future in this business.
The biggest change hitting currency markets is technological: computers are replacing human traders. Not just in the spot market, but also in options and swaps, where electronic trading accounted for an estimated 43 to 57 percent in April, according to Aite Group.
Keeping up with the competition is increasingly about investing in technology, with the set up cost of a single-dealer platform in the region of $250 million, according to GreySpark Partners. That may not be a problem for the biggest banks, but for smaller players that, together to the cost of compliance, makes the business too expensive to protect.
Market makers from outside the traditional banking industry are also taking share, as XTX's entry into the top 10 of Euromoney's currency rankings this week demonstrates. Non-bank liquidity providers account for as much as 13 percent of spot currency trading, according to a February 2015 report by Oliver Wyman.
The point isn't so much that the biggest banks will be dislodged or unable to fight back, but that smaller players will find it harder slog to justify the costs of committing themselves to the business. Expect more cutbacks -- or new business models -- from those lacking in either size or a low cost base.
Sure, currency trading doesn't consume a lot of capital and looks healthier than other fixed-income businesses that have been ravaged by regulators' post-crisis rule-making. Revenue from trading the currencies of G10 countries has held up the best of all fixed-income businesses, according to Coalition.
But as trading businesses become more commoditized, margins get thinner. And banks can't afford to invest as freely as before, with tougher post-crisis rules leading many to exit geographic markets, shutting dealing rooms and paring back their client roster.
Somewhere here is an opportunity for a bank to use automation to take out costs and partner with outsiders to provide customers liquidity in the less-heavily traded currency pairs. But for most firms, revenue will be under threat.
It's good currency traders now have a clearer set of rules. But more automation means there won't be so many of them around to regulate.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
To contact the author of this story:
Lionel Laurent in London at firstname.lastname@example.org
To contact the editor responsible for this story:
Edward Evans at email@example.com