New 'cable' trading: tech could boost landlocked FX cities

Thu May 5, 2016 11:45am EDT
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By Anirban Nag

LONDON May 5 (Reuters) - The dominance of financial centres such as London, New York and Tokyo in the $5 trillion-a-day global currency market may face challenges from landlocked cities as new technology erodes the advantage offered by high-speed undersea cables.

A European Central Bank research paper says these three centres, along with Singapore and Hong Kong, dominate the industry in part because of the history of submarine cables that have made high-frequency trading possible.

But, it says, new fibre optic networks that can also carry data at very high speed are being laid and which could influence the geography of the 24-hour, five-days-a-week currency market.

The location of foreign exchange hubs has implications for big trading firms and job creation as well as the prestige of the cities or countries in question.

There is also a political and policy edge to it now since the ECB has insisted all clearing and settlement of international euro currency trading must be conducted within the European Union - even if the world's biggest forex centre London were to find itself outside the bloc if Britain voted to leave the EU.

Were that to happen, the major centre for euro trade within the EU would probably be Frankfurt, the ECB's headquarters.

A 2013 survey of the FX market by the Bank for International Settlements showed that while the United Kingdom, the United States and Singapore expanded their share over the past decade, trading activity in Germany and Switzerland shrank. Between them, Germany and Switzerland account for just under 5 percent of global foreign exchange trade.

The ECB paper, however, says recently installed cables connecting landlocked cities have the potential to lure back high-frequency traders, who contribute about a third of trading.   Continued...