I know the spot forex has been OTC market from the beginning but I don't see any reason why it should be like that forever. Is it systematically impossible to become centeralized as future? It will be disaster for MM like FXCM or Onada but the market is not for MMs.
Spot is traded electronic interbank. EBS is the largest electronic market for spot, Reuters the second (as far as I know). In the wholesale zone (some say this is in fact retail) there are Currenex, Hotspotfxi, Lava, FXAll. All these are the equivalent of ECN's, they are in fact exchanges for FX. They compete with each other for liquidity. Liquidity attracts traders, which will generate even more liquidity. The natural tendency is towards consolidation, because this maximizes liquidity. It is the same tendency we witness nowadays with the stock exchanges/ECN's. My opinion is that we do not have a true retail spot market. Only market makers compete in the retail zone for the moment. This is still unexplored territory, and a lot can happen...
of course there is a huge chance that it ends up like the futures market..centralized clearing..yes..its part of the way there with CLS. EBS added Hedge funds last year through prime brokerage... Hotspot / Lava already have clients trading with each other...smaller brokers like IB / Oanda ; ) receive their pricing from the big FX banks ..where does that flow end up..in the books of the banks offset or if large enough back into EBS eventually...Most of the small brokers also take their pricing from the larger platforms too...FXCM Pro (is currenex) ... Flextrade ..is bank direct and Hotspot/Lava etc... So pricing is actually coming from the same names most of the time ...to you and I wheres the actual difference in the pricing going to come from eventually...to see any real movement you need retail clients and institutions trading with each other and the only way to do that is on a centralized system.... Whilst there is still fragmentation as such with the platforms each is fighting to become the Futures market of FX ... Primebrokerage brought that a step closer...wont happen in next 2 years but it will come..
The problem is the big banks do not want a centralised open market. As you mentioned, its the same names behind most platforms. There are very few liquidity providers in the FX market - 80% of trading is probably done by less than a dozen banks. The "largest market in the world" is really not very liquid. EBS opening to hedge funds was not welcomed by the banks, and my guess is thats the main reason they've just sold out. The banks don't want anonymity, they want an all bank only platform - a true interbank platform.
Yip of course you are right the banks dont want it..and they will try to do everything they can to delay the process..even DB are stepping into the retail world just recently! We need a centralized clearer before we can really move to an exchange model...each of the platforms have a quasi centralized clearing method...Icap buying EBS allows EBS to push harder into the space of online trading..the price they sold for however may suggest the banks are still tied into it for a while OR it may be the price they had to pay to be allowed to open it up freely to the market place.....tbh I think the larger banks are kidding themselves if they think they can do without the network of smaller clients and banks for their liquidity...yes Lava came out and said they will now become the closed network for the large banks...fine..the hedge funds are taking the place of many banks as liquidity providers...EBS sale opens up the opportunity for them to begin to push for more open exchange model...would be nice to turn around to those banks that try to close everyone else out and tell them to poke it....