Whether this proves to be the case is perhaps debatable – history has repeatedly shown that the more things change in FX, the more they stay the same. But at the same time, the way the market is evolving should not be underestimated. It is clear that FX participants need to give thoughtful consideration to the structure of their business, otherwise they risk losing competitive advantage.

Consolidation and concentration within the industry are the main drivers of the shift currently taking place. This is nothing new – it is a trend that has been taking place for more than a decade. As can be seen in the BIS chart, fewer players are accounting for the majority of the volumes transacted.

In theory, the fallout from the sub-prime crisis could have allowed the emergence of some new FX powerhouses – those banks to have emerged from the turmoil with their balance sheets relatively intact have an opportunity. While that may yet happen, the evidence suggests that it will take more than a strong credit rating to break the dominance of the large FX trading banks. As the Euromoney FX poll showed this year, the market share of the top five banks remains remarkably steady at around 61.5%, even though several of them were high-profile losers from the sub-prime crisis. It is also worth noting that in the past year, the combined share of the top 10 banks rose from 76.3% to 79.7%.

Such figures underscore the role these banks play in the market, and this importance is not decreasing. At the time of the last BIS Triennial central bank survey in April 2007, much was made about the emergence of a new breed of market-maker. In reviewing the turnover, BIS stated: “By counterparty, the expansion in turnover in the inter-bank market was comparable to growth over the previous three years, but was outpaced by the increase recorded in the non-financial customer and non-reporting financial institution segments, which more than doubled in size.”

But BIS makes another key observation: “Consolidation of the banking system was identified in the past as reducing turnover in the inter-bank market through channels such as efficiency gains and the ability to net trades across related parties within an organisation.”

Three years ago, it was anticipated that the emergence of the new players would have the most impact. This, many argued, would lead to an erosion of the banks’ dominance on price making, leading to the long-anticipated move of FX on to a single, or at least fewer, centralised locations. But this has not happened, largely because of the ability of leading FX banks to internalise their order flow – or, as BIS put it, net their “trades across related parties within an organisation.”

Internalisation is a much-talked about concept in other markets; in FX it is a reality. The ability to match-up trades means banks are no longer so reliant on – and perhaps are even independent of – the main external platforms for reference pricing. Banks have rediscovered the true art of market making, albeit with a new, electronic twist. However, they will always have business that they cannot match up and that they need to offset.