In a report on global foreign exchange trading by Greenwich Associates, April 2009, foreign exchange trading from hedge funds has declined from 21% of the total market to 14% year-over-year according to research by the consulting firm, Greenwich Associates, overall volume has climbed roughly 15% from increased trading activity from corporations and financial institutions. Volume from firms specializing in retail (individuals) trading soared approximately 43%.
More Expensive to Trade
While the overall level of trading has risen, economies of scale do not apply here, the cost of trading has risen as well, manifested by wider bid-ask spreads. There are several factors contributing to this cost increase: Volatility adds due to risk premium, less dealers and "the" factor is credit or counter-party risk premium. Trading desks have become increasingly cautious about whom they do business with.
E-Trading Soars
While an overall increase of 15% in volume is impressive, the level of foreign exchange trades executed electronically jumped from 44% in 2007 to 53% in 2008 according the same Greenwich Associates research. Much of the expansion in e-forex can be attributed to investors seeking liquid markets and plain-vanilla assets to trade.
The increase in e-trading was very impressive in Europe with volume from the continent rising 37% and volume from the United Kingdom soaring roughly 78%. Growth in e-trading in the United States was more modest at approximately 20%.
Who has access to electronic trading systems and what proportion of their volume is executed by them? Globally, 57% of traders have access to electronic trading systems and execute about 65% of their volume by them. In the Americas, about 54% have system access and execute about 61% of their volume by them. In Europe, those numbers are 69% and 66%, Asia ex-Japan it is 46% and 63% and in Japan, while only 40% of traders have access to electronic systems, they execute roughly 75% of their volume by them.
Trends
The trend of more corporate and institutional users of electronic trading systems abandoning single-bank proprietary systems in favor of third-party, multiple dealer systems is continuing. Single system users have declined again, from 50% to 46% while multiple dealer or third-party systems have increased from 75% to 80%. On a volume basis, single bank systems account for about 15% of volume while multiple bank and third-party systems contribute approximately 38%.
Globally, the amount of traders using electronic systems to actually trade on-line is fairly stable at about 57% while the number of traders that will not trade on-line is also stable at roughly 35%. What is shrinking is the number of currency traders that are undecided. That number has decreased to 8% from 11% as more markets participants have made a decision to trade on-line.
Dean Lundell - A capital markets professional with over thirty years of experience and a licensed Commodity Trading Adviser.
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