Global FX Market Cools as Financial Markets Stabilise

Worldwide foreign exchange (FX) trading volume declined by approximately 6% to just under US$100 trillion last year, according to Greenwich Associates. The cooling down of global FX markets brought to an end an impressive run that saw new records for volume set in each of the prior two years.

The slowdown in global FX markets began in the second quarter of 2009 as world financial markets began to stabilise, and continued through the end of the year. Because Greenwich Associates completes interviews for its research on global FX markets mid-way through the fourth quarter of every year, it’s possible that reported volume totals actually understate the extent to which markets slowed in calendar year 2009 due to a significant falloff in activity at year-end.

Among the financial institutions that constitute the lion’s share of the global FX market volume, trading volumes were flat to just slightly lower last year, as a 23% decline in hedge fund trading volume was partially offset by a 16% increase among retail aggregators. Among corporations, which generated only 11% of total volume in 2009, foreign exchange volume increased 10% from year-to-year.

Trading volumes in the US declined 10% from 2008 to 2009 and UK trading volumes fell by 14%. Trading volumes in continental Europe and Japan were essentially unchanged year-to-year. Throughout the rest of Asia, trading volumes grew nearly 10%, driven by an increase among a handful of large banks. Worldwide, trading volumes among the biggest users of FX markets, primarily financial institutions generating more than US$50bn in annual FX trading volumes, declined about 7%. Trading volumes among corporations and financial institutions with lower average annual totals increased slightly.

Hedge Fund Falloff

FX trading volumes among hedge funds declined 23% from 2008 to 2009, a drop-off that had a disproportionate impact on global foreign exchange growth rates. As of the end of 2008, hedge funds generated only about 14% of global FX trading volume. Until recently however, hedge funds had accounted for a much higher proportion of the market’s growth. From 2006 to 2007, a period during which global FX volumes grew by 30% – hedge fund trading volumes increased 180%. The global financial crisis brought that phase of growth to a sudden stop, with hedge fund FX trading volumes dropping 28% from 2007 to 2008.

“After continuing to decline over the past 12 months, hedge fund trading volume remains at just 14% of the market, allowing retail aggregators to close the gap in terms of contributions to global FX trading volumes,” said Greenwich Associates consultant Tim Sangston.


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