Electronic FX: As Global Markets Normalise, Slow but Steady Growth

Global foreign exchange (FX) markets continued their migration to electronic execution last year as electronic trading (e-trading) volumes increased amid a decline in overall FX trading activity, according to a Greenwich Associates report.

Customer electronic FX trading volumes increased 7% from 2008 to 2009. While this growth pales in comparison to the 25% expansion in 2007-2008, the fact that e-trading systems were attracting business while the overall market was contracting suggests that market participants continue to actively shift trading volumes to the platforms from other channels.

Worldwide FX trading activity spiked during the crisis-plagued years of 2007 and 2008. Over the following 12 months, volatility subsided and markets returned to some degree of normality. Stabilisation of global markets led to a 6% decline in total FX volume from 2008-2009. This contraction, coupled with growth in e-trading, pushed the share of total FX trading volume executed electronically to 58% in 2009 from 54% in 2008.

Over that period, e-trading volumes increased 16% in the Americas and by 44% in Asia, while remaining essentially flat in continental Europe and falling nearly 10% in the UK. E-trading systems now capture 53% of total FX trading volume in the Americas – up from 48% in 2007-2008 – and 61% in Europe – up from 59%. The shift to electronic execution has been even more pronounced in Asia. In Japan, e-trading increased to 63% of total FX volume in 2008-2009 from 42% in 2007-2008, driven by a huge increase in volume among retail aggregators. Across the rest of Asia, electronic platforms attracted half of total FX trading volume, up from 40% in 2007-2008.

“Last year’s growth had two main drivers,” said Greenwich Associates consultant Peter D’Amario. “Around the world, but particularly in the Americas and Asia, electronic trading systems are attracting new customers. At the same time, existing users are increasing the share of their total foreign exchange trading volumes conducted via electronic execution.”

Hedge Fund Falloff

The increase in e-trading volume last year is all the more impressive in light of a reduction in activity among hedge funds. Although hedge funds have not traditionally been heavy users of e-trading systems relative to banks and other large financial institutions, they were among the most important drivers of booming FX trading volumes in the years leading up to the global crisis, and as such, contributed significant amounts of new trading business to electronic systems.

“Through 2008, electronic trading systems were capturing almost half of hedge fund FX trading volumes. That share dropped to 44% in 2009, as the total amount of electronic trading volume generated by hedge funds dropped 15%,” said Greenwich Associates consultant Tim Sangston.

E-trading Displaces Telephone as Primary FX Trading Channel

It is becoming increasingly apparent that the telephone, which has reigned as the dominant channel for FX trading for decades, is losing ground to electronic execution of all types in every major market around the world. Less than 30% of FX trading volume is now done by phone in the US, and in non-Japan Asia that share has fallen to just 21%. Around the world, multi-bank e-trading platforms captured about 40% of overall FX trading volume in 2008-2009 and single-bank platforms captured another 15%. In fact, in Asia, telephone transactions have been surpassed by messaging systems on Bloomberg and Reuters as a means of conducting FX trades, with these systems capturing 23% of overall volume.

“We fully expect this trend to continue as electronic trading platforms continue to attract new customers and market participants already experienced in electronic trading allocate increasing amounts of business through electronic systems,” said Greenwich Associates consultant Frank Feenstra.


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