Global FX trading up 71%

The 71% volume increase since the last survey in 2004 takes average daily turnover to $3.2 trillion, based on figures collected by central banks in April this year. The survey found a significant increase in the participation by investor groups such as hedge funds in driving up volumes, which was supported by substantial growth in the use of prime brokerage, and retail investors.

The latest report also confirmed a marked increase in algorithmic trading as a factor towards greater turnover in FX. The Federal Reserve Bank of New York also pointed to the greater role of hedge funds "behaving more like dealers with regard to pricing and the liquidity they are willing to provide to the market".

According to the BIS, the market share of other financial institutions - defined as smaller banks, securities houses, hedge funds, currency funds and pension funds -increased to 39% this April, from 34% in the last survey. Meanwhile, the proportion of the turnover with reporting dealers slipped from 48% to 42%, indicating continued consolidation in the market.

Graham Williams, vice-president of FX and interest rate derivatives sales at ING in London, attributed the activity to the increased accessibility of the FX market. "While FX trading used to be primarily driven by real business such as hedging, FX volumes have recently been boosted by increased levels of speculative trading. This has been encouraged by the development of black-box trading and e-commerce platforms, which allow participants to easily slip in and out of positions," he said.

"The biggest difference this year versus April 2004 has been the increase in the electronic platforms, and the transparency and ease of access to what is pretty decent liquidity," said Ian O'Flaherty, global head of e-FX at Deutsche Bank in London. "Foreign exchange might be volatile, it might be moving, but even electronically there seems to be the ability to deliver that price at any time. The transparency and deep markets and the ability to get in and out of a position when you need to, are key features that have made the market grow."

The resilience of the industry was challenged in the August fallout from the US subprime crisis. "August really put most of the systems to test from the front office through to the back office," said O'Flaherty. "The client feedback was that a price could still be produced, a trade could be executed and it could be settled, properly. So on the whole, while there were a few tense moments with some institutions, for the amount of increase that we saw from an electronic communications network, bank and client point of view, things seemed to go through very well."

Developments in technology will continue to drive growth. For example, improvements in the construction of an API, have made more users feel comfortable trading electronically. "Three or four years ago, it was major overhaul if you wanted to change something on an API. But now, APIs have become slicker, they've become easier to connect, upgrades can happen much faster. It can be seen through Java, Fix or however you want to do it," said O'Flaherty.

He added that over the next three years the challenge will be to see if the take-up in the spot market can be transferred to the options market. "First what needs to happen is the ability to construct a price, risk manage it and make sure it settles ok. But also, clients have to feel comfortable that machine A can trade with machine B, and not feel like there's a problem with that."

The BIS collects its turnover data every third year in April. The 2007 survey is the seventh survey of the FX markets and involved data from 54 central banks and monetary authorities.