Trading in the FX markets averaged $5.1 trillion per day in
April 2016, according to the Bank for International Settlements’ Triennial
Central Bank Survey of Foreign Exchange Turnover, a decrease of 5.5% compared
The last time that the BIS survey indicated a contraction in
the size of the FX market was 2001, when average volumes dipped to $1.2
trillion from $1.49 trillion in 1998.
BIS Survey FX Volumes (in USD trillions)
Source: BIS Triennial Survey
A decline in spot trading is largely responsible for this
latest contraction in the size of the market, with spot transactions falling
from $2 trillion per day in 2013 to $1.7 trillion per day in 2016, a 19%
In contrast, the turnover of FX swaps rose 6% to $2.4
trillion per day in April 2016, with the BIS attributing this increase largely
to an increase in FX swaps involving the yen. However, it should be noted that
the growth in FX swap turnover has slowed significantly when compared to the
27% growth registered between April 2010 and April 2013.
In other parts of the FX OTC markets trading activity
“Trading volume of outright forwards rose to $700 billion in
2016, a 3% increase from $679 billion in 2013. Trading volume of currency swaps
grew much faster than in any other part of the FX market, although this
instrument still remains the least traded, owing in part to the long maturity
of the contracts. Turnover in currency swaps rose to $96 billion in 2016, a 79%
increase from $54 billion in 2013,” the BIS says. “In contrast, trading volume
of FX options declined to $254 billion in 2016, 24% lower than in 2013. The
largest decline took place in yen cross rates, which declined to $74 billion in
2016 (i.e. by 52% from 2013).”
On this last point though, it should be noted that there was
a significant surge in FX options trading when the survey was conducted in
April 2013 as many market participants were using options to express their
directional views on the yen following the expansionary shift in Japanese
monetary policy that month.
The US dollar remained the dominant vehicle currency, being
on one side of 88% of all trades in April 2016, marginally up from 2013 when it
the currency was on one side of 87% of FX trades.
The BIS survey notes that the role of the euro in the FX
market continues to decline, as it has since the sovereign debt crisis in 2010.
After recording a market share of 39% in April 2010 the BIS survey shows that
the euro’s market share dropped to 33% in 2013 and is now down to 31%.
Meanwhile, much has been made in recent years of the growing
significance of the RMB in the global financial markets and this is reflected
in the BIS survey, which showed that average daily turnover in RMB has almost doubled
since 2013, reaching $202 billion.
This means that RMB has also doubled its market share to 4%
of the FX market, making it the world’s eighth most actively traded currency and
the most actively traded emerging market currency, overtaking the
The BIS notes the jump in RMB trading was largely driven by
an increase in trading against USD, with 95% of RMB trading volume occurring
against USD in April 2016.
Source: BIS Triennial Survey
Bucking the Trend
The share of trading between reporting dealers has grown
over the past three years, according to the BIS data, accounting for 42% of
turnover in April 2016, compared to 39% during the same month in 2013. This
bucks a more than 20-year trend, as 1995 was the last time that the share of
trading between reporting dealers increased.
“The rise in inter-dealer trading was primarily driven by
the increased trading in FX swaps, an 11% rise since 2013 to $1.2 trillion in
April 2016,” notes the BIS in the survey.
Trading between reporting dealers and other financial
institutions has fallen slightly over the past three years to $2.6 trillion.
Non-reporting banks – smaller and regional banks that serve as clients of the
large FX dealing banks but do not engage in market-making – accounted for
roughly 22% of global FX turnover in April 2016 down from a 24% share in April
At the same time, institutional investors, such as insurance
companies and pension funds, further increased their share of FX trading
relative to hedge funds and proprietary trading firms: institutional investors
were on one side of 16% of daily turnover in April 2016, up from 11% in 2013,
whereas the corresponding share of FX trading by hedge funds and proprietary trading
firms decreased from 11% to 8%.
Commenting on these statistics the BIS report says: “The
rise in the share of trading by institutional investors is mostly due to an
increase in their use of FX swaps. Average daily FX swap turnover with
institutional investors as a counterparty rose to $278 billion by April 2016, a
79% increase compared with the 2013 survey.
“The fall in the share of trading by non-reporting banks is
primarily due to a decline in their activity in the spot market, followed by a
decline in their use of FX swaps. Average daily spot turnover with non-
reporting banks as a counterparty stood at $354 billion in April 2016, a 30%
decline compared with the 2013 survey; and average daily FX swap turnover stood
at $564 billion (a 7% decline).
“The fall in the share of trading by hedge funds and
proprietary trading firms was due to a decline in this sector’s activity in all
three of the main market segments. Average daily spot turnover with hedge funds
and proprietary trading firms as a counterparty stood at $200 billion in April
2016, a 29% decline compared with the 2013 survey; trading in outright forwards
and FX swaps with this counterparty sector also declined, by 29% and 37%,
Pivot to Asia?
Geographically, the BIS survey suggests that the FX market
is continuing to become more concentrated. In April 2016 five countries – the
UK, US, Singapore, Hong Kong, and Japan intermediated 77% of FX trading, up
from 75% in April 2013 and 71% in April 2010.
But breaking down this headline figure slightly is revealing
as the data shows that actually the share of FX trading in the UK has declined
from 41% in April 2013 to 37% in April 2016. Indeed, this drop from $2.7
trillion of FX turnover recorded in 2013 to the $2.4 trillion recorded in 2016
represents the first time since the 2001 survey when the amount of FX trading
occurring in the UK has declined.
Meanwhile, at 19% market share, the amount of FX trading
occurring in the US is virtually unchanged over the past three years.
In contrast, the Asian financial centres – Tokyo, Hong Kong
and Singapore – have increased their combined intermediation share from 15% to
21% since the last BIS survey. This is a significant shift and could raise
questions about whether it is the start of a general trend of more FX trading
shifting towards the APAC region.
Elsewhere, the market share of the euro area continued to
decline, falling to 8% in April 2016 from 9% in 2013, although France did
maintain its 3% share. The trend decline in the share of trading activity
taking place in Switzerland and Australia also continued, to 2% in each country
in 2016 compared with 3% in 2013.