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Greenwich Survey Highlights Increased FX?Volumes …

Greenwich Associates has released its 2008 study of global foreign exchange flows and says that among those accounts interviewed for the survey, global trading volume surged 36% from 2006 to 2007. This continues a steady run of double-digit annual growth in the survey.

Unsurprisingly, the survey finds that banks and investment managers are increasing their presence in FX as they diversify portfolios with international assets, and the market continues to attract new users ranging from hyper-active hedge fund traders to a growing cohort of retail investors.

Equally unsurprising is the statement that much of the growth is being facilitated by electronic trading technology.
“For global FX users, we have entered into an era of something close to free liquidity,” says Greenwich Associates consultant Robert Statius-Muller. “Cheap access to liquidity from a broad and growing list of sources is drawing in new participants and encouraging users of all types to trade more, which is further adding to global market liquidity.”

The survey measures 2007 global foreign exchange trading volumes among accounts interviewed by Greenwich at nearly $100 trillion.

Growth was strongest last year in the United Kingdom, the world’s largest foreign exchange centre, where trading volumes jumped some 69%. Volumes increased by about 37% in the Americas and by more than 25% in Continental Europe. Only in Asia excluding Japan, Australia and New Zealand were trading volumes flat year over year.

The firm says its research reveals several trends contributing to the growth of global FX: hedge funds were the biggest drivers of growth (rising by 180%); investment managers’ volume grew 31% and bank volumes 23%.

“Among both groups, an ongoing shift of assets away from the United States and into global and international investments is helping drive the increase in FX trading volumes,” says Greenwich Associates consultant Tim Sangston.

The survey says that the spread and advancement of algorithmic trading strategies is giving an important boost to hedge fund trading volumes.

“The amount of forex trading volume generated by hedge funds increased some 180% from 2006 to 2007,” says the report. Hedge funds accounted for 20% of global market share in FX in 2007, compared with 11% in 2006. The growth is attributed to the increasing usage of algorithmic trading strategies.

Retail Traders

The survey finds that FX markets continue to attract a growing host of retail traders. In past years, trading volumes from this customer segment were captured mainly by the retail aggregators, whose businesses had been expanding rapidly.

The results of this year’s research suggest that growth rates for these retail aggregators might be leveling off. One possible reason, the firm says, is that the retail business has become so attractive that banks have launched and marketed their own retail trading platforms, which are beginning to siphon business from the established retail aggregators.

Corporate volumes were also higher. “Although the dramatic increase in FX trading volumes among professional investors has diminished the importance of corporations in global foreign exchange markets, total foreign exchange trading volume among corporates increased nonetheless by some 12% from 2006 to 2007,” says consultant Peter D’Amario.

E-Trading Growth Slowing

Electronic FX trading volumes increased by 21% from 2006 to 2007, according to the survey. But, says Greenwich, that impressive performance was not enough to keep pace with the volume surge in global FX markets last year – a sign, it claims, that the electronic trading business could be entering a phase of more mature development.

That said, the research company says that by “almost any standard, last year was a good one for electronic trading systems”.

In addition to the overall increase in trading business, e-trading systems continued to attract new users, especially among the world’s most active FX traders.

The firm says that market-wide FX trading volumes jumped 36% year over-year, which caused the total share of FX trading executed electronically on a global basis to shrink from 50% in 2006 to 43% last year.

The survey tracks trading volume among end-user customers. Volume figures reported exclude interbank transactions and volume generated by other sources.

The research also reveals that prior to last year, electronic trading systems were gaining new users and new business from FX market participants globally at a relatively consistent pace.

E-trading systems captured 20% of global volume in 2003 and 30% in 2005 before hitting the 50% mark last year. However, the results of the 2008 study suggest that trading practices have begun to diverge among different types of FX users in different regions.

“This finding supports the notion that eFX is leaving behind its initial stage of dramatic, across-the-board growth and entering a more mature period in which market participants begin to self-sort into active or infrequent users of electronic trading systems based upon their unique needs and strategies,” says D’Amario.

Market sources express some surprise at Greenwich’s assessment of the situation. Two e-commerce chiefs at banks in Europe tell Profit & Loss that the huge growth in volumes that their institutions have seen over the past year is predominantly driven by electronic trading.

“Clients that still prefer the telephone are doing more business,” says one. “But at the same time, new clients are primarily using our platform and we continue to transition existing clients from voice to electronic trading. So I am a little surprised by the finding.”

The second e-commerce chief has another theory behind the perceived slowdown in e-adoption. “The survey period takes in August, September and November when the credit crunch and liquidity crisis meant that a lot of clients went to the telephone. Typically a certain segment of clients want help in executing in volatile markets. I think this finding is an aberration that reflects that. As clients accept that the platforms coped, we will see the e-adoption trend resume.”

The survey finds that global e-FX volumes increased to $43.0 trillion in 2006-2007 from $35.5 trillion the prior year.

“This growth lagged the expansion in total FX trading volume in part because the boom in the overall business was driven by increases in the trading of options and emerging market currencies – two products not particularly conducive to electronic trading,” the company says.

It also accepts that its finding is much more complicated than it seems. “For starters, the share of FX market participants using electronic trading systems for at least a portion of their business actually increased to 55% in 2007 from 53% in 2006 – a statistically significant increase in the context of the more than 1,700 companies and institutions participating in the Greenwich Associates research last year,” Greenwich states.

“Just as important, the percentage of FX users telling Greenwich Associates that they have no plans to start trading electronically continues to shrink. In 2006, 36% of FX users said they have no use for electronic trading; that share fell to just a third in 2007.”

Among companies and institutions that are regularly in the market, it is becoming increasingly rare to find one that does not use e-trading systems for at least some part of their FX trading business, adds consultant Woody Canaday.

The company says the results of this year’s research reveal a growing divergence in usage patterns between large, active traders – generally financial institutions – and accounts that generate relatively small amounts of annual FX trading volume.

More than 80% of the world’s most active FX traders (those that trade more than $50 billion in foreign exchange every year) use e-FX systems, up from 77% last year, it says.

But usage rates decline with overall trading activity, and although the share of global corporates saying they use electronic trading systems increased to 43% in 2007 from 40% in 2006, usage remains far lower than that among banks (90%), hedge funds (65%) and fund managers/pension funds (55%).

“Our research reveals a significant spike in e-FX usage among fund managers and pension funds, which see electronic systems as a means of documenting best execution in keeping with stricter demands from regulators,” says consultant Frank Feenstra.

On a regional basis, e-FX usage patterns seem less influenced by differences in trading strategies and more driven by cultural preferences and the state of development of e-trading systems in terms of technology and liquidity.

E-trading providers have achieved the highest level of market penetration in the US, Greenwich finds, where more than two-thirds of FX market participants trade electronically – up from 61% in 2006.

Europe is not far behind at 63% after an increase from 60% in 2006. In sharp contrast, e-FX use fell to 46% of Asian FX market participants in 2007 from 52% the prior year.

“In particular, our research points to something of a ‘digital divide’ between FX markets in Japan and the rest of the world,” says Sangston. “Although the share of FX users trading electronically in Japan did increase year-over-year, only 36% of market participants there say they use e-FX systems.”

Single vs. Multi-Dealer platforms

While electronic FX trading was mostly increasing as a whole, single-bank systems failed to keep pace with multi-dealer platforms, says the report. FX market participants using single-bank platforms fell from 55% in 2006 to 47% in 2007.

The study shows that fund and pension fund managers defected from the single-bank systems, particularly in Europe. Only in Asia did use of these increase while usage of multi-dealer systems decreased.

Some bankers, however, feel differently claiming that growth on the bank’s own platform “far outstripped” any numbers it saw from the multi-dealer industry. “I think this is a one-off,” says one e-commerce manager in North America. “Some banks had troubles maintaining prices for a few weeks and that drove some clients to multibank portals, but I think they came back pretty quickly.”


Clearly the survey’s findings have raised a degree of debate, especially in banking circles, but notwithstanding any disagreements over the conclusions drawn by Greenwich’s consultants, the report provides a fascinating insight into client behaviour in times of market turmoil.

That clients move away from online trading to telephone during times of strife is unsurprising, especially as this is really the first time that a liquidity and credit crunch has hit during the electronic era.

What will be interesting to see is how the survey pans out for 2008 when banks have made their pricing more robust in troubled times.

The one thing that drove clients to the telephone was banks widening, or even removing, pricing from their platforms. If the banks can prove to their clients that they are able to maintain a stable service during market turmoil – and this is a test of faith for the banking industry – then clients may return to using their platforms.

A more aggressive stance by banks in terms of where they provide pricing in the multi-dealer environment, allied to the fact that several provide wider pricing to public platforms than their proprietary offerings, is likely to have seen clients move back to single bank platforms – especially as the latter are free.

Last year was clearly one of upheaval for the electronic foreign exchange industry, but going forward it may well be seen as merely an anomoly in a long term uptrend.

Profit & Loss

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