Currency market shrinks as survivors turn electronic - Aite

New York - The global currency market is shrinking, and there’s a place to look for survivors - in electronic markets, according to Aite Group, a consulting firm based in Boston.

Average daily volume of over-the-counter foreign exchange fell to $5.32trn in 2015, down 9% from $5.87trn in 2014, the consultant said in a study that surveyed banks, brokers, asset managers and trading platforms.

Even as overall trading falls, the remaining volumes are increasingly migrating to electronic venues, which are forecast to account for 64% of over-the-counter trading by 2019 from 62% this year.

"Adapt to lower volume," said the Aite report’s authors, Javier Paz, Howard Tai and Sang Lee. "Banks may project a business-as-usual facade, but in reality they are in a defensive mode. They are forced to comply with new regulations and are atoning for past misdeeds, but they also are bearing higher regulatory and compliance costs."

Aite’s overview comes before the results of a triennial survey by the Bank for International Settlements, due to be published in September. The Basel-based BIS’s April 2013 study showed market volumes averaging $5.3trn a day.
 
Since then, currency markets have been roiled by a price-manipulation scandal that’s seen banks fined billions of dollars and prompted scrutiny by regulators. Volatility has also risen as the Federal Reserve tightens policy while its major peers carry out stimulus.

In the US, computerized trading surged to 24% of average daily volume, or $412bn, from 2012 to 2015, according to Aite. In London, volumes on platforms that offer prices from multiple dealers surged 70% to $352bn during the same period, while activity on single-dealer platforms dropped 4% to $292bn.

Traders are executing more trades via automated computer programs that use algorithms, Aite said. About 24% of the spot currency market uses algos, driven by money managers and corporations.

"As the industry sorts through various regulatory changes in coming years, the demand for execution tools that can provide more transparency and better performance than the traditional custodian-based execution methods will become more important," Aite said.

"Foreign-exchange algos are expected to play a key role in this change in traders’ preferences."