Global forex volume slips, led lower by retail

Wednesday, March 30, 2011 Stamford, CT USA — Global foreign exchange trading activity slowed last year, with some notable exceptions. Exception Number 1: Japan, where a surging yen led to a pick up in trading volumes driven by financials. Exception Number 2: Trading volume in Tomorrow-Next (Tom/Next) and other short-dated roll-over trades, which increased 68% last year.

Greenwich Associates tracks foreign exchange trading volume among a universe of 1,563 end-user corporate and institutional customers. Volume figures calculated in its research exclude inter-bank and other trades between market counterparties. Greenwich Associates also generally excludes Tom/Next and other short dated roll-over trades in its official customer trading tallies.

On this basis, the research results show that global foreign exchange trading volume declined approximately 13% from Q4 2009 to Q4 2010 — a fall-off in trading volume spanning the United States, Europe and Asia (outside of Japan and Australia/New Zealand). In the United States, FX trading volume declined 22% year-over-year. Trading volume fell 20% in Continental Europe, 8% in the United Kingdom and 12% in Asia (ex- Japan) and Australia/New Zealand.

The picture looks much different when Tom/Next transactions are allowed back into the mix. If these trades were included in total customer volume figures, overall global FX trading volume would have actually been flat to even slightly higher from 2009 to 2010. "Historically low overnight borrowing costs have altered the economics of these trades, providing users with a cheap way to fund positions and make interest-rate plays," says Greenwich Associates consultant Frank Feenstra.

Retail Slowdown Contributes to Decline
Outside the Tom/Next business, the decline in customer trading volumes was consistent across corporate and financial FX users. Globally, FX trading volume generated by companies fell 16% year-over-year and volume from financials fell 13%. Among the financials, volumes declined for hedge funds and customer banks. Only among fund managers and pension funds were year-to-year FX trading volumes essentially unchanged.

A main contributor to the global slowdown from 2009 to 2010 was a pronounced drop in FX trading volume generated by retail traders. Retail traders played a big role in the volume growth in late 2009. But trading volume among a matched sample of 25 of the world's largest retail FX trading aggregators fell 47% from Q4 2009 to Q4 2010. Even in Japan — a market in which overall FX trading volumes increased over the period and a country that includes the world's largest and most active retail FX market — trading volumes generated by retail aggregators declined 12% on a matched sample basis. "The year-to-year declines in global FX trading volume are only one half as large when retail aggregators are excluded from the mix," says Greenwich Associates consultant Woody Canaday.

In Global FX Market Share, Deutsche Bank Retains Greenwich Share Leader Position While Barclays Capital Narrows the Gap
Deutsche Bank and Barclays Capital top the ranks of the global foreign exchange market in terms of market share, with Deutsche Bank holding a slight lead over Barclays Capital (10.7% versus 10.5%). Both firms have built their market-leading positions on their commanding presence among financial clients, among which the individual markets shares of Deutsche Bank and Barclays Capital top those of their nearest competitor by more than a full percentage point. Among corporate users of foreign exchange, Citigroup leads all dealers with a market share of 10.5%. All three of these firms rank among the 2011 Greenwich Associates Share Leaders in Global Foreign Exchange.

The 2011 Greenwich Quality Leader in Global Foreign Exchange Service is HSBC.

In 2010, Greenwich Associates interviewed more than 1,500 users of foreign exchange at large companies and financial institutions around the world. These professionals were asked to name the dealers they use for FX trading, to reveal the amount of their total trading business allocated to each dealer and to rate these dealers in a series of product and service categories. Companies with the highest market shares are named Greenwich Share Leaders. Companies that receive quality ratings that top those given to competitors by a statistically significant margin are named Greenwich Quality Leaders.

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