Greenwich Associates tracks foreign exchange (FX) trading volume among a universe of 1,632 end-user corporate and institutional customers. Volume figures in this report exclude inter-bank trades, as well as end-user short-dated swaps and rollovers. On this basis, the Greenwich Associates 2012 Global Foreign Exchange Services Study reveals that electronic FX (eFX) trading volumes increased 23% from Q3 2010 to the same period in 2011. That growth surpassed the 15% increase in overall foreign exchange trading volumes, thus expanding the share of the market traded on electronic systems to 61% from the 57% of total volume recorded in Q3 2009 to Q3 2010.
The study results reveal a clear and interesting trend: Electronic trading systems did not attract new users last year. Instead, eFX growth was driven entirely by a pickup in the share of total foreign exchange trading volume routed to electronic systems by existing users. Globally, 62% of FX market participants trade foreign exchange electronically — a share unchanged from 2010. Approximately half of FX market participants in the Asia Pacific region use electronic systems, as do 75% in Europe, 76% in the United States and 80% in the United Kingdom.
While electronic trading systems failed to win new customers last year, they did manage to capture a growing share of business from their existing users. At a global level, existing users of eFX increased the share of their total foreign exchange trading volume executed on electronic systems to 71% in 2011 from 68% in 2010. The biggest jump occurred in the Americas, where electronic trading systems captured three-quarters of overall foreign exchange trading volumes from their users — up from 67% in 2010. The one outlier in these terms was the United Kingdom. However, the dip in share of total volume executed electronically by U.K. eFX customers might be attributable to the fact that, unlike in other markets, electronic trading platforms in the United Kingdom did manage to win new customers last year, and these customers likely drove down overall averages as they got up and running.
Strong growth in North America, Asia and Europe
In a year in which overall global foreign exchange trading volume notched a strong recovery from the contraction experienced in 2010, eFX volumes surged in most major market regions last year. From 2010 to 2011 electronic trading volumes increased 47% in the Americas, 20% in Europe and 22% in Asia Pacific.
As a result of those increases, the share of total foreign exchange trading volume executed electronically in the Americas increased to 60% in 2011 from 51% in 2010 and the share of overall volume executed electronically expanded to 62% from 58% in Europe. The European expansion was driven by a 22% increase in e-trading volume on the continent; eFX volumes in the United Kingdom were essentially flat.
In Japan, the share of overall foreign exchange volume executed via electronic trades held steady at roughly 68% amid strong year-to-year growth in both total FX volume (up 23%) and eFX volume (up 35%). In Asia ex-Japan/Australia/New Zealand, the share of overall foreign exchange trading volumes routed through electronic systems declined to 54% in 2011 from 59% in 2010 as growth in e-trading volumes (+4%) lagged growth in total FX (+6%).
Biggest market participants lead e-trading push
In what can only be seen as a positive sign for the global e-trading industry, eFX trading volume surged last year among the largest and most actively trading financials and corporates that generate the bulk of global trading business. In 2011 about 86% of market participants generating in excess of $50 billion in annual foreign exchange trading volume traded electronically, and those users increased the percentage of business executed through electronic systems to 71% in 2011 from 69% in 2010.
Among market participants generating annual FX trading volumes between $10 billion and $50 billion, the share trading electronically increased to 75% in 2011 from 73% in 2010 and the typical eFX user in this group increased the share of overall foreign exchange volume executed electronically to 66% from 62%. Due to such consistent uptake, electronic trading systems are now capturing nearly two-thirds of trading volume generated by the biggest players in global FX markets.
Platforms win trading business
The trend of pushing increasing amounts of foreign exchange trading volume onto electronic platforms was evident last year among both financial participants that make up the bulk of the global FX market and among companies. In 2010 the typical financial institution active in eFX executed 70% of total foreign exchange volume on electronic systems. In 2011 that share increased to 73%. Customer banks using electronic trading systems executed 77% of total volume electronically, up from 74% in 2010, and fund managers/pension funds that trade electronically increased the share of overall FX volume routed through electronic systems to 61% from 57%. Because many corporations participate in FX markets on only a sporadic basis, just 52% of them use electronic FX systems. But companies that do use eFX increased the share of their total foreign exchange volume executed electronically to 61% in 2011 from 58% in 2010.
Hedge Funds slump
Electronic trading volumes decreased 7% among hedge funds last year. However, because that decline occurred against the backdrop of a 10% decline in overall hedge fund foreign exchange trading volume, the proportion of FX volume traded electronically actually increased among hedge funds to 45% of total market volume in 2011 from 36% in 2010. The decline in eFX among hedge funds should not be taken as a sign of future direction in terms of demand. In fact, both the share of hedge funds trading on electronic systems and the share of total business executed electronically by hedge fund users held up relatively well from 2010 to 2011. The pronounced slump in general hedge fund performance and foreign exchange market activity simply dragged down the absolute eFX volume totals last year.
Retail Aggregators: The Return
The amount of FX trading volume executed electronically by retail aggregators increased 43% from 2010 to 2011, essentially mirroring the increase in overall foreign exchange volumes generated by these firms. The spike in both overall FX and eFX trading volumes almost made up for the significant declines in activity among retail aggregators from 2009 to 2010 and served as one of the important drivers of the general recovery in global FX trading volumes last year.
A Multi-Dealer world
The results of Greenwich Associates research point to a continued move away from bank proprietary trading systems by major FX market participants, even among the financial institutions that make up the majority of foreign exchange trading volume. Among financials, the share of eFX users trading on single-bank systems declined slightly to 53% in 2011 from 54% in 2010 and the share trading on multi-bank platforms increased to 78% from 75%.
The move away from single-dealer platforms included customer banks, fund managers, pension funds, and even hedge funds, which traditionally have been heavy users of bank proprietary trading systems. While the share of hedge fund e-traders employing multi-bank systems held steady at 62% from 2010 to 2011, the share using single-bank systems dipped to 64% from 66%.
The trend moved in the opposite direction for only two types of FX market participant: the market’s largest players and retail aggregators. In both cases, market participants are making heavier use of both types of trading platforms. Among market participants generating more than $50 billion in annual FX trading volumes, the use of proprietary bank systems increased to 54% in 2011 from 52% in 2010 while use of multi-bank systems increased to 85% from 81%. Among retail aggregators, usage of single-bank platforms increased to nearly three quarters in 2011 from about half in 2010 and the jump in usage of multi-bank platforms was even more dramatic. Overall FX volume surged among retail aggregators last year, and the massive increases in total volume prompted these firms, which rely on electronic trading for nearly all of their business, to utilize all the tools at their disposal.
A Faster, more sophisticated future
The FX market has the reputation of being perhaps the world’s most liquid and one of the world’s most efficient marketplaces. It has also become one of the most competitive. As increasing amounts of business flow to multi-dealer platforms, banks find themselves in a race to get prices quoted on these systems and to find ways of differentiating themselves from competitors.
Many banks are looking to one tool they think will help them better compete: algorithmic trading. Only 8% of global FX market participants use algorithmic trading strategies for foreign exchange. While that share is up from the 6% using algo trades in 2010, the 2011 results leave little doubt that these strategies have yet to gain much traction market-wide. However, the research results do show signs that algorithmic trading is beginning to catch on in certain segments of the market:
• Use of algorithmic trading strategies increased to 16% in 2011 from 12% in 2010 among the market’s biggest and most active traders — those generating more than $50 billion in annual FX trading volume.
• Use of these strategies increased to 12% from 8% among market participants in the United Kingdom and to 12% from 10% among U.S. participants.
• Twenty percent of hedge funds are using algorithmic trading strategies in FX, up from just 14% last year.
Meanwhile, many of the banks with which Greenwich Associates regularly works are investing heavily in the development of algorithmic strategies for foreign exchange, and they expect this product to attract significant levels of demand in the months and years ahead.
As FX evolves into a mainly electronic marketplace, competition is taking place in milliseconds as opposed to minutes or hours. In such an environment, algorithmic trading strategies will play a much bigger role for both investors and banks.
Between September and November 2011, Greenwich Associates conducted interviews with 1,632 top-tier users of foreign exchange services at large corporations and financial institutions in North America, Latin America, Europe, and Asia Pacific. Participants were asked about market trends and their relationships with their dealers.