Peter D'Amario Managing Director of Greenwich Associates
Peter D'Amario Managing Director of Greenwich Associates

In slowing market, E-trading systems capture FX trading share

For nearly a decade, trends in electronic foreign exchange have been consistent: increasing use, growing trading volumes and an expanding electronic share of the global FX pie. Two of those three trends held true in 2010: electronic trading systems continued to attract new users — albeit at a slower pace than prior years — and the proportion of overall FX trading volume executed via electronic transactions grew. But the remaining trend, the steady growth in the absolute trading volumes executed through electronic systems, met at least a temporary end last year.

First Published: e-Forex Magazine 44 / e-FX Industry Report / July, 2011

Greenwich Associates tracks overall foreign exchange trading volume among a universe of 1,563 end-user corporate and institutional customers; volume figures cited in the research exclude Tomorrow-Next Day (Tom/ Next) and other short-dated rollover trades. On this basis, the research results show that global foreign exchange trading volume declined approximately 13% from Q4 2009 to Q4 2010. However, the picture looks much different when Tom/Next transactions are allowed into the mix. Trading volume in Tom/Next and other short-dated rollover trades increased 68% last year. 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. 

Likewise, the total amount of FX trading volume executed through electronic systems declined by approximately 10% from 2009 to 2010, excluding Tom/Next trades. Since Tom/Next and other short-dated rollover trades are generally executed electronically, any significant pick-up in Tom/Next volume will have a correspondingly large effect on e-trading volumes. As such, when Tom/Next trades are included in the count, global e-trading volumes were essentially flat from 2009 to 2010. 

While that decline in e-trading volume was consistent between financials and corporates worldwide, the slowdown was not evenly spread among regional FX markets. To the contrary, any drop in global eFX trading volumes last year would have been driven almost entirely by declines in Continental Europe, where e-trading volume totals declined 20% from 2009 to 2010, and in the United States, where electronic trading volumes fell 18%.

Meanwhile, eFX trading volumes on that basis increased approximately 3% in the United Kingdom and 15% in Japan. Volume increases were also recorded in the much smaller markets of Latin America and Australia/New Zealand. The gains in e-trading volumes in Japan and the smaller regional markets mirror patterns in the foreign exchange market overall. From 2009 to 2010 overall foreign exchange trading volumes increased 12% in Japan, and 33% in Australia/New Zealand. 

The growth in the United Kingdom is something else entirely. The fact that electronic trading systems were able to maintain and even increase their absolute levels of volume in a period in which overall U.K. trading volumes were down 8% represents a significant achievement.

Year-over-year percent change in Foreign Exchange Trading Volume vs. Foreign Exchange e-Trading Volume*
Year-over-year percent change in Foreign Exchange
Trading Volume vs. Foreign Exchange e-Trading Volume*

New users, bigger share

Trading platforms pulled off that feat in the U.K. by both attracting new customers last year and capturing a growing share of trading business from existing customers. In the United Kingdom, the share of FX market participants engaged in electronic trading grew to 77% in 2010 from 73% in 2009. Meanwhile, U.K. e-traders increased the share of their overall foreign exchange trading business executed through electronic systems to 64% from just 61%.

Such rates of growth easily top those of the global market overall. Worldwide, the share of FX market participants trading on electronic systems increased to 62% in 2010 from 61% in 2009. That average pick-up rate included an increase to 40% from 39% among Japanese market participants and an increase to 69% from 68% among market participants in Continental Europe. Among the world’s largest and most active FX traders — those generating more than $50 billion in annual trading volume — 86% now say they trade electronically, up from 83% in 2009.

Globally, market participants that use eFX increased the share of their total foreign exchange trading volume executed through electronic channels to 68% in 2010 from 64% in 2009. As in the United Kingdom, eFX users in the United States made a big move in this direction, increasing the share of their total volume executed electronically up from 61%. In Japan that share increased to 88% from 85% and in the rest of Asia (ex-Japan, Australia/New Zealand) the proportion grew to 69% from 56%. 

Electronic platforms’ ability to attract new users and capture a bigger share of overall volume on a global basis expanded the profile of e-trading systems within the context of the broader foreign exchange market. Worldwide, eFX now represents 57% of global foreign exchange trading volume — up from 56% last year. In Continental Europe electronic trading platforms captured a steady 60% of total foreign exchange trading volume from year to- year. In the United Kingdom, where electronic trading systems experienced increases in both number of users and share of these users’ trading wallet, eFX decreased as a proportion of total foreign exchange trading volume to represent 56%, down from 57% in 2009. 

Electronic Trading Volume
Electronic Trading Volume

Retail Aggregators

Perhaps the biggest driver of the declines in both overall foreign exchange trading volume and eFX volumes last year was the slowdown in activity on the part of retail  aggregators. Overall foreign exchange 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 — where total trading volumes increased last year and FX trading remains a near passion among retail investors — trading volumes generated by retail aggregators declined 12% on a matched sample basis. The falloff was essentially the same in electronic foreign exchange: while eFX trading volume was essentially unchanged from year to year among banks, fund managers and pension funds, electronic trading volumes generated by retail aggregators declined 49% from 2009 to 2010. 

Hedge Funds

Electronic trading platforms captured 36% of hedge fund foreign exchange trading volume last year, up from just 34% in 2009. In a year in which the absolute amount of foreign exchange trading volume generated by hedge funds declined, hedge funds’ total eFX trading volume actually increased 19%. That growth was the result of increases in both the share of hedge fund FX market participants using electronic systems and in the share of total FX trading volume routed to electronic platforms by these users. 

In 2009, two-thirds of hedge funds active in foreign exchange markets traded FX electronically. In 2010 that share remained the same. Over the same period, the share of total FX trading volume executed electronically by hedge funds that trade online jumped to 57% from just 40%. 

As a result of that growth, hedge funds now account for 11% of total electronic FX trading volume, up from 9% in 2009.

FX traders hanging up the phone

With electronic trading volumes fast approaching 60% of the global foreign exchange market, the share of volume executed through telephone transactions is shrinking. Among market participants that use electronic platforms, the share of total FX trading volume conducted by telephone declined to 28% in 2010 from 30% in 2009. 

Meanwhile, the share of total global FX volume executed by this group through multi dealer platforms increased to 43% in 2010 from 40% in 2009. Much of that increase can in turn be attributed to shifts among the world’s largest and most active FX traders. 

Among market participants generating more than $50 billion in annual FX trading volume, the proportion using multi-dealer platforms increased to 40% in 2010 from 34% in 2009, while the proportion using single-dealer platforms fell to 17% from 19%. Some of the business that was until recently conducted by phone is also moving to messaging systems like Bloomberg and Reuters.

Type of Electronic Trading System used
Type of Electronic Trading System used
In slowing market, E-trading systems capture FX trading share

Growing preference for third-party platforms

The study results suggest trading volumes shifting away from telephone-based transactions will increasingly move to third-party or multi-bank platforms. Globally, the share of eFX traders using third-party or multi-bank systems inched up to 78% in 2010 from 77% in 2009, while the proportion using single-bank or proprietary systems held steady at 45%. However, a closer look at the data reveals a bigger shift in Europe, where the share of eFX traders using third-party or multi-bank platforms increased to 85% from 82% and the share using single-bank systems fell to 37% from 42%. Likewise, among the biggest and most active FX traders in the world — those generating more than $50 billion in annual trading volume — use of third-party or multi-bank platforms jumped to 81% from 78% and the use of single-bank systems dropped to 52% from 56%. 

These two groups, the market’s most active traders and companies and financials in Europe, represent the most experienced and often most sophisticated foreign exchange traders in the world. Since trends that originate with this cohort generally carry over to the broader global market over time, we anticipate a continuing, gradual shift among users of electronic foreign exchange to third party and multi-dealer platforms. 

Members of another group of sophisticated traders — hedge funds — increased their use of both types of systems last year. Hedge fund use of third-party or multi-dealer systems increased to 62% in 2010 from 53% in 2009. At the same time, use of single-bank systems ticked up to 66% from 64%. 

While eFX users in the United States and Japan both shifted in step with their European counterparts toward greater use of third-party and multi-dealer systems last year, users in Asia (ex-Japan, Australia/New Zealand) moved in the opposite direction. In Asia, use of third-party or multi-bank platforms declined to 56% of eFX users in 2010 from 70% in 2009 and use of single-bank systems increased to 77% from 70%.


Methodology

Greenwich Associates conducted in-person interviews with 1,563 top-tier users of foreign exchange services at large corporations and financial institutions on market trends and their relationships with their dealers. Interviews were conducted in North America, Latin America, Europe, Asia, and Japan between September and November 2010. The findings reported in this document reflect solely the views reported to Greenwich Associates by the research participants. They do not represent opinions or endorsements by Greenwich Associates or its staff.