John Labuszewski Director of Research at CME Group
John Labuszewski Director of Research at CME Group

e-FX Industry Report - From Hedging to Alpha: e-FX gains even greater momentum

Volumes in the FX marketplace continue to increase from year-to-year, reaching $3.2 trillion a day globally in 2007, with an increasing number of market participants. CME Group recently commissioned a research initiative to look behind the headline figures and identify what trends are driving this growth. The Global FX Market Study, conducted by, the wholesale financial services research and consulting firm ClientKnowledge, showed that market participants’ growing focus on electronic trading, risk management and cost control is driving the record growth in global foreign exchange (FX) markets.

Market participants on every level reported use of electronic trading systems to facilitate cash business.   While it is well established that traditional telephone and voice-based trading continues to give way to electronic trading, the study revealed that traders expect electronic trading growth to gain momentum faster than previously anticipated. CME Group’s Global FX Market Study predicted an average of more than 80 percent of all cash business will be executed electronically in 2010 (banks 89 percent, traditional money managers 83 percent and non-traditional money managers 96 percent). 

Use of electronic systems was down slightly from 2006 to 2007 but this may be attributed to the fact that there were more market participants joining the survey by 2007, presumably of the novice variety and less amenable to electronic technologies.

Derek Sammann

Derek Sammann


Although latency is a hot topic with electronic traders, 72 percent of bank survey participants cited counterparty risk as their biggest concern, followed by settlement risk (64 percent), giving a clear advantage to the exchange-style centrally cleared model, which lessens both of these risks. Latency was of concern to only 19 percent of participants who responded to this question.

“Our global customer feedback from a year ago showed latency as the top concern. This report shows there is a clear change in that counterparty risk has overtaken latency and cost,” said Derek Sammann, Managing Director, Head of FX Products at CME Group.

From Hedging to Alpha: e-FX gains even greater momentum

RTTP was mentioned by 73% of respondents as the connectivity standard of choice with FpML, FIX, TWIST and TOF running no more than 11%. 

Key role of technology

Less active traders reported that the quality of the e-trading technological platform was the key to their participation.  More active traders were more interested in the range of products and post-trade connectivity.  Sales support generally was devalued by all respondents.

Trading activity and the usage of FX technology was guided in large part by volatility.  But market access, pricing, strategies and ability to use different instruments likewise played a role.

Banks generally reported that their biggest concern in making electronic markets was counterparty credit risk followed closely by settlement risks.

From Hedging to Alpha: e-FX gains even greater momentum
From Hedging to Alpha: e-FX gains even greater momentum
From Hedging to Alpha: e-FX gains even greater momentum
Trying to avoid greater momentum

Trying to avoid greater momentum

Efficient Execution

Traders of all categories also continue to focus on efficient execution.  The Global FX Market Study showed that 79 percent of active and 81 percent of real-money traders were concerned primarily with bid/offer spreads as the key component of their transaction costs, while market impact (price movement during trade execution that negatively impacts the market price) concerned 59 percent of active and 64 percent of less active traders (although the width and depth of the market and its effects on the spread are difficult to separate).

  Levered & Active Traders Less Active Traders
79% 81%
Market impact 59% 64%
Settlement costs
49% 48%
Fill compared to benchmark 23% 15%

It is notable that “settlement costs,” which might be equated with exchange fees, ran a reasonably distant third in this analysis.  Settlement costs concerned 49 percent of active and 48 percent of less active traders, while reported fills relative to benchmark prices concerned a mere 23 percent of active and 15 percent of real-money traders – a very distant fourth.  This confirms that increasing numbers of participants are looking for liquid venues with tight spreads and clearly identified settlement cost.

“On the cost side, what this survey clearly highlights is that counterparty risk is now a much higher level risk than it was 6-12 months ago. In terms of transaction cost analysis, this manifests itself in the way in which firms actually quantify their "costs". Rather than simply limiting costs to an execution fee, more customers are now taking counterparty risk into consideration by implicitly valuing this as part of the transaction itself.  So by more highly valuing this risk, the actual cost analysis calculation itself is changed.  Effectively, FX market participants are now ascribing a higher value to the risk mitigation aspects of cleared products, and in turn this is driving more trading decisions,” said Sammann. 

One possible reason for the relative lack of significance attributed to fills relative to benchmark prices is a relatively sparse use of algorithmic trading methods by respondents.  Although much in the news as a driver of volumes and of returns, algorithmic trading registered a surprisingly low 9 percent among active traders, down from 12 percent in 2006, and 6 percent among less-active traders, down from 13 percent the previous year.

  Levered & Active Traders Less Active Traders
  2006 2007 2006 2007
Fundamental 65% 67%  68% 79%
Quantitative 37% 33%  39% 19%
Algorithmic 12%
 13% 6%
Mixed trading
35% 14%  37% 13%

“At one point very few people were using models, and then everybody was using them. Now it’s being scaled back again. I think that’s the natural ebb and flow of a healthy market,” commented Sammann. 

Pursuit of alpha

These numbers occur within the context of respondents’ reported purpose in using the FX markets: the study shows that a relatively small number of traders use FX markets in pursuit of alpha, although this small number of end users tends to generate a large amount of activity as alpha strategies tend to be pursued by more levered, active and sophisticated traders.  Among FX traders, the leveraged/active dedicate 39 percent of their volumes to translation strategies, 45 percent to hedging and only 16 percent to the pursuit of alpha.  The real-money traders ascribe 47 percent of their volumes to translation strategies, 43 percent to hedging, and only 10 percent to pursuing alpha.

   Levered & Active Traders  Less Active Traders
  2006 2007 2006 2007
Translation 27%
39% 38% 47%
Hedging 41% 45% 43%


Alpha Pursuit 33% 16% 19% 10%

When pursuing alpha, traders most commonly use managed hedge or currency overlay programs (leveraged/active 44 percent, less active 51 percent), while dedicated FX funds are less common (27 percent and 30 percent respectively). 

   Levered & Active Traders  Less Active Traders
 2006  2007  2006  2007
 Hedge/overlay  76%  44%  75%  51%
 FX fund  67%  27% 52%  30%

Cross-product management of risk is key in this environment.  The survey revealed that among the asset classes most likely to be additionally traded with FX, banks see money markets as most important (71 percent) while highly active traders looked to fixed income (53 percent), equities (41 percent), and interest rates (28 percent).  According to the study, to fully exploit the FX relationship, providers need to have depth in other product classes.

While the vast majority of market participants of all sorts reported use of plain vanilla options, usage of barrier and “more exotic” options was reported at far lower levels.  


Banks and less active traditional money managers are directing their electronic trading based on the quality of the electronic trading platform; while more active traders are guided more so by the range of products offered and post-trade connectivity considerations. . 

Scope of Survey - The survey polled 933 end-users including 333 banks, 333 traditional money managers and 267 “non-traditional” money managers or “levered” traders including hedge funds and Commodity Trading Advisors (CTAs).  Traditional money managers were further categorized into highly active traders that transact >$25 billion per annum vs. less active traders who transact less <$25 billion.