The BIS Triennial Central Bank Survey
BIS’ Survey highlighted that OTC FX trading increased 14% from 2019 to $7.5 trillion daily in April 2022. This increase occurred despite increased volatility caused by Russia’s invasion of Ukraine, rising commodity prices, and uncertain interest rate environments in advanced economies. Furthermore, COVID-19 restrictions in China and Hong Kong SAR suppressed reporting, making the increase even more marked.
Spot FX accounted for 28% of global turnover, amounting to $2.1 trillion daily. This number is a slight reduction from 2019. FX swaps remained the most highly traded instrument with a $3.8 trillion daily turnover, representing a 51% share of total volumes, up from 49% in 2019.
Outright forwards accounted for 15% of overall volumes, unchanged from 2019, with options accounting for 2% of total turnover. The growth in overall trade volumes was a result of greater inter-dealer trading, accounting for 46% of overall turnover. This is an 8% jump from 2019.
The BIS Survey indicated that inter-dealer volume was 40% of spot turnover and 54% of swaps turnover. This increase might reflect the higher volatility levels in the market during April 2022.
The US Dollar formed one side of 88% of all trades, similar to 2019, while the Euro decreased to 31% (from 32% in 2019.). Shares of the Japanese Yen and Pound Sterling remained at 17% and 13% respectively, unchanged from 2019.
The Renminbi rose to 7%, making it the fifth most-traded currency in the world, up from eighth in 2019. These data show that despite increasing talk that questions the US Dollar’s role as the world’s reserve currency, it retains the top spot by a huge margin.
The BIS Quarterly Review listed a few reasons for this dominance. First, the USD is a vehicle currency for FX transactions, forming the medium of exchange even when it isn’t one of the currencies being traded. This type of trading accounts for 40% of the USD’s turnover.
The USD’s presence in offshore funding markets also contributes to high volumes. Debt and cross-border loans raised in these markets tend to be USD denominated. BIS estimates 88% of total international USD-denominated debt involves parties where neither the issuer nor lender is a US resident. 65% of international USD bank loans similarly involve parties not connected to the US.
Lastly, almost half of all global trade is invoiced in USD, with the share changing depending on regions. These factors ensure the Dollar remains the world’s preferred trade currency.
Electronification in FX steadies
The primary venues (Refinitiv Matching and Electronic Broking Services) have long formed an important portion of the inter-dealer spot market. In recent years, secondary venues in the dealer-customer segment have grown significantly. The BIS Quarterly Review highlights the rise of these secondary venues, earmarking the rise of algo trading as one of the causes.
Internalisation is one of the three reasons for declining volumes on primary venues. The second is the attempt to shield bank dealers from HFT strategies by introducing electronic speed bumps. The third, execution by algorithms, might become more significant as time passes. These algos slice orders and distribute orders across multiple venues efficiently, accounting for 20% of spot trading in 2020.
Typically, volumes on primary venues jump during volatility, but 2022 was an exception. BIS reckons several factors contributed to this phenomenon, including higher internalisation ratios, more risk management, and more evenly spread electronic execution between dealers.
While electronification has been increasing, the Q4 Quarterly Review suggests the trend might be steadying. 60% of trades continue to be executed electronically, remaining unchanged in three years. Direct forms of electronic trading continue to rise though, with trading resembling methods where counterparties know each other’s identity while retaining trade information privacy.
Direct electronic methods jumped 7%, while indirect methods like electronic trading on anonymous venues declined by the same amount.
Corporate attitudes towards FX changing
Traditionally, corporate desks have focused less on FX execution quality compared to asset managers, but recent research by Coalition Greenwich indicates a shifting corporate attitude towards FX workflows and instruments.
Stephen Bruel, Head of Derivatives and FX, Market Structure and Technology at Coalition Greenwich, summarizes the reasons for this shift. “Currency markets have been volatile, and in some cases negatively affected corporate earnings,” he says. “While the use of FX derivatives such as options can be expensive, corporates need to think about how to manage through volatility.”
Data and analytics are at the forefront of every corporate treasurer’s mind since they form the basis for workflows related to managing volatility and risk. However, several respondents believe they manage data needs around existing trade execution strategies effectively. Note that algo usage is not a part of these strategies.
Coalition Greenwich notes that only 12% of corporates currently use algos, with pricing and evaluating market impact posing significant challenges.
“One goal of the FXGC as it relates to algos is transparency into how they work,” notes Bruel. “For those corporates that have yet to embrace algo execution, more transparency from brokers as to how the algos work will give confidence and help them embrace it more.”
Voice trading has long dominated FX thanks to its ability to offer traders insights into market colour. In the past, voice’s ability to offer more insights was a reason for slow algo adoption. Coalition Greenwich’s research indicates a shift in this regard.
Corporates directing more flow toward multi-dealer platforms (MDPs) reflects a move to electronic platforms, further reinforcing the need to establish data-backed workflows and processes. Investment into data-backed oversight of FX flows will push corporates closer to the picture their asset management colleagues face. Coalition Greenwich’s study highlights improving post-trade processes, pre-trade analytics, and optimizing pre-to-post-trade workflows as the top three areas of significant investment over the coming year.
As algos continue to account for larger volumes by the day, corporates have clearly realized they must evolve to avoid being left behind. Data and analytics, along with investments in integrating pre to post-trade workflows give them the best chance of optimizing their operations.
“Corporates need to examine the costs of the status quo,” he says, “whether those costs are volatility, risk, or high transaction costs. This will help them gain consensus regarding the scope of the problem to be solved.”