Currency Market Shrinks as Survivors Turn Electronic, Aite Says

  • Trading volume falls 9% to $5.3 trillion a day in 2015
  • Automated trading accounts for 62% of foreign-exchange market

The global currency market is shrinking, and there’s a place to look for survivors -- in electronic markets, according to Aite Group, a consulting firm based in Boston.

Average daily volume of over-the-counter foreign exchange fell to $5.32 trillion in 2015, down 9 percent from $5.87 trillion in 2014, the consultant said in a study that surveyed banks, brokers, asset managers and trading platforms. Even as overall trading falls, the remaining volumes are increasingly migrating to electronic venues, which are forecast to account for 64 percent of over-the-counter trading by 2019 from 62 percent this year.

“Adapt to lower volume,’’ said the Aite report’s authors, Javier Paz, Howard Tai and Sang Lee. “Banks may project a business-as-usual facade, but in reality they are in a defensive mode. They are forced to comply with new regulations and are atoning for past misdeeds, but they also are bearing higher regulatory and compliance costs.’’

Aite’s overview comes before the results of a triennial survey by the Bank for International Settlements, due to be published in September. The Basel-based BIS’s April 2013 study showed market volumes averaging $5.3 trillion a day. 

Since then, currency markets have been roiled by a price-manipulation scandal that’s seen banks fined billions of dollars and prompted scrutiny by regulators. Volatility has also risen as the Federal Reserve tightens policy while its major peers carry out stimulus.

In the U.S., computerized trading surged to 24 percent of average daily volume, or $412 billion, from 2012 to 2015, according to Aite. In London, volumes on platforms that offer prices from multiple dealers surged 70 percent to $352 billion during the same period, while activity on single-dealer platforms dropped 4 percent to $292 billion.

Traders are executing more trades via automated computer programs that use algorithms, Aite said. About 24 percent of the spot currency market uses algos, driven by money managers and corporations.

“As the industry sorts through various regulatory changes in coming years, the demand for execution tools that can provide more transparency and better performance than the traditional custodian-based execution methods will become more important,’’ Aite said. “Foreign-exchange algos are expected to play a key role in this change in traders’ preferences.”

Before it's here, it's on the Bloomberg Terminal.