The Slump in Global Forex Industry

The turnover of the global foreign exchange trading industry has dropped considerably from its highs of the last three years. The daily turnover in April 2013 was $5.4 trillion but the industry has only able to manage $5.1 trillion per day as of April 2016. In fact, this was the first time after 2001 that the industry reversed its growth. Spot trading also dropped to a daily level of $1.7 trillion in April 2016 from a high point of $2 trillion during the same month in 2013. At the same time, FX swaps trades in derivatives increased.

The triennial central bank survey of forex and OTC derivatives conducted by the Bank for International Settlements had very interesting results regarding the changes in the financial markets worldwide.

The triennial survey was done on around 1,200 big and small financial institutions located in 52 different countries from around the world. Its results are very illuminating as you will read below:

While most traders preferred the major currencies such as US dollar, Pound Sterling, and Euro, there was increased interest in emerging market currencies. China’s Renminbi has been especially popular with traders. Its trade turnover has doubled over a three year period over the past 15 years. A major reason for the renminbi’s attractiveness to forex traders is the increase in its liquidity.

Traders have shown a marked preference for low risk institutions, especially post the global financial crisis of 2008. Besides, weaker institutions have been removed from the market, from certain areas if not entirely, thanks to regulatory reforms and the need for higher capital. Banks, in particular, have chosen to trade in forex for hedging.

Many leveraged players have chosen to reduce their forex trading volumes, both directly and indirectly, in response to changes in the regulatory environment and macroeconomic reasons.

Hedge funds based in the financial centres of New York and London have reduced their forex trading by half from 2013 to 2016. Principal trading firms in these two cities have dropped their trading volumes by a relatively smaller 10% during the same period.

Interestingly, trades in the Hong Kong SAR rose a whopping 88% whereas Singapore performed even better at 100%. Tokyo outperformed them both by tripling in trading volumes. However, the trading base in these three places is far smaller than New York’s or London’s. In all, hedge funds and principal trading firms located in the Asian financial centres did 4% of overall forex trading, a substantial hike from the 1% that was traded in 2013.

The financial crisis of 2008 has also lead banks to re-evaluate the profitability of their prime brokerage trading businesses. Profits in this sector have been affected by strict regulatory reforms as well as institutional pressure to de-leverage. The forex turnover from this vertical dropped a massive 22% from 2013’s levels. The difference was even higher in spot markets, at 30%. Prime brokers have adapted to changes by dropping retail aggregators and minor hedge funds from their lists of customers, while retaining their large-volume clients. These prime brokerage companies have continued to make a lot of money in the form of high fees even though the business volumes have dropped.

Another trend in the industry has been of non-bank institutions and hedge funds trading with clients instead of just broking. These companies have made use of technology to offer customers digital trading platforms and change the way in which the business is run.

The survey did not analyse the uncertain future faced by the industry. The forex trading industry is no doubt sensitive to risk and a lack of liquidity but it comes up with strategies to deal with these problems.