James H Sinclair

Every three years, the Bank of International Settlements, through the world’s central banks, collects data for FX volume for the month of April. Their interim 2013 report released last week confirms the health of the market and contains a few surprises.

Total FX Volumes, Chart by MarketFactory

The Basic Facts
– Forex volumes grew 35% from $4.0 trillion/day in April 2010 to $5.2trillion/day in April 2013. The FX Spot market grew from $1.5trillion/day to $2.0 trillion/day over the same period.

– The proportion of FX volume traded by banks was steady at 39%, non-bank financial institutions continued to grow from 48% to 53% at the expense of corporates which now represent 9% of Forex volume, down from 13%, presumably because of the recession.

– FX trading remains concentrated: 6 currency pairs represent 65% of all forex volume. The US$ has lost none of its status: The US$ is on one side of 87% of all FX volume traded.

– Volume in FX derivatives grew strongly, despite some forecasts alleging regulatory uncertainty would slow growth. FX options grew 60% in volume. FX forwards grew by 48%.

The News
– Two emerging market currencies joined the top 10: Renminbi yuan volumes grew from $34bn/day to $120bn/day reflecting modest internationalization of the Chinese currency including facilities to settle in Hong Kong; Mexican Peso volume doubled. The Swedish Krona and Hong Kong dollar were displaced.

– A stark wake up call, at least for me as I lived in Japan for 10 years: Singapore FX volume now exceeds that of Tokyo. UK represents 41%; USA 19%; Singapore 5.7%; 5.6% Japan; and Hong Kong 4.1% of world Forex volume. A possible problem with these numbers is that, for non-bank financial institutions, they represent the residence of the sales desk or prime broker, not the place of actual FX trading.

– For the first time the BIS surveyed what makes up the category of non-bank financial institutions. Smaller banks represent 24% of the Forex volume; hedge funds and institutional investors represent 11% each. Surprisingly for those of us who grew up in an age of active central banks, the “Official Sector” represented only 1%. Superman has taken a break.

What does it mean?

– The FX market continues to grow strongly and, at least in aggregate, weathered the recession extremely well. The only decline in total BIS FX volume since surveys began in 1989 was during the introduction of the euro when major trading currencies were lost.

– The long term trend where non-bank financial institutions increase their share continues. It is often remarked upon, though it is nothing new. The table below shows the compound annual growth rates of each sector, shown in each survey:

Compound Annual Growth Rates

– The table above begs several questions. One is – where is the bump from electronic FX trading? Banks brought out customer APIs in the late ‘90s, but usually only for small amounts. EBS and Reuters introduced API-based trading in 2004; in the survey month of April it was still only offered to banks. There is an increase in 2007, but if we were expecting a hockey stick when electronic FX trading blossomed, it isn’t there. The non-bank financials showed their sharpest growth in Forex volumes when their world was manual in 1992-1995. The answer is, in part, that electronic trading has caused FX transaction size to fall almost as fast as it has increased transaction count. It is a sobering thought that, while cheaper, automated trading may not have increased overall Forex volumes significantly beyond their secular trend – but it has made everyone do more work for the same volume.