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Electronic trading tops 60% of global foreign exchange trading volume

2 April 2012  •  Source: Greenwich Associates

Strong growth in electronic trading activity last year pushed electronic foreign exchange volumes above 60% of the overall global FX market for the first time, according to the results of Greenwich Associates recent Global Foreign Exchange Services Study.

Electronic FX trading volumes increased 23% from Q3 2010 to the same period in 2011. That growth surpassed the 15% increase in overall foreign exchange trading volumes, thus expanding the share of the market traded on electronic systems to 61% from the 57% of total volume recorded in Q3 2009 to Q3 2010.

Note: Greenwich Associates tracks foreign exchange trading volume among a universe of 1,632 end-user corporate and institutional customers. Volume figures exclude inter-bank trades, as well as end-user short-dated swaps and rollovers.

Americas Lead Global eFX Expansion

From 2010 to 2011 electronic trading volumes increased 47% in the Americas, 20% in Europe and 22% in Asia Pacific. As a result of those increases, the share of total foreign exchange trading volume executed electronically in the Americas increased to 60% in 2011 from 51% in 2010 and the share of overall volume executed electronically expanded to 62% from 58% in Europe. The European expansion was driven by a 22% increase in e-trading volume on the continent; eFX volumes in the United Kingdom were essentially flat.

In Japan, the share of overall foreign exchange volume executed via electronic trades held steady at roughly 68% amid strong year-to-year growth in both total FX volume (up 23%) and eFX volume (up 35%). In Asia ex-Japan/Australia/New Zealand, the share of overall foreign exchange trading volumes routed through electronic systems declined to 54% in 2011 from 59% in 2010 as growth in e-trading volumes (+4%) lagged growth in total FX (+6%).

Retail Aggregators: The Return

The amount of FX trading volume executed electronically by retail aggregators increased 43% from 2010 to 2011, essentially mirroring the increase in overall foreign exchange volumes generated by these firms. The spike in both overall FX and eFX trading volumes almost made up for the significant declines in activity among retail aggregators from 2009 to 2010 and served as one of the important drivers of the general recovery in global FX trading volumes last year.

Algorithmic Trading: Big Growth Ahead

The FX market has the reputation of being perhaps the world’s most liquid and one of the world’s most efficient marketplaces. It has also become one of the most competitive. As increasing amounts of business flow to multi-dealer platforms, banks find themselves in a race to get prices quoted on these systems and to find ways of differentiating themselves from competitors.

Many banks are looking to one tool they think will help them better compete: algorithmic trading. Only 8% of global FX market participants use algorithmic trading strategies for foreign exchange. While that share is up from the 6% using algo trades in 2010, the 2011 results leave little doubt that these strategies have yet to gain much traction market-wide. However, the research results do show signs that algorithmic trading is beginning to catch on in certain segments of the market:

  • Use of algorithmic trading strategies increased to 16% in 2011 from 12% in 2010 among the market’s biggest and most active traders — those generating more than $50 billion in annual FX trading volume.
  • Use of these strategies increased to 12% from 8% among market participants in the United Kingdom and to 12% from 10% among U.S. participants.
  • Twenty percent of hedge funds are using algorithmic trading strategies in FX, up from just 14% last year. Meanwhile, many of the banks with which Greenwich Associates regularly works are investing heavily in the development of algorithmic strategies for foreign exchange, and they expect this product to attract significant levels of demand in the months and years ahead.

“As FX evolves into a mainly electronic marketplace, competition is taking place in milliseconds as opposed to minutes or hours,” says Greenwich Associates consultant Peter D’Amario. “In such an environment, algorithmic trading strategies will play a much bigger role for both investors and banks.”