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Global Forex Exchange Trading Volumes Increased Last Year Despite Credit Crisis

Activity from corporations and financial institutions more than offset the contraction among hedge funds.

Global foreign exchange trading volume increased 15 percent from 2007 to 2008 as corporations and large financial institutions offset the sudden collapse of hedge fund FX trading, according to a study by Greenwich Associates.

While the rate of growth marks a slowdown from the 30 percent increases in FX trading recorded in each of the prior two years, the past 12 months did not feel like a slowdown, reported the consulting firm. High volatility and an influx of investors seeking liquid markets and a plain vanilla asset class produced a boom in forex trading. This kept the market in expansion mode despite the sharp contraction among hedge funds.

Hedge funds were the biggest drivers of growth in global foreign exchange markets from 2006 to 2007. During that period, FX trading volume generated by hedge funds increase 180 percent and hedge fund trading business grew to represent 20 percent of global FX volume. From 2007 to 2008, hedge fund trading volumes declined about 28 percent. However, these declines were more than offset by increases in trading volumes from large corporate clients and other financials.

There was a huge spike in FX trading volumes at the end of the fourth quarter of 2008 and in fact, foreign exchange was one of the few sources of steady profits for global banks last year, according to Greenwich. Banks that were struggling for survival due to losses in other business benefited from the increase in FX trading volumes and the widening of FX trading spreads. The increase in volatility and the reduction in the number of existing dealer desks, coupled with new concerns about counterparty risk over the past 12 months, led to widening FX spreads, according to Greenwich. “The greater significance of credit risk is certainly having an effect on dealers’ decisions about the customers with which they are comfortable dealing, and those clients that do make the cut are often seeing wider spreads,” stated Greenwich Associates consultant Woody Canaday in the release.

Though the credit crisis for the most part did not interrupt liquidity in the foreign exchange markets, it is having a profound impact on corporate FX trading flows. From 2007 to 2008, corporate clients allocated 37 percent of their FX trading volume to dealers on the basis of existing lending relationships, up from one-third in 2006-2007. Because of the change in market conditions, corporations are looking for their banks to provide credit as a standard minimum requirement for winning FX trading business from companies, according to the company’s release. “Companies are using every tool at their disposal to secure access to affordable credit; and FX trading business can be a valuable asset in that regard,” stated Andrew Awad, consultant at Greenwich Associates in the release.

The list of the world’s top foreign exchange dealers by market share is comprised of nine commercial banks and only one (former) investment bank, according to Greenwich’s ranking of dealers. Among the large universal banks that dominate global FX trading, Deutsche Bank and UBS top the list with market shares of 10.8 percent and 10 percent, respectively, followed by in rank order by Citigroup, The Royal Bank of Scotland and Barclays Capital.

Greenwich Associates tracked FX volume among a universe of 1,440 end user corporate and institutional customers. The volume data is taken from the firm’s annual global foreign exchange research study and exclude interbank transactions and volume generated from other sources. Interviews were conducted in September, October and November 2008, and the research covers the prior 12-month period.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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