Much has changed in the currency market over the past 20 years. Once dominated by the world’s largest banks, the advent of e-commerce has allowed small financial firms to become directly involved in currency trading.
At the same time, regulations have placed limits on the level of risk these banks can take on their books, making them more selective about how and with whom they do business.
On Thursday, the Bank for International Settlements, widely known as the central bank of central banks, released preliminary results of its triennial currency trading survey. The survey, which monitors long-term trends in the forex market, found something surprising: Despite the rise in currency market volatility over the past three years, daily turnover has actually declined. to $ 5.1 trillion in April 2016, up from $ 5.3 trillion three years ago. .
This is the first time that overall trade has declined since 2001, according to the report. However, much of this difference can be attributed to the strength of the dollar DXY,
which has grown by around 16% against its main rivals since 2013 (the survey results are ultimately denominated in greenbacks).
Here are some lessons learned from the BIS report:
Emerging market currencies are increasingly traded
Many emerging market currencies have seen their share of global currency trading increase since the last BIS survey. The Chinese renminbi USDCNY,
led the way: its share has doubled to 4% in the past three years, making it the eighth most traded currency in the world.
However, the dollar remained by far the most traded currency: on the one hand, it represented 88% of all currency exchanges in April 2016, a period measured by the survey.
The graph below shows how the currency market share has evolved since the last survey:
Investors prefer derivatives to spot trading
For the first time since 2001, revenue in the spot currency market declined as traders showed a growing preference for derivative contracts. The decline in spot trading was the main reason for the overall drop in daily turnover to $ 5.1 trillion, from $ 5.3 trillion in 2013.
Daily trading in the spot market fell 19% to $ 1.7 trillion per day in April 2016. Their overall market share fell 5 percentage points to 33%.
However, trade in various OTC derivatives has increased.
Currency swaps rose 6% to $ 2.4 trillion per day, maintaining their place as the most traded instrument. Direct forwards saw their share jump 1 percentage point to 14%. The market share of options and other products decreased slightly to 5%. Meanwhile, currency swaps, the least popular instrument, saw their share rise to 2% from 1% in the last survey.
Large resellers recover market share
Foreign exchange trading continues to be dominated by financial institutions that the BIS describes as âother financial institutionsâ. This category includes small commercial and investment banks, as well as buying companies such as pension funds, mutual funds, and hedge funds.
But the largest currency traders appear to have regained some of the market share lost in previous years. The share of trade between the largest dealers increased for the first time since 1995, from 39% in 2013 to 42% in 2016.
Growth has been uneven among smaller financial firms which control 51% of transactions. Institutional investors like pension funds accounted for 16% of transactions, up from 11% in 2011. Meanwhile, hedge funds and proprietary trading companies have cut back on currency trading, accounting for just 8% of the figure daily business, compared to 11%. in 2013.
Trading is concentrated in the largest financial hubs
Currency trading is a global business. But most of the trading takes place in five financial centers: the UK, US, Singapore, Hong Kong and Japan.
The BIS will release the final results of its investigation later this year. Meanwhile, forex traders will be busy trying to guess at the Federal Reserve’s plans to raise interest rates. Another rise could push the dollar even higher.