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Business and the Global $117 Billion a Day Market - A study of global business Spot FX behaviour

Business and the Global $117 Billion a Day Market - A study of global business Spot FX behaviour

  • October 2016
  • 42 pages
  • ID: 5351841

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An average of US$5.088 trillion1 is traded every day on foreign exchange (FX) markets, making it the largest and most liquid financial market in the world. Trading in currency markets is increasingly dominated by financial institutions outside the dealer community.

Transactions with non-dealer financial counterparties now account for slightly over 50% of total FX volume turnover. While this is slightly down on the 52.5% from 2013, non-dealer institutions still make up the majority of FX trades. These non-dealer financial institutions include (Tier 2) banks, institutional investors (e.g. pension funds and mutual funds), hedge funds, high-frequency trading (HFT) firms and official sector financial institutions (e.g. central banks or sovereign wealth funds).

This rise in FX activity by non-dealer financial institutions has turned currencies into an asset class of their own and as the Financial Times once put it, it is an asset class that thrives on volatility.

Currencies as assets generate a dynamic of their own, resulting in currency flows that are no longer adjunct to trade and investment but rather an asset that exists for its own sake2.

This is exemplified by the latest Bank for International Settlements (BIS) data showing that less than a tenth (7.5%) of global FX turnover is transacted by business. East & Partners research shows that for most regions, FX trades conducted by non-financial customers are speculative in nature rather than for the purpose of ‘real’ business-to-business (B2B) trade.

Over two thirds of FX transactions executed by Australian and US based companies and over half conducted by those based in Hong Kong and the UK are speculative. Canada and Singapore are the exception to the global trend with the vast majority of businesses using FX tools in support of actual trade flows.

Spot FX transactions make up US$1.65 trillion of daily traded FX volumes. Non-financial customers or corporations comprise 7% of this total, equating to US$117 billion3. While global Spot FX market turnover had been trending steadily higher since 2001, reaching a daily average peak of US$2.05 trillion in 2013 before declining to US$1.65 trillion in April 2016, the volume attributed to non-financial customers has been steadily declining since 2007. The global economy is more interconnected than ever before yet corporates represent a rapidly shrinking contribution to overall FX turnover.

How do banks and FX providers stand out in what is an increasingly competitive and crowded business FX market?

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