Since the inception of electronic foreign exchange trading, companies and large financial institutions have driven the rapid and consistent growth in e-trading volumes. In 2005, however, the pace of growth among corporations and large institutions slowed considerably relative to that seen in prior years. Despite this slowdown, e-trading continued to boom thanks in part to a somewhat unexpected source: retail customers.

EFX trading volumes among large companies and institutions had been doubling every 12 months for the past three or four years and this years growth among the institutional segment was more in the range of 10%. In many respects the real action in electronic foreign exchange last year took place among non-traditional FX traders including hedge funds and so-called retail aggregators operating around the world.

Total electronic foreign exchange volume among the forex customers interviewed by Greenwich Associates as part of its annual global FX Research Study increased from approximately $15.7 trillion in 2004 to almost $17 trillion in 2005. The majority of this growth was generated by financial institutions, which as a group increased their annual e-trading volume by about 8%.

Among the financials, fund managers and pension funds significantly increased their eFX trading activity, with average volume increasing some 68%. Only one other class of financial institution topped this rate of growth: organizations classified not as banks, funds, hedge funds, nor insurance companies. E-trading volumes among these other financials increased 70% from 2004 to 2005 a rate of growth that we would attribute to the large increases in the amount of business coming through retail aggregators, particularly those in the United States and Asia.

eFX 2005: Financials Lead the Way
The proportion of large corporate and financial users of foreign exchange services trading FX online remained stable at about 44% from 2004 to 2005. Over the past 12 months, however, the proportion of e-trading holdouts that say they plan to start trading electronically in the coming 12 months slipped slightly from 14% to 13% a sign that electronic trading systems might have reached at least a temporary plateau in terms of number of customers.

Across all geographic regions, more than half of financial institutions trade FX electronically as compared to only 37% of corporates. Among all types of FX user, those with the heaviest foreign exchange trading volumes are also the most likely to trade electronically. More than 55% of corporates or financial institutions with more than $10 billion in annual forex trading volume use electronic trading systems, as compared with 37% of users with total trading volumes between $1 billion and $10 billion, and just 27% of smaller traders.

E-trading systems last year did manage to attract a significant number of new customers from one important group: hedge funds. The proportion of hedge funds interviewed by Greenwich around the world trading FX electronically increased from 49% in 2004 to 53% in 2005. Over that same period, the total amount of electronic trading volume generated by hedge funds increased 46%.