The new drivers of e-trading growth
Peter D'AmarioConsultant with Greenwich Associates
Peter D'Amario assesses the importance of Hedge Funds, Real-Money
managers and the Retail market in driving current e-trading growth.
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%.
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