The Bank of International Settlements (BIS) releases its currency survey every three years. Although the meat of the BIS report is barely 1,700 words, it is highly anticipated by many people in the forex arena.
The survey polls 54 central banks and monetary authorities around the world, collecting data on spot forex and other transactions. Participants in the forex market use the data to determine new trends.
As expected, the survey showed that spot forex activity grew at an unprecedented level between 2004 and 2007, increasing 71 percent to an average daily turnover of $3.2 trillion in April. Survey participants point to increased interest in the forex market by hedge funds and individual investors, and institutional investors looking for more diversity in their portfolios also turned their attention to forex.
“I think the bottom line can be summed up in one single word: volatility,” says Andrew Wilkinson of Interactive Brokers. “Traders, and apparently retail traders, too, love volatility. We’ve noticed the rise in volume on currency futures and how that’s feeding through to options activity and liquidity.”
The number of firms and individuals using technical trading — particularly algorithmic trading — has also increased significantly, likely leading to greater forex participation.
“Foreign exchange is a bit of a ‘Field of Dreams’ in a sense,” Wilkinson says. “Retail traders have shown an appetite for risk and brisk movements in underlying instruments. FX certainly affords that, and product innovators — from brokerages to exchanges — have built on the mantra, ‘If you build it, they will come.’”
However, while overall volume goes up, the share done by the interbank continues to fall. Transactions completed via the interbank accounted for 43 percent of the total market; down from a high of 64 percent in 1998. While an increasing number of brokerages with their own trading desks are taking business from the interbank, continuing consolidation in the banking industry is also contributing to the decreased numbers.
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