Forex trading is the day trading of the early 21st century. The advent of electronic trading has caused forex volume to skyrocket, and technological advances have made it easier for retail traders and institutions alike to get involved.

A recent report by Client Knowledge, a London-based research firm, indicates that steadily improving technology will help keep currency volumes at high levels.

The value of average daily activity in the forex market is about $2 trillion, a total that Client Knowledge expects to rise to more than $3 trillion by 2010. Furthermore, while electronic trading is currently responsible for more than half of all currency trades, the report says that number will be more than 75 percent by 2010, adding, “The technology infrastructure needed to enable and support those trades is now fundamentally interlinked with the infrastructure needed to support and render profitable non electronically transacted trades.”

The report focuses on technology and estimates that the sell side spends almost $400 million a year on e-commerce, a total it expects to double by 2010. The report specifically addresses retail trading and exchange-traded flows. Of the former, it says, “A growth area attracting considerable attention at the present time, this is the space for individual traders and very small hedge funds. Serviced by such consolidators of flow as Saxobank, FXCM, Gain Capital, and others, in the past month a number of banks, led by Deutsche Bank and UBS, have shown an appetite to address and grow this space by providing easily accessed, online margin- based trading for smaller accounts. This is another technology dependent FX space that, in turn, increases the range of liquidity pools requiring servicing and risk management.”

However, while the report acknowledges the Chicago Mercantile Exchange handles almost $50 billion a day in forex transactions, it considers this amount “trivial.”

The report states, “This is because the flows are undertaken by firms and end users who have not previously been active in the traditional market and continue to be overwhelmingly absent from it. While the CME is certainly an interested party in any possible move towards an exchange model, we believe trends driven by this liquidity pool, beyond the simple provision of a connector, are unlikely to be important features of most banks’ requirements of an e-dealing system.”

The overwhelming tone of the report is that technology will continue to drive the forex space, at the expense of human interaction. “Our analysis demonstrates that the recent growth in the foreign exchange market is sustainable and will extend further over the next five years,” says Justyn Trenner, CEO and Principal of Client Knowledge. “Success for the sell-side will be predicated on their effectiveness in implementing interconnected technology, trading, and distribution strategies — and they will be penalized rapidly for failing to do so. Technology, strategy, and spending, therefore, will be at the heart of future profitability.”