Money managers and individual traders

According to the survey, trading between banks and financial customers (such as hedge fund managers) rose, and its share of total turnover went up from 28 percent to 33 percent. The survey said the higher activity between reporting banks and financial customers may reflect a sizeable
increase in activity by hedge funds and commodity trading advisers, as well as robust growth of trading
by asset managers (money managers). Between 1998 and 2001, when the last survey was taken, activity in that market segment had been driven mainly by asset managers while the role of hedge funds had declined.


“There are two contributing factors driving the BIS-reported increase in daily turnover in the foreign exchange market,” says Michael Woolfolk, senior currency strategist with Bank of NewYork. “First, the prior tri-annual figure was reduced by the launch of the euro and subsequent elimination of high volume European cross currencies such as the Deutsche mark/French franc (DEM/FRF) and Deutsche mark/Italian lira (DEM/ITL). Given the growth trend in FX turnover during the preceding decade, this number would have been closer to $1.7 trillion without the launch of the euro.

“Second, the current tri-annual turnover figure reflects an acceleration in the velocity of foreign exchange transactions as hedge funds and other speculative trading interests play a larger role in the market,” he adds. The survey reveals trading between reporting dealer banks rose between 2001 and 2004, although its share continued to fall, from 59 percent in 2001to 53 percent in 2004.

According to theBIS, restraining factors might included the continuing consolidation in the banking industry, as well as efficiency gains derived from the use of electronic brokers in the interbank spot market.

The share of trading between banks and non-financial customers edged up slightly to 14 percent.
“[Interdealer shrinkage] is actually a testimony to individual customers,” says Glenn Stevens of FX brokerage Gain Capital. “They’re bypassing the banks and going to market makers like us. Also
the onset of electronic trading has contributed. Price discovery is a lot closer.”