Latest Central Bank FX Surveys Reveal Fresh Insights and a Market Regaining Its Footing

Twice a year and once every three years, the world of foreign currency trading gets a peek at the trajectory of OTC FX markets. Having just gone through the April 2016 results from semiannual FX surveys by major central banks, I am now anxiously awaiting the early-September interim results from the April 2016 Bank for International Settlements triennial FX survey.

Here are some of the major takeaways for OTC FX market participants:

• In April 2016, all but one FX product (FX swaps) experienced volume losses relative to both April 2015 and to the highs seen in 2014; conversely, all FX products saw a jump in volume over October 2015 trading levels in what can be called a cautious recovery from multiyear lows.
• Globally, spot FX activity saw an 18% year-over-year volume drop (22% in London, 6% in New York), and spot FX non-prime-brokered activity in London fell for the fourth consecutive measurement period to US$442 billion per day, a level last seen in 2009 and 2010. This lack of growth within the cash/non-levered part of the market makes the overall spot FX market dependent on trading generated by prime-brokered entities (HFT firms, retail aggregators, and prop trading firms), which have also been hit by less bank-credit availability since 2013.  
• FX swaps activity, the largest FX product, is responsible for roughly US$2 trillion of daily activity. Originally a source of worry at the end of last year, the FX swaps market saw a 4% volume growth relative to April 2015 (25% in New York, zero change in London).
• In April 2016, the New York Federal Reserve survey adopted the latest BIS methodology, yielding juicier insights than the Bank of England survey, which still uses an old methodology. Among the new New York Fed survey insights are:
  • As much as US$102 billion in daily volume in New York originates from retail customers, equivalent to 10% of all U.S. OTC FX activity—a figure considerably larger than what we and most market observers would have suspected.
  • The “customer direct” reporting category has been broken down by voice/electronic types, and we now learn that US$426 billion (more than 40% of U.S. OTC FX volume) still takes place through voice methods. Industry estimates had put electronification of the FX market at 70% or higher, and subsequently they will need to be adjusted to reflect a lower level of electronification.
  • We now have more clarity about execution venue preferences in the United States: Reuters Matching and EBS captured a combined daily volume of US$44 billion across FX products, compared to US$186 billion coming from bank-owned single-dealer platforms, and US$80 billion from ECN venues like FXall, Currenex, Hotspot FX, and 360T. This latter figure strikes us as surprisingly low.
  • Electronic direct trading (excluding SDPs) is booming. Trading done through Bloomberg FXGO, Thomson Reuters Conversational Dealing, and other direct API pricing streams generated roughly 25% of all U.S. OTC FX activity, with US$256 billion ADV.
  • Finally, we have data on the share of the U.S. spot FX market produced by prime-brokered clients, and it is huge: 66%.   
• Non-bank financial customers in New York generated a record high 44% of all OTC FX activity in the United States, with 29% coming from reporting dealers and 19% from non-reporting banks. These figures contrast sharply with the reporting-dealer-dominated scene in London, where non-bank financial firms hold 24% market share and the main reporting dealers produce 50% of all activity (23% by non-reporting banks). 

For additional insights, see our latest global FX report, Global FX Market Overview, 2016: Regulation Flux and Vanishing Credit Lines.