The FX market’s six-month health check is due this week

The Bank of England releases FX trading data from the market for the six months to October last year. That covers a bouncy few months to say the least.

This data set will cover the Brexit vote and the not-entirely-event-free run up to the US election so we’ll be interesting to see what happened with dollar-peso volumes and Sterling which continues to be buffeted by the winds or Brexit and a significant degree of political and economic uncertainty.

These are unprecedented times for the flow and trade of global currencies and the structure of one of the world’s largest and most liquid markets.

The public face of the market has focussed on the conduct of some traders remains in the spotlight following a series of high profile legal cases over alleged malfeasance.

Much of this is being addressed through the Global Foreign Exchange Code of Conduct, led by the Bank for International Settlements.

But it is the changing role of the banks and the funds as makers and takers – the shape-shifting of the formerly API prop traders towards market maker status that, in our view, has delivered the most significant structural change.

Once dominated by the largest global banks, the growth of electronic trading has made it easier for relatively smaller financial firms to become directly involved in currency trading. Access to the market and competing trading venues have exacerbated this process.

Concurrently, regulation has limited the risk these banks can carry on their books, making them more selective about how and with whom they trade.

Currency trading continues to be dominated by what are euphemistically described as “other financial institutions”

This category includes smaller commercial and investment banks, as well as buy-side firms like pension funds, mutual funds and hedge funds. In other words, not the banks.

Broadly, volumes of late have been lower with overall daily turnover declining to around USD 5.1 trillion in April 2016, from USD 5.3 trillion three years ago.

But the there has been a significant uptick in currency market volatility has increased over the past few years.

All eyes on Tuesday to see how the market fared through the events of the latter part of 2016. Expect a few surprises.

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