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Reasons Behind $4 Trillion Daily Forex Turnover

December 13, 2010 by

Michael R. King from the Bank for International Settlements (BIS) and Dagfinn Rime from the Central Bank of Norway (CBN) have published an interesting article about the major reasons of the growth of volume in the Forex market since 2007. Although the article contains little useful information for the retail Forex traders, it shows some interesting issues that can help understanding the inner structure of the FX market, who are the market participants and how do they trade. The report follows the 8th Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity. It’s also important to understand that this article doesn’t necessarily reflect the official opinion of BIS or CBN. Here are some interesting points mentioned in the article:

  • 85% of the 20% growth in FX volume since 2007 can be attributed to small banks, hedge funds, mutual funds, retail investors, etc.
  • The growth could be even faster if not the credit crisis. The peak of the volume was in September 2008 (as the popularity of Forex searches in Google) then declined rapidly after Lehman’s Brothers bankruptcy and was growing slowly since then.
  • Carry trade unwinding attributed to the slowdown of growth in number of the FX transactions.
  • Electronic trading (ET), algorithmic trading (AT) and high-frequency trading (HFT) contributed to the growth of FX market volume (please, mind that HFT is a part of AT, and AT is a part of ET).
  • Increasing popularity of Forex trading (and especially electronic Forex trading) has led to increased competition with lower spreads, which in turn continued to attract even more traders.
  • The popularity of the HFT is evident from the drop in the average transaction size accompanied by the growth in the number of transactions. All retails traders should be aware that they are competing with the aggressive HFT systems employed by various financial institutions. One should understand what advantage could they possibly have against such systems.

Please, feel free to read the actual article:
The $4 Trillion Question: What Explains FX Growth Since The 2007 Survey?

If you have any questions, comments or opinions regarding the rising volume of the global Forex transactions, please, feel free to reply in the comments below.

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