“FX turnover reached an all-time high of $5.3 trillion per day in April 2013, up by 35% relative to 2010. This was faster than the 20% rise from 2007 to 2010, but fell short of the strong increase in the pre-crisis period from 2004 to 2007. Main reasons for the increase in turnover:
- One reason behind this increase in turnover was the intensive trading of yen pairs following the Bank of Japan’s monetary policy regime shift in early April 2013, which triggered a phase of exceptionally high turnover across asset classes. In the months that followed, particularly during the summer, the rise in yen trading partly reversed. Even without this yen effect, however, FX turnover would probably still have grown by about 25%.
- Another reason for the higher turnover is the growth of investment in international assets. With yields in advanced economies at record lows, investors increasingly diversified into riskier assets such as international equities and local currency emerging market bonds. Over the past three years, equities have provided investors with attractive returns, emerging market bond spreads have simultaneously dropped, and issuance in riskier bond market segments (eg local currency emerging market bonds) has soared. Not only did these three factors give rise to the need to trade FX in large quantities and to rebalance portfolios more frequently, but it also went hand in hand with greater demand for hedging currency exposures. This triggered currency trading as a by-product of investments.
- A third reason is greater participation by non-dealer financial institutions. FX markets have traditionally been dominated by inter-dealer trading. However, transactions with non-dealer financial counterparties grew by 48% to $2.8 trillion per day in 2013, up from $1.9 trillion in 2010, and accounted for roughly two thirds of the rise in total turnover during the period. I will explore the reasons for this shift in FX trading from dealers to non-dealer financials in greater detail in the next section.
- Related to 3 above, a number of technological advances (which I will also discuss at more length in what follows) have also contributed to the growth in FX volumes in recent years. These include the emergence of liquidity aggregators and algorithmic trading techniques.”