The US research house attributed a 25 per cent increase in FX trading volumes over the past 12 months mainly to cyclical factors such as the war in Iraq, terrorism, fluctuations in the value of the dollar and rapidly rising commodities prices. However, trading volumes were boosted further by the active trading strategies of hedge funds and asset managers looking to capitalise on high volatility levels.
The report revealed that while the lacklustre performance of equity and bond markets had encouraged an increasing number of traditional asset managers to trade foreign exchange as an independent asset class, the most active of the new professional FX investors were hedge funds.
Greenwich said the scale of hedge fund involvement in FX trading was illustrated by trading activity in currency options.
Among all types of FX users, average trading volume in currency options increased from $4.4bn (€3.4bn) in 2003 to $5.7bn in 2004. Average hedge fund trading volume over the same period rose from $16.8bn to $23.8bn.
“When you combine last year’s dollar volatility with the drastic ups and downs in pricing for commodities - which are priced in dollars - you produce nothing short of a currency volatility bonanza for hedge funds,” observed Greenwich Associates consultant Frank Feenstra.
Europe accounted for the majority of global FX volume, approximately 60 per cent in 2004, with the highest rate of year-to-year growth in average foreign exchange trading volumes found in the UK. On a matched sample basis, average volume in Britain rose from $38.9bn in 2004 to $55.4bn in 2005 an increase of some 42 per cent. Trade volumes in the US, also increased by an average of 39 per cent from $39.2bn to $54.5bn. Volume growth in other regions was less than that in the US and UK.
Average continental European trading volumes rose 18 per cent from $35.4bn to $41.7bn. In Latin America, volumes grew 7 per cent from $15.1bn to $16.2bn. In Canada, average trading volume increased 4.6 per cent, from $18.6bn to $19.5bn, and average trading volumes in Asia ex-Japan rose 2 per cent from $20.9bn to $21.4bn. The only year-to-year decrease occurred in Japan, where average trading volumes fell by more than 6 per cent.
The high number of hedge funds domiciled in the US and UK contributed to these countries recording the biggest increases in average FX trading volumes.
Greenwich noted that the total electronic FX trading volumes rose from $7200bn in 2003 to $15,700bn in 2004.
The research showed that electronic FX trading is growing both in terms of both the number of FX users trading online and the portion of their total foreign exchange trading volume that is carried out electronically.
Forty four per cent of top-tier FX users trade electronically, up from 29 per cent in 2003 and 32 per cent in 2002. The proportion of total FX volume executed electronically by these eFX users increased from an average 43 per cent in 2003 to 48 per cent last year.
The proportion of asset managers trading electronically increased from 37 per cent in 2003 to 42 per cent, while eFX trading by hedge funds was up from 36 per cent in 2003 to almost 50 per cent.
Seventy per cent of banks traded electronically in 2004 compared with 62 per cent in 2003.
HS
