Is the Foreign exchange market shrinking?

 

It took the foreign exchange market decades of build up as well as globalization and deregulation measures to earn the title of the largest financial market there is. However, as much as the forex market cannot get relinquished easily, it appears as if its glory days may just be over.

The situation has been accredited to the shrinking in size of both the market volumes as well the number of employees who work in the currency departments of most major banks. Other factors contributing to the same fact include banks implementing stringent regulations, a downward trend in; the market boom, as well as global economy and growth.

According to statistics, in the last three years, the total number of market traders employed in Europe’s top ten currency exchange banks has dipped by 30 per cent. Based on figures provided by the New York Federal Reserve and the Bank of England, as of last month, the trading volumes have reduced to a three-year low.

According to Coalition; a financial data analytics firm, 332 people were employed by the top ten FX banks that operate in Europe. However, in 2012, 475 people were employed by the same institutions, meaning that in 2012 the number of individuals employed by the banks was 30% higher than in 2015.

According to a central banker, towards the end of the year in 2014, the global forex activity in the market was at a peak. During this period, the average daily volumes amounted to about $6 trillion a day. According to data provided by CLS Bank, the average daily volumes in January amounted to $4.8 trillion. This figure indicates a drop by 9% from the previous year and a far cry from the peak average of $6 trillion.

The downward trend has also been attributed to regulatory changes that took place after the global financial crisis which has resulted in a reduction in the ability and willingness of traders to take risks.

According to Howard Tai, a senior analyst at Aite Group, the regulations carried a psychological effect on the market players and thus traders are o longer as aggressive as they used to be.

Suppressed market volatility has also been blamed for the dwindling average market volumes. A fall in spot volumes and reduced demand for derivative products; for example, currency options, based on the fact that if there is no movement of money in the market, them the demand for hedge quite minimal.

According to the managing director of Chapdelain FX, Douglas Borthwick, there is little volatility due to zero interest rates combined with a global environment that appears to be very dovish. Thus, since the volatility is low then the total average volumes are also low.

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Isuru Karavita

He graduated from the university of Hertfordshire with a BEng(Hons) in Digital Communication and Electronic Engineering. 

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