Electronic trading in foreign exchange growing – PFEC

The growing use of electronic systems in foreign exchange transactions is changing the complex of currency trading worldwide, according to data gathered by the Performance Foreign Exchange Corp. (PFEC).

In an analytical paper, PFEC said that its April 2001 figures showed that trading between bank and non-bank foreign exchange dealers in the world had fallen substantially from $908 billion to P689 billion.

"This can in part be explained by the growing role of electronic brokers in the spot inter-bank market. The use of electronic brokers in the spot inter-bank market. The use of electronic brokers implies that foreign exchange dealers generally need to trade less actively among themselves," said the PFEC, a firm specializing in global information regarding currency price movements and trading.

"The contraction in inter-bank trading seems also to reflect the growing concentration in the banking industry and the consequent reduction in foreign exchange trading desks," PFEC continued.

The company also noted that transactions between banks and non-financial customers also fell, from $242 billion to $156 billion.

"This development might be associated with the trend towards concentration in the corporate sector through the centralization of corporate treasury functions and the consequent increase in intra-company netting of foreign exchange flows. It may also reflect the acceleration over the past few years off the trend towards a cross-border consolidation in the corporate sector. By contrast, trading between banks and financial customers increased from $279 billion to $329 billlion."

The PFEC observed that the trading volumes between banks and other financial institutions seem to have reflected the increasing role of asset managers. Market commentary suggests that the role of hedge funds in foreign exchange markets has on balance declined some what since the previous survey, PFEC observed.

"As a result of these developments, the share of inter-bank trading in total turnover declined from 64 percent to 59 percent, the share of bank to non-financial customer trading fell from 17 percent to 13 percent, and the share of activity between banks and non-bank financial customers rose from 20 percent to 28 percent," PFEC concluded.

World currency trading now amounts to $1.173 billion, according to the Bank of International Settlements, based in Switzerland.

The global currency trading was broken down as follows: commercial banking institutions, $689 billion; non-bank financial institutions, $329 billion; brokers and others, $156 billion.