Decreasing forex volumes – a trend or an opportunity?

Lately newspapers and publications are full of news about falling forex volumes – indeed many reporting brokers such as Gain

Lately newspapers and publications are full of news about falling forex volumes – indeed many reporting brokers such as Gain Capital and ICAP have demonstrated a significant drop in volumes that started in Q4 2011 and continued well into Q1 2012. It seems that many publications that were bullish on the forex market’s growth in past few years are now in the opinion that a one or two quarter’s drop in volumes is an indication of a trend.

They may be partially right, however this only concerns top brokers. The market is becoming increasingly fragmented and if we are allowed to paraphrase a known proverb: not all brokers are born equal.

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In the retail market our latest survey shows a considerable drop (over 10%) in volumes by the top 15 brokers, however this drop was offset by the much smaller brokers. Due to this overall volumes in Q1 2012 still decreased but only by 1.5%.

In the institutional market ICAP and Reuters reported considerably lower volumes however HotSpot managed to keep growing and increased its market share.

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One conclusion we can draw from it is that smaller players still have much room to grow and perhaps by focusing on specific niches are more competitive than the more established brokers.

Amid the flurry of pessimistic forecasts one positive voice emerged:  Harpal Sandhu, Integral‘s CEO, published an interesting article putting latest developments in perspective:

FX markets are maturing, competition is increasing and that the one-size-fits-all area in FX is coming to an end. The future will see a much larger number of different business models, liquidity sources, risk management approaches, FX exchanges, all co-existing in an even larger market than FX is today.

When markets mature, the old guard that advanced the industry to that point either has to go through a painful realignment process, or will simply disappear. Look at the airline industry for reference. In the 1970s, there were a handful of airlines in business. Today, we have more than 70 airlines in the U.S. Some of the old guard like United and American have survived because they dramatically changed their business models. Others, like TWA and Pan Am, are history. More importantly, since the 1970s, the number of passengers has tripled. That is the positive sign I mentioned before.

Harpal is very bullish on the market and believes that “a $4 trillion day will be viewed as a slow day in FX markets.”, I agree.

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