How Big is the Retail Forex Market?

Continuing yesterday's Forex Industry Review, we take a look at the other events of the just concluded month. We begin

Yesterday, in Part One of our September Forex Industry Review, we analyzed last month’s M&A, provided our purchase price calculations and analysis for each of the five deals, including Swissquote’s purchase of MIG Bank and FXCM’s dual acquisitions. Today, we continue to review the previous month’s activity.

BIS Triennial FX Survey

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BISBefore the flurry of deals in the second half of September, the month’s headline event was the release of the Bank of International Settlements (BIS) Triennial FX Survey. The survey was composed of calculated results from primary dealers from around the world for the month of April, 2013. At an average of $5.3 trillion in average daily FX volume for April, the results crushed the $4.0 trillion figure from 2010 (time to update all those broker websites that refer to FX as a $4 trillion a day market).

Among important trends of the survey, the data showed that the UK and US, the two largest regions for FX trading in 2010, held onto their top positions as well as increased market share. This occurred even as originations of trades from non-UK and US countries has increased. As such, despite the growth, firms in these countries are choosing to use UK and US dealers for sourcing liquidity. This could change though, as specifically in Asia, there has been increased demand for localized liquidity pools.

Another highlight of the report was the inclusion of retail data. For the first time, the FX survey included statistics of retail volumes, and measured primary dealer volumes with retail driven counterparties. This volume is primarily liquidity that was being sourced for aggregators targeted for retail order flow. The survey indicated that $185 billion, or 3.5% of the $5.3 trillion, was retail flow. Of the $185 billion, $78 billion was registered as FX spot with a slightly smaller amount ($74 billion) in FX swaps.

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FM LOGOAccounting for the fact that the BIS survey uses ‘single counting’ for its calculation, retail FX spot figures were $156 billion a day when double counted. For comparison, in our Quarterly Industry Report, Forex Magnates’ Research estimated average retail daily volumes of $325 billion. Accounting for the discrepancy, is the inclusion of retail volumes in our estimates that are warehoused internally by market maker brokers, and aren’t hedged externally. Taking that into consideration, it represents that more than 50% of retail volumes are executed internally on a market making basis. The actual amount of non-hedged volumes are probably closer to 60%-65%, as we reason that the BIS’s $78 billion figure includes order flow from Tier 3 regional banks that are using retail driven aggregators to source liquidity. In regards to these banks, although order flow is being registered as retail flow, it is excluded from Forex Magnates’ estimates.

Other headlines during September

Alpari Exits US Retail FX Market: Also occurring in September was the exit of Alpari from the retail FX market. Presently, the broker will continue to provide institutional solutions in the US but transferred its US retail book to FXCM and FXDD (details of possible compensation were highlighted yesterday). The exit was not much of a surprise as it had been rumored since 2012, amid rising costs of meeting US regulatory requirements and the broker’s dwindling client base. In terms of the latter, retail assets had fallen over $5 million in 2013, to $10.33 million at the end of July.

CFTC SEF Approvals Steady: The CFTC was very busy during September both receiving and approving applications for swap execution facilities (SEF). The facilities are the result of firms rushing to comply with upcoming Dodd-Frank regulations that were set to go into effect today, but have been postponed until November. The rules are aimed at regulating the trading of over the counter swaps, with SEF formulated to provide increased financial safety through the use of pre-trade credit monitoring and a central counterparty (CCP) structure. During the month, major trading venue powerhouses, the CME, ICAP and Thomson Reuters applied for SEF status. Receiving approvals were Integral, Tradeweb, MarketAxess, the ICE, 360T, TrueEX, GFI, Javelin, BGC, and TeraExchange. The firms join Bloomberg, who became the first approved SEF in July.

Regulatory Roundup: After being charged by the NFA in 2012 for ‘unfavorable price slippage practices’, FXDD followed with a countersuit against the regulator in court. The matter was finally put to rest with FXDD receiving a reduced $2.9 million fine from the NFA in September. Elsewhere, the Reserve Bank of India (RBI) ruffled some feathers when it notified banks that it was demanding the closing of accounts of customers found guilty of transferring funds via credit cards to trade forex. The policy follows a continuation of anti-forex actions from the RBI as the country has been the target of numerous HYIP fraud.

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