After Hitting $1.2T Milestone, Cboe FX Volumes Nosedive in April

Cboe FX disclosed a total trading volume of $643 billion, down -46% from $1.2 ‎trillion in March 2020.

Cboe’s institutional spot FX platform on Friday reported ‎its trading volumes for the month ending April 2020, which saw a ‎sharp drop to hit its lowest point since December 2019.

During April 2020, Cboe FX disclosed a total trading volume of $643 billion, down -46 percent on a month-over-month basis from $1.2 ‎trillion in March 2020‎. This figure was even lower by 7 percent year-over-year when weighed against $693 billion in April 2018.

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In addition, the exchange’s institutional FX trading venue saw its average daily trading volumes amounting to $29.2 billion in April 2020, down 47 percent month-over-month from $55 billion in March 2020.

On a year-over-year basis, the ADV numbers released by Cboe FX, formerly Hotspot, illustrated weaker performance, falling by 7.2 percent when weighed against $31.5 billion a year earlier.‎

Cboe FX turnover crossed the $1 trillion milestone last month amid coronavirus-driven volatility that has shaken awake previously slumbering FX markets. The recent pullback, however, raises serious questions about how deep a possible pullback in volumes and brokers’ fortunes will be, though it should not cause panic.

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Changes in risk sentiment and volatility

The historical precedents, most recently the 2008 crisis, show that FX market liquidity falls during periods of market stress; and that the impact of post-crisis regulatory change often brings adverse consequences on FX traders’ activity.

If the history tells anything at all, the increase in FX volatility, reflected by sharp swings, makes traders tend to pare back the size of their positions in order to avoid the sizeable risks on the downside.

According to conclusions made by one of the BIS reports, there was a marked increase in the amount of FX turnover during the lead-up to the financial crisis, aided by low volatility and a high appetite for risk. These factors reversed a few months later when traders became increasingly risk-averse, and market volatility spiked higher.

Interestingly, the current pattern mimics what happened during the crisis period, which initially saw an increased FX turnover that was attributed to a ‘hot potato’ effect, where traders were keen to pass on any risk as quickly as possible. This was seen recently when investors liquidated nearly everything for cash, including the traditional safe havens like gold and yen, only driving up the US dollar.

Cboe strengthens FX business

Liquidity management has been a key focus at Cboe FX over the past year, coupled with adding extensive analytics capabilities. The company has recently launched an electronic foreign exchange trading venue that permits certain institutions to enter into spot transactions with their preferred counterparties to meet their specific trading needs.

Dubbed ‘Cboe FX Point,’ the new direct execution model provides institutional investors with a flexible range of options, including the ability to create custom, relationship-based connections.

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