London FX Volume Shrinks to $2.41 Trillion, Secures 37% Share on Global Trading

Hedge funds were also suffering with volumes falling by more than 50 percent to $164 billion.

Daily foreign exchange trading volumes out of London have shrunk by 12 percent in the past three years to $2.41 trillion, the Bank of England said in its latest triennial report on the FX market. The report prompts warnings that the currency markets are becoming more volatile, due to lower liquidity, and prone to events such as the sterling flash crash in October.

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Earlie this week, the Bank for International Settlements (BIS) reported the first fall in the world’s FX volumes in more than 16 years, which dropped to an average daily volume of $5.1 trillion, from $5.4 trillion in the same period three years ago.

Although the market shrinkage was a particular blow for London, the City remains the world’s biggest currency trading hub, responsible for 37 percent of global volumes. However, London’s lead in the global currencies trading was eroded to the aforementioned figure from a nearly 41 percent share in 2013.

According to the survey, which was conducted before the June 23 Brexit vote, London has also been hampered by the sickly appetite for major currencies like the dollar and euro which typically dominate City trading, with more US dollars traded in London than in New York.

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The latest data shows that currency volumes have picked up since Brexit but the UK capital will struggle to regain ground in the wake of the event, which may compromise its position in euro trading, and which will probably put off overseas banks from setting up a base in the city.

“The decline in the United Kingdom’s total market share is consistent with the overall decline in spot turnover and hedge fund activity, which have traditionally been based in London. The survey also indicated reduced trading in major currencies, an activity traditionally concentrated in London, and increased appetite in so-called emerging market currencies typically traded most heavily in their respective regions,” the BoE said.

According to the survey, one factor that may be depressing trading volumes is that the industry has been hit over the past three years by changes in regulations, as well as market-rigging scandals which triggered extensive investigations. The financial watchdogs’ crackdown not only resulted in huge fines to several banks and ended the careers of dozens of traders and sales people, but also left investors much more reticent to trade.

The BoE added that spot turnover, the most basic end of the market, fell 24 percent year-on-year to $784 billion a day, more than 75 percent of the overall fall in FX trading volume.

Finally, hedge funds were also suffering into the background. While they accounted for 12 percent of the market in 2013, their market share has now slipped to 7 percent, whilst their overall volume fell by more than 50 percent to $164 billion per day.

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