Every three years, detailed information on the structure of the global foreign exchange (FX) market becomes available via the Triennial Central Bank Survey of Foreign Exchange and Derivatives Markets Activity (widely known as the ‘Triennial’). The 9th Triennial conducted in April 2013 covered 53 countries. It is the most comprehensive effort to collect detailed and globally consistent information on the trading activity and market structure of one of the world’s largest and most active over-the-counter markets.
The 2013 Triennial shows that global FX turnover grew 35% from the previous survey in 2010 to $5.3 trillion per day in 2013 (see figure, left panel ).* By way of comparison, growth between 2007 and 2010 was 20% (King and Rime 2010). In this column, we take a closer look at the drivers and trends behind the growing FX volumes based on our research in Rime and Schrimpf (2013).
Trading in currency markets is increasingly dominated by financial institutions outside of the dealer community (‘other financial institutions’ in the survey terminology), as shown in centre panel of the accompanying figure. Transactions with non-dealer financial counter-parties grew by almost 50%, and accounted for roughly two-thirds of the rise in the total.
New counter-party information collected in the 2013 Triennial provides a more granular picture than before of the trading patterns by non-dealer financial institutions and their contribution to turnover (see right panel of accompanying figure). These non-dealer financial institutions are very heterogeneous in their trading motives, patterns and investment horizons. They include smaller and regional banks, institutional investors (e.g. pension funds, mutual funds), hedge funds, high-frequency trading firms, and official sector financial institutions (e.g. central banks or sovereign wealth funds), among others.
The increased importance of non-dealer financial customers has led to the demise of the once clear-cut two-tier structure of the market, with clearly delineated inter-dealer and customer segments. Via computer-based algorithms for order placement, financial customers contribute to increased volumes not only through their investment decisions, but also by taking part in a new ‘hot potato’ trading process, where dealers no longer perform an exclusive role.**
A significant fraction of dealers’ transactions with non-dealer financial customers is with lower-tier banks. While these ‘non-reporting banks’ tend to trade smaller amounts and/or only sporadically, in aggregate they make up roughly one-quarter of global FX volumes (as shown in right panel of accompanying figure). As they find it hard to rival dealers in offering competitive quotes in major currencies, they