More than 44% of global foreign exchange trading will be conducted electronically by next year, says the latest TowerGroup research which shows that global FX daily average volumes are set to exceed $3,000bn by 2007.
Towergroup says the global FX market will have doubled in size in just three years by 2007 with increasing buy-side market participation and structured retail FX products driving growth. FX volumes rose from $1,770bn in 2004 to $2,000bn last year and are set to rise again to $2600bn this year and $3,600bn in 2007.
However Tom Price, senior analyst, securities and capital markets, Towergroup says technology, culture and methodology have shifted FX trading from the telephone to the desktop keyboard, following a path similar to path of electronic trading in the equity and bond markets.
The electronic FX market has come to represent 40% of all FX trade volume, says Price, and will grow to more than 44% of the total volume by 2007.
Interdealer portals, single-bank portals, multibank portals and ECNs have all contributed to the growth in e-FX trading and now 60% of the spot transaction volume is being done electronically says TowerGroup.
"Rather than being a disruptive force, e-FX has enabled both innovation and growth in the space," says Price. The adoption of e-FX has changed the nature of the market by increasing the number of participants and creating advantages of scale for trade processing and management.
Price says hedge funds in particular have had a major impact on the FX market and will continue to be the driving force for technology innovation in the FX marketplace. Hedge funds now account for the greatest currency volume on the buy side and the strongest rate of growth. Price says hedge funds have embraced electronic trading and are utilising algorithms, causing a sea change from single-bank and multibank portals to ECNs.
But TowerGroup also says it expects consolidation of FX execution venues to occur over the next two to three years, with multibank portals being the most affected by consolidation, to the extent that only two or three are expected to remain.
Looking ahead, TowerGroup says the buy side will increasingly utilise e-FX aggregation and algorithms and the dealer banks will have to adjust their models.
FX ECNs represent the next stage in the evolution of the FX markets, says the report, and will become the platform of choice for traders that treat FX as an asset class.