Electronic FX volumes stabilise

GLOBAL - Electronic forex volumes remain depressed, though levels are improving from last autumn's crisis, market participants tell FX Week .

In a report published last Monday (March 2), the Bank for International Settlements (BIS) confirmed that e-FX volumes slumped by around 50% on EBS between September and December for the three most traded currency pairs - EUR/USD, EUR/JPY and USD/JPY. On Reuters Matching, the equivalent figure was roughly 20% lower than the corresponding period the previous year.

The BIS report argues that electronic volumes were "disproportionately affected" for three main reasons: the general reduction in risk appetite may have had a larger adverse effect on proprietary and prime brokerage accounts; market-makers may have been less willing to quote on electronic platforms to avoid being caught by adverse price movements; and trading activity that relies on electronic execution methods may be abandoned at times of unusually high volatility.

It seems that volumes remain behind the searing pace set at the start of 2008. Average daily spot volumes on EBS in February were $153.7 billion, 29% lower than in February 2008. The January 2009 figure was $149.1 billion, 37% down on January 2008.

Expected

These figures are to be expected, according to Kelvin Jouhar, head of FX and FX derivatives at HBoS in London. "I do not think volumes are back to normal yet - we have seen several banks disappear over the past few months as they have been swallowed into larger banks, so this will have affected trading."

One London-based FX trader agreed, adding: "The volatility we are seeing on a daily basis is driving away participants. They have either made significant profits and are happy to sit on them, or had to re-evaluate their strategies due to losses."

Jouhar, however, does not believe that struggling volumes are necessarily a uniquely electronic problem, with market stresses causing a reduction in liquidity across the board.

An Icap spokesperson told FX Week that electronic broking platforms continue to be the primary method for spot execution and that as stability returns to the markets "we would expect to see volumes rise".

A New York-based market source said that after a period of readjustment, electronic volumes will inevitably recover as market participants return. One such participant is likely to be Nomura, which told FX Week it is investing in the e-FX business.