LeapRate today announced a new forex volume index. It is intended to provide an estimate of retail spot forex trading volume. The reported inputs into the estimate are “…monthly and/or quarterly activity levels put out by various retail FX brokerage firms; similar activity levels announced by other FX aggregators such as Forex ECNs and FX settlement firms; as well as anecdotal evidence we encounter as part of our general research activities in the Forex sector.” This isn’t something that will be of much use on a day-to-day basis for traders, but it does offer some insights into the retail forex business in general.
The index shows volume rising from about $100bln per day back at the start of 2006 to having reached above $200bln a couple of times in the last few years. That’s not a bad growth rate over the span.
It should be noted, though, that even with the big increase in volume since 2006, retail forex volume remains only a tiny fraction of the overall forex market. The latest LeapRate estimate has average daily volume in the $175bln area. The latest data we have for the inter-bank markets in New York, London, Tokyo, Sydney, and Singapore put average daily spot volume at about $1.640trln (the $5trln figure often noted includes swaps, forwards, etc. as well). That means retail flow is about 11% of the global figure (see The Most Traded Currency Pairs for a more specific review).
Here is the current chart:
There have been some concerns expressed about flattening volumes of late thanks to increased regulation (particularly in the US and Japan) and lower market volatility. There’s no doubt that regulation has increased as the CFTC and NFA have moved on several fronts to tighten things up in the US (largely motivated by Dodd-Frank) and much has been done to reduce leverage in Japan. There’s been considerable discussion on those developments in the last few years – much of it derogatory. I, for one, think they have gone a long way toward getting rid of the old “Wild West” aspect to retail forex trading, at least in the US.
On the volatility side, as you can see from the weekly EUR/USD chart below, it has indeed dropped off in recent times. This is seen in the falling Average True Range (ATR) line in the lower sub-plot. It is telling us that weekly ranges (averaged over 14 periods) have fallen to their lowest levels since the financial crisis was developing in the latter part of 2007. This, however, is about in line with where volatility was during much of the 2003-2006 period, so we may just be seeing a reversion to more normal levels.
If volatility is indeed just mean-reverting then it has implications for the forex business. Things have already become increasingly competitive in recent years. That is only going to become even more intense if lower volatility keeps trading volumes subdued.
The interesting thing to watch will be whether the big push in the area of automated “mirror” or “follow” trading through initiatives like the Currensee Trade Leaders program draws in more investment oriented capital and thereby increases retail forex volumes, both outright and in terms of the retail share of the overall forex volume pie. That is certainly something which is very possible. New developments like that can help the retail forex business continue to grow over time, even if volatility doesn’t move back up to higher levels.
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