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The Bank for International Settlements (BIS) does a survey every three years to gauge flows in the forex market. The 2010 version of the report estimates average daily forex volume at $4 trillion. You can see the full report (PDF) here. I’d like to take a look at one particular element of it, though. Specifically, I want to focus on what the BIS said about the fastest growing area, namely the “Other Financial Institutions”, which basically means those who fall outside the inter-bank dealers who are part of the survey underlying the report. That, by the way, is the area where retail forex comes into play.

Here’s the chart included in the BIS report showing how the “Other” group now represents the largest share of the market. This is thanks to 42% growth from the 2007 survey.

It’s worth noting that the Other group has been climbing at the expense of the Reporting group for some time now. As the BIS noted in the report, this can be attributed to the rapid structural change in the forex market toward more electronic trading. As anyone who was trading forex circa 2000 can attest, trades were mainly executed manually back then – the “dealing desk” model. The first broker I ever used was basically a voice broker. I could put orders in over the website, but the trades were executed by people. These days it’s almost completely electronic, with little human intervention. This rapid evolution is part of what pulled so many traders into forex in the 2000s, that and the issues with the stock market following the burst of the Tech Bubble.

Naturally, the often talked about High Frequency Trading (HFT) also plays a part. Algo-based trading systems of all kinds have been developed to take advantage of the electronic market. Some of them are dealing systems like EBS. Many are run by hedge funds and the like. But it’s not just the big players who are involved in algo trading. Retail traders can do the same thing with so called Expert Advisors (EAs) which trade automatically based on a programmed system. Heck, even the Currensee Trade Leaders program could be considered an algo strategy since the individual account-holder doesn’t do anything to execute trades.

There are many other interesting observations in the report. They include discussions of how the forex market is consolidating at the top, the impact of the financial crisis on forex volume, and all kinds of other slicing and dicing of the figures for those with an interest in the structure of the market. I definitely recommend giving it a look.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.