Foreign exchange trading volumes increased last year among only one type of financial institution: retail aggregators.
With the downturn in equity markets and high levels of volatility among global currencies, FX trading gained popularity among retail investors around the world during the global financial crisis. Benefitting from this trend have been the firms that provide execution services to retail traders, several of which have grown into some of the worlds biggest producers of FX trading volume.
Trading volume among these retail aggregators increased 16% last year while overall global FX volumes declined by about 6%. Those shifts increased the share of total FX volume produced by retail aggregators to 12% in 2009 from 11% in 2008.
Retail aggregators actually generate 28% of all spot transaction volume in global FX markets, up from 24% in 2008. What makes that proportion all the more impressive is the fact that the $12 trillion in annual spot transactions generated by retail aggregators originate with just 32 corporations. Those numbers indicate that retail aggregators generate some $375 billion in spot transactions per capita every year a figure that ranks them among the most active and important accounts in global foreign exchange markets, says Greenwich Associates consultant Peter DAmario. By way of comparison, the typical bank generates about $75 billion in spot transactions each year.
In terms of the popularity of foreign exchange among retail investors, few countries can match Japan, where the huge numbers of individual investors that originally entered the market to take advantage of the carry trade in the early 2000s became epitomized as Mrs. Watanabe, the metaphoric Japanese housewife/speculator.
The boom in retail FX trading in Japan has given rise to a host of retail aggregators. As a group, retail aggregators generated over half of the $6.4 trillion in FX customer trading volumes in Japan in 2009, up from 27% in 2008.
The dominant role of retail aggregators sets Japan apart from other regional foreign exchange markets. Outside of Japan, retail aggregators represent only 9% of worldwide FX trading volumes.
Retail foreign exchange trading is coming under increased scrutiny from regulators around the world. In the United States, the U.S. Commodity Futures Trading Commission has issued a proposal that would impose new requirements on retail brokers covering registration, disclosure, record keeping, financial reporting and operational standards. The provision that has generated the most controversy, however, is a proposal to cap the amount of leverage available to retail traders.
Critics of these moves contend that the imposition of strict leverage limits would curtail retail trading activity within the U.S., but would do so mainly by driving retail investors offshore to countries that have no limits on leverage.
D.C.