A quarter of the world’s corporate and financial institutions are trading foreign exchange products online, up from less than a fifth (17 per cent) at the end of 2001. Meanwhile, volume traded online climbed significantly and is expected to rise even more by year’s end. Or so says a recent research report by Greenwich Associates.
“For the biggest institutions, electronic trading is a way of capturing efficiencies,” Greenwich Associates consultant Tim Sangston says. “For the smallest institutions, it’s great for accessing dealers they normally would not be able to work with.”
Online forex trading is most p opular in the United States, where four out of every ten institutions are trading some of their foreign exchange volume electronically, up from 27 per cent in 2001. Strong growth has also been reported in continental Europe (from 15% to 29%) and Australia/New Zealand (from 23% to 30%.)
Volume in 2002 climbed from 26% to 32% of the total trading volume among those institutions trading online, and is expected to rise to 40% by 2003.
Electronic forex users cite faster trade execution and fewer trade errors as principle reasons for embracing the practice. Yet more than half of the marketplace says they do not trade electronically now and have no plans to do so.
“There seems to be a hard core of non-users that have to be convinced and might prove to be a marketing challenge for the Street,” consultant Frank Feenstra adds.
The main drawback to online forex trading, according to those who do not utilize it, is the loss of personal contact.
“Not only do many market participants enjoy longstanding personal relationships with their principal dealers, but they also rely on these counterparts to supply them with market updates and, potentially, to prevent them from making serious trading mistakes,” consultant Peter D’Amario says.
He adds that those reservations may well melt away as these institutions obverse the continued success of electronic trading for those that utilize it, represented most conclusively in Greenwich Associates research by the rising online volume seen.
Corporations and financial institutions reveal different attitudes to online forex trading in the Greenwich Associates research. One-third of financial institutions are trading online, and trade nearly $2.9 trillion in annual electronic foreign exchange volume. By contrast, 22% of corporate institutions trade online, and online volume for them is estimated to represent a total of around $770 billion annually.
“For financial institutions, particularly banks, FX is a big deal, a key raison d’etre,” Peter D’Amario says. “For the great majority of corporations, the need to trade FX is a rather unwelcome sideline unrelated to their core business.”
46% of financial institutions say they have no plans to trade online, compared with 60% of corporate institutions.
The proportion of foreign exchange users using straight-through processing (STP) remains below 15%, and Greenwich Associates consultants say that even this proportion may depend on a liberal definition of what STP is.
Tim Sangston explains: “STP means different things to different people, and when you actually peel the onion, you find that complete STP – in the sense of pushing a button and getting a trade executed, confirmed, and entered into the books – doesn’t exist yet.”
Only 14% of all institutions trading foreign exchange said they use STP in 2002, up from 13% in 2001. But the proportion of those saying they do not plan to use STP fell in 2002, from 69% to 59%.
From September to December, 2002, Greenwich Associates conducted 2,724 mostly in-person and some telephone interviews at corporations and institutions around the world about their foreign exchange business practices, service provider assessments, and compensation. Interviews were conducted with chief financial officers, finance directors, treasurers, assistant treasurers, fund managers, portfolio managers, and buy-side traders. Interviews were conducted in the following countries: Argentina, Austria, Australia, Belgium, Brazil, Canada, Chile, China/Hong Kong/Macau, Colombia, Denmark, Finland, France, Germany, India, Indonesia, Ireland, Italy, Japan, Malaysia, Mexico, the Netherlands, New Zealand, Norway, the Philippines, Portugal, Singapore, South Korea, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, the United Kingdom, the United States, and Venezuela. Each firm interviewed traded $250 million or more annually in foreign exchange products.