Banks are no longer the largest counterparty in the FX market

One of the most significant changes that the FX market is currently undergoing is the substantial increase in trading activities from “other financial institutions” —included in this group are retail aggregators, high frequency trading firms, and smaller (Tier-2, Tier-3) banks. Banks with an FX expertise (dealers, reporting dealers) accounted for 64% of all trading in 1995, but that figure declined to less than 40% by 2010. Non-financial customers (primarily corporate clients) as a group have more or less kept pace with growth in the FX market and held on to a 13%-to-18% share of FX volume. Trading from non-bank financial institutions (such as high frequency firms, smaller banks, and retail aggregators) increased from 20% in 1995 to 48% in 2010, thereby becoming the largest counterparty in the FX market. Principal reasons for this large jump in activity follow:

• The growth and popularity of electronic trading platforms that started in equities markets two decades ago has gravitated to the FX market.
• The lack of steady, profitable returns from traditional asset classes such as equities and fixed income have propelled FX and commodities as the new alternative asset classes, thereby attracting fresh investor money flow into the FX market itself.