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Average Trade Size Declines for Spot FX
A key insight from semi-annual surveys by the London Foreign Exchange Joint Standing Committee (FX JSC) and U.S. Foreign Exchange Committee is that the average trade size for parts of FX markets is decreasing over time. Lower currency volatility, the rise in interest for HFT, and fierce competition in the FX liquidity part of the market have reduced the average size of spot FX trades two- to threefold, to around US$1.1 million in both the United Kingdom and the United States. The average trade size of other FX products is much higher than that of spot FX, however—outright forwards currently sit at US$3.0 million, FX options at US$25.1 million, and FX swaps at US$47.1 million. With expected continued growth in HFT volume and increasing market participation by retail traders, the average trade size of spot FX is expected to decrease even more in coming years.
Average Trade Size Declines for Spot FX
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Is the growth in Spot FX expected to continue?
According to the recently published report by Aite Group ‘Global FX Market Update 2013: Increased Market Transparency, More Competition’, June 2013, the spot FX volumes will continue to grow on the back of prime-brokered clients (retail FX brokers and hedge funds/HFT firms) for the foreseeable future. Other FX products not impacted directly by regulations, such as outright forwards and FX swaps, should experience similar growth trajectory. Aite Group expects the spot FX market to reach US$2.2 trillion in daily turnover by 2016, up 35% from 2010 levels.
The largest daily trading volume in foreign exchange has traditionally come from the FX swap part of the market, but there are clear signs that new regulations on both sides of the Atlantic— particularly related to higher margin requirements for OTC FX swaps—will temper volume growth as market participants unable to secure margin to maintain or roll FX swaps choose to let them expire or look for alternative hedges on the futures/on-exchange side of the market, something that is now being termed “the futurization of FX swaps.”