Although a slowdown in global foreign exchange trading activity kept FX e-trading volumes stagnant last year, electronic trading systems continued to attract new users at a rapid pace. A new report released today, Trading Slowdown Can’t Stop the Electronification of FX, by Greenwich Associates shows that the continued adoption of e-trading by large numbers of institutions and companies is furthering the transformation of foreign exchange into a truly electronic marketplace.

Despite a modest slump in global foreign exchange trading activity last year, electronic FX trading systems attracted new clients both in developed markets and in Asia, where market fragmentation and other factors had slowed the adoption of e-trading in prior years.

Electronic trading is already standard operating procedure for investors and many large corporations in the U.S. FX market, but even in the United States electronic trading platforms managed to expand their customer bases last year by meaningful margins. The share of U.S. market participants trading foreign exchange electronically increased to 82% in 2012 from 76% in 2011. Electronic platforms also gained a few new customers in the United Kingdom, where the share of institutions and companies trading FX electronically increased to 82% from 80%, and in continental Europe, where the share of market participants executing trades electronically increased to 75% from 73%.

Even more impressive was the uptake of electronic trading last year by investors and companies in Japan. Japanese market participants have been slow to adopt electronic trading in part due to concerns that a switch to e-trading would undermine personal relationships with banks that are seen as invaluable sources of market information, trade ideas, sales coverage and support and, of course, credit. While adoption rates in Japan continue to lag those of other markets by a considerable margin, the share of Japanese companies and institutions trading FX electronically jumped to 45% in 2012 from just 38% in 2011.

Elsewhere in Asia, electronic trading systems continued their slow but steady advance. Electronic trading has taken root at a slower pace in Asia than in other markets due to variety of factors including the heterogeneous make-up of the Asian marketplace and the differing levels of development among Asian country markets and institutions. From 2011 to 2012, however, the share of Asian-ex Japan/New Zealand/Australia institutions trading FX electronically increased to 57% from 54%.

“Globally, two thirds of institutions most active in foreign exchange markets now trade electronically, including nearly 80% of participating financial institutions and over half of corporations,” says Greenwich Associates consultant Woody Canaday. Although e-trading volumes were stagnant at a top-line level last year amid a broader slowdown in FX trading activity, the influx of institutions and companies to electronic trading systems last year is a sign that foreign exchange continues its transformation into the world’s first truly global electronic market. Including short-term transactions, e-trading systems captured 71% of global FX trading volume in 2012. Institutions executed 76% of trading volume in G-10 currencies electronically, as well as 53% of trading volume in emerging markets currencies and 23% in currency options.

E-Trading Volumes Poised to Resume Growth
Greenwich Associates expects e-trading volumes to return to a growth trajectory as foreign exchange trading regains steam and market participants continue dropping the telephone for screen-based execution. Among users of e-trading, the average share of FX transactions executed via phone calls between market participants and dealers declined to 23% of total volume in 2012 from 27% in 2011.

“In terms of overall foreign exchange trading volumes, 2013 got off to a strong start,” says Greenwich Associates consultant Peter D’Amario. “If this level of activity holds, we would expect to see meaningful increases in both the absolute volumes executed through online systems this year and in the share of overall marketplace trading volumes executed electronically.”