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FX may be less risky for banks in ordinary times but with the banks
taking larger portion of market it is time to ask if the banks can
analyze the political risk that might impact currency trades. - Michael

Banks’ shift pushes FX trading to $4,000bn a day
By Peter Garnham and Jennifer Hughes
Published: September 1 2010 00:04 | Last updated: September 1 2010 00:04
Currency trading has surged to record levels in 2010, even as the
foreign exchange market becomes increasingly concentrated among a
smaller number of banks and trading centres.

According to the Bank for International Settlements, an average
$4,000bn is being traded daily, up from $3,300bn in 2007, when the BIS
last surveyed the market.

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Bank executives have become increasingly interested in foreign
exchange, or FX, as part of their search for less risky sources of
profits following the financial crisis.

FX trading is a so-called “flow” business in which profits are made
from trading commissions rather than risking increasingly expensive
bank capital.

The rise in turnover has been driven by a near-50 per cent jump in
“spot” FX – currencies traded for immediate delivery – to $1,500bn a
day.

The BIS report also showed that London has increased its dominance of
the currency world, accounting for 36.7 per cent of global turnover,
up from 34.6 per cent in 2007.

The US was second, with 17.9 per cent, compared with 17.4 per cent
last time, while Japan retook third place from Switzerland, with a 6.2
per cent share.

Simultaneous data from the Bank of England on Tuesday highlighted the
increasing concentration of FX among a handful of banks. According to
the Bank’s report, the 10 banks with the highest FX turnover increased
their market share to 77 per cent from 70 per cent in 2007. The top 20
accounted for 93 per cent of the market.

The biggest banks in the FX market are Deutsche Bank and Citigroup.
Other top players include UBS, JPMorgan and HSBC.

According to the BIS, the higher market turnover reflects increased
trading activity by “other financial institutions”, a group that
includes hedge funds and other non-bank counterparties such as pension
funds and mutual funds.

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