ClientKnowledge's research, based on surveys with 2,000 corporates, money managers and bankers, confirms what market participants have reported anecdotally. The forex market is growing in almost every sector due to the advent of the single European currency, electronic trading and banking consolidation.
"Volumes are up, the number of counterparties trading foreign exchange is up and the number of banks counterparties are trading with is up," said Justyn Trenner, London-based managing director of the firm.
Factors such as the tentative US economic recovery and unstable oil prices created the dollar volatility that has characterised the year. Existing foreign exchange clients have therefore increased their activity, both to manage their currency exposure, and to invest in the highly volatile markets.
At the same time new participants such as hedge funds are bringing extra flow to the market in a quest for returns no longer seen in the equities markets, and the broker-dealer community, that sees easier access to foreign exchange as a result of technology-driven initiatives.
The number of money managers trading more than $30 billion a year is up 75% year-on-year to more than 250, the research firm revealed.
The survey also reveals an unprecedented growth in the number of banks clients are trading with, most notably for leveraged real-money managers, sharing the majority of their volumes with an average of just under 10 banks, up from under eight last year.
Even spot forex – declining when the last BIS survey was published in October 2001 – is on the increase. Jack Jeffery, chief executive of spot broker EBS, said 2004 has been the busiest trading period for its EBS spot platform in the firm's 10-year history, with spot volumes up 20% so far year-on-year.
The BIS data, which is based on volumes supplied by global banks, was collected earlier this year and will be published in October. Its last survey revealed average daily turnover in the foreign exchange market stood at $1.2 trillion – down 20% on the 1998 survey, taken before the euro was launched in January 1999.