It seems as though Forex trading volumes worldwide will be down in Q4 from earlier-in-the-year levels, barring any wild trading in the few remaining weeks before year-end.
An excellent proxy for forecasting trading at the retail Forex firms are reported volume levels at Forex ECNs. These ECNs, such as ICAP’s EBS, State Street’s Currenex, Knight Capital’s Hotspot FX, and FXall (currently in registration for an IPO), are often the source for live quotes at retail Forex firms – and the trades made at retail firms often end up being executed, directly (via agent firms) or indirectly (via market maker firms engaging in hedging), at Forex ECNs. While Forex ECNs also serve other institutional and corporate customers, a healthy portion of their volumes originate at retail Forex firms. And with more and more retail Forex firms (such as MIG Bank, FxPro and FXCM) going the “agent” route, or at least offering that option to clients, we would expect higher volume levels at Forex ECNs.
As the graph above shows, ICAP’s Oct and Nov volumes (the green bars) were both the lowest they’ve been since April, with Nov volumes ($144.6 billion) lower than every other month in 2011 except Feb, and 11% below 2010 levels. Similarly, retail Forex industry leader FXCM saw Oct retail volume (of $339 billion) below Aug and Sept levels (although FXCM’s institutional business continued to increase nicely in Oct).
The reasons for the dropoff in trading volumes is somewhat unclear. Volatility in the main instruments traded at Forex firms – the EURUSD pair, Gold and Oil – has remained high during Q4, thanks mainly to the on-again off-again Euro rescue saga. We will hopefully get more clarity in the coming weeks as more firms report results – note that ICAP is the only ECN to report monthly figures (Hotspot FX and FXall report volumes quarterly).
For more information on Forex ECNs and Forex trading volumes see the LeapRate-Dow Jones Forex Industry Report for 2011.
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