Fascinating, but also deeply worrying. In contrast to other comments which emphasise recent changes, I would like to draw attention to some aspects of global foreign exchange trading which have not changed – and which, in a changed environment, should give more cause for concern than ever before.
The $5.3 trillion estimated average daily trading volume is a dramatic increase from $4.0 trillion in April 2010 and $3.3 trillion in 2007. However, in times of slow growth, low overall returns and widespread deleveraging the growing focus on the biggest, most lucrative and least transparent financial market outside the limelight of public attention should not come as a surprise. As I stressed elsewhere, volatility in this market is high, and as a rule, fluctuations in exchange rates are more erratic than in interest rates or prices of other financial instrument. Furthermore, risks and rewards can be even higher in trading in emerging market currencies as past and current financial crises demonstrate. The latter may offer one explanation for the increasing number of emerging market currencies traded these days – and their growing exposure to financial crises rooted elsewhere.
$5.3 trillion is an impressive number, but the statistics hide the fact that still there is no information at all about the true market volume and its development. As I wrote:
The foreign exchange market is largely an unknown quantity. … The only coherent source of information on market volumes is a survey conducted in April every three years by central banks and monetary authorities of countries with large and medium-sized foreign exchange markets under the auspices of the Bank for International Settlements. … Participants are asked to report all arm’s-length trades which means trades in which the dealer is indifferent as to the counterparty. For example, not included are in-house deals and deals with other offices of the same institution. Excluded are also deals of large globally operating firms within private corporate networks “bypassing” banks.
*Read the rest of the article at Beate Reszat’s blog.