Asia’s trading volumes (including Japan) are 10 percentage points higher than Europe’s and double those of North America. Celent predicts Asia will continue to grow market share as China further liberalizes its currency trading rules. Since 2007, the US, has seen the biggest contraction in volumes, down almost 10 percentage points.
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| Source: Celent |
The region’s growing importance is best illustrated by the extent to which it accounts for overall business for leading US and UK brokers. For example 48% of Gain Capital’s total trading volumes are Asian, while for FXCM they are 42%. As is the case with wholesale FX markets, the growth in volumes traded over the past five-years has been the result of the adoption of electronic trading, which has allowed retail brokers to achieve a higher level of market penetration through easier connectivity, and allowed clients to trade more frequently. It has also presented a new opportunity for some retail brokers, because of the convergence in trading technology between retail and the high-end FX providers.
Because retail firms have had to develop technology capabilities to serve their ‘active traders,’ in many cases they are as sophisticated as the bank single-dealer trading platforms. This has led some retail firms to look beyond their traditional domain to servicing institutional clients that have traditionally only dealt with the banks.
“This has given retail firms the confidence that they can deliver quality services in execution as well as front office services to the institutions as well,” says the report’s author, Sreekrishna Sankar.
The report cites retail platforms, such as FXCM and Oanda, as providers of institutional trading services. QuantumFX, a unit of the retail broker, Alpari, is another firm that is expanding into this area.
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| Source: Celent |
Celent also notes that there are also new entrants entering the retail market such as TraderStation and Microsoft, who have started offering services to compete with brokers. Large FX banks, including Citi and Barclays, have also entered the market through white-labelling relationships with Saxo Bank. New rules issued in 2011 from the Office of the Comptroller of Currency has given banks more freedom to offer currency trading to individual clients which should see lenders become more active in the long run, Celent says.
While leverage has contributed to the strong volume growth, it has also exposed retail clients to huge risks. Leverage ratios of between 50:1 and 200:1 have not been uncommon in the retail market whereas in the institutional sector the ratio has rarely risen above 10:1. The report estimates only 30% of retail clients are profitable. In a bid to retain customers retail brokers have refocused on front-end technology and newer ways to refocus the customer experience, the report says.
This comes as, new, more conservative rules are now being applied in many jurisdictions. For instance, in the US, leverage has been reduced to a maximum of 50:1 in the retail market for key currency pairs and regulators have imposed higher capital requirements, which have caused many players to exit the market.
While this has impacted short-term growth rates and so-called client churn rates, Celent expects growth in the retail segment to remain strong and stable. Sankar says that the liquidity and ease of access to the FX market will continue to attract new investors and a safer environment will retain more medium to long-term investors.