LONDON The foreign exchange market’s status as the world’s largest, built up over decades of rampant globalization, deregulation and growth in financial services, is unlikely to be relinquished any time soon. But the glory days are over.
Overall market volume and employment levels at the biggest banks trading currencies are shrinking, as tighter bank regulation, the fading emerging market boom and a secular slowdown in world growth and trade take their toll.
Industry figures show the number of traders employed in Europe at the top 10 foreign exchange banks is down 30 percent over the last three years. Figures from the Bank of England and New York Federal Reserve last month showed that trading volume has fallen to its lowest level in three years.
The days when close to $6 trillion changed hands on an average day may never return, industry observers say, as tighter bank regulation, the fading emerging market boom and secular slowdown in world growth and trade take their toll.
According to financial industry analytics data firm Coalition, the top 10 FX banks alone operating in Europe employed 332 people on their G10 European FX trading desks last year. That’s down 30 percent from the 475 employed in 2012.
The vast majority of those frontline positions are in London. Both inside and outside the UK capital, countless other jobs in back office areas servicing the market have also likely disappeared for good even if quantifying that is trickier given the multiple areas these people work across.
“The end of 2014 was a peak in global FX activity,” when average daily volume was around $6 trillion a day, said one central banker in Europe.
Data from CLS Bank, which offers the world’s largest multilateral cash settlement service, showed average daily volume in January was $4.8 trillion, down 9 percent from a year earlier and a far cry from the near $6 trillion peak.
Trading desks at some of the biggest banks in London and New York — the largest centers in foreign exchange — are grappling with lower volumes in actively traded currencies like the yen, Swiss franc and Australian dollar over the past year.
Spurred by huge losses for many from the Swiss franc’s surge in January last year, big banks have cracked down on the number of smaller hedge fund-style operations they issue credit to and the leverage ratios they give others, halting the growth of highly leveraged speculative trading.
The trend was highlighted in a recent survey by central banks in Britain and the United States that showed daily volumes were down 21 percent in April to October 2015 from a year earlier in London and 26 percent in New York.
“The $5 trillion-plus-a-day volumes that we saw is probably the peak for the near term,” said Jim Cochrane, a foreign exchange industry veteran and a director at ITG, an independent broker to institutional investors and hedge funds.
The foreign exchange market, which is used as a snapshot of global trade and economic activity, is the world’s biggest financial market, and had been growing steadily for decades.
Twenty years ago, volumes averaged $1.2 trillion daily, according to the Bank for International Settlement’s 1995 global survey, the first time volume was above the $1 trillion mark.
But a market-rigging scandal that erupted in 2013 and led to several banks being fined billions of dollars and dozens, possibly hundreds, of traders around the world suspended or fired has cast a long, dark shadow over the industry.
More regulatory changes, prompted by the global financial crisis, has reduced their ability and willingness to take trading risks.
Besides contending with higher capital costs and rising costs of doing business as spending on risk management, surveillance and technology rises, banks can no longer trade currencies on their own behalf.
“The impending regulatory changes have had a psychological impact on market participants’ behaviors and traders are no longer being as aggressive as they were before,” said Howard Tai, senior analyst with Aite Group, a financial research and consultancy group.
Analysts say relatively subdued volatility in the foreign exchange market has played a role in keeping volumes low in recent months. Spot volumes have fallen and so did demand for derivative products such as currency options given there can be little demand to hedge if currencies are not going anywhere.
“Zero interest rates and a very dovish environment globally means there is less volatility,” said Douglas Borthwick, managing director at Chapdelaine FX in New York, a division of Tullett Prebon, a inter-dealer money broker.
“When volatility is clamped down, then volumes collapse.”
Traders are banking on some volatility spilling over from unsettled financial markets and a slowdown in China to force a major rethink of where asset prices, inflation, growth and central bank policy are headed this year.
Whether the increased turmoil will also lead to a boost in currency trading is an open question.