While it is well established that traditional telephone and voice-based trading continues to give way to electronic trading, the study revealed the following:
- Traders expect electronic trading growth to gain momentum faster than previously anticipated. CME Group's Global FX Market Study predicted an average of more than 80 percent of all cash business will be executed electronically in 2010 (banks 89 percent, traditional money managers 83 percent and non-traditional money managers 96 percent).
- Although latency is a hot topic with electronic traders, 72 percent of bank survey participants cited counterparty risk as their biggest concern, followed by settlement risk (64 percent), giving a clear advantage to the exchange-style centrally cleared model, which lessens both of these risks. Latency was of concern to only 19 percent of participants who responded to this question.
"The concerns about counterparty and settlement risk speak to the value that an exchange model brings to the FX market and the potential to play even a greater role in the market," observed Sammann. "The central counterparty model virtually eliminates both of these risks."
Traders of all categories also continue to focus on efficient execution. The Global FX Market Study showed the following:
- 79 percent of active and 81 percent of real-money traders were concerned primarily with bid/offer spreads as the key component of their transaction costs.
- Market impact (price movement during trade execution that negatively impacts the market price) concerned 59 percent of active and 64 percent of less active traders (although the width and depth of the market and its effects on the spread are difficult to separate).
- Settlement costs (including exchange fees) concerned 49 percent of active and 48 percent of less active traders, while, in line with the relatively low number of algorithmic traders, reported fills relative to benchmark prices concerned a mere 23 percent of active and 15 percent of real-money traders.
This confirms that increasing numbers of participants are looking for liquid venues with tight spreads and clearly identified settlement cost.
Furthermore, the study shows that a relatively small number of traders report using FX markets in pursuit of alpha, although this small number of end users tends to generate a large amount of activity as alpha strategies tend to be pursued by more levered, active and sophisticated traders. Among FX traders, the leveraged/active dedicate 39 percent of their volumes to translation strategies, 45 percent to hedging and only 16 percent to the pursuit of alpha. The real-money traders ascribe 47 percent of their volumes to translation strategies, 43 percent to hedging, and only 10 percent to pursuing alpha.
When pursuing alpha, traders most commonly use managed hedge or currency overlay programs (leveraged/active 44 percent, less active 51 percent), while dedicated FX funds are less common (27 percent and 30 percent respectively).
In addition, almost half of the transactions are initiated as hedging instruments, while quantitative trading models are used by proportionally fewer market participants, indicating that the majority of new entrants to the market are trading fundamentally. Cross-product management of risk is key in this environment. The survey revealed that among the asset classes most likely to be additionally traded with FX, banks see money markets as most important (71 percent) while highly active traders looked to fixed income (53 percent), equities (41 percent), and interest rates (28 percent). According to the study, to fully exploit the FX relationship, providers need to have depth in other product classes.
Finally, polled on their concerns regarding risks to the FX markets, not surprisingly the respondents cited liquidity crunch (40 percent), and macro-economic problems (31 percent).
