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Assessing competitive forces in the retail FX Market


BY JAVIER PAZ, SENIOR ANALYST, AITE GROUP


Foreign exchange as an asset class has been one of the beneficiaries of a reduced investor appetite for trading stocks and unlevered products. Retail FX, the portion of global currency markets traded by regular people, has established for itself a firm foothold.


M illions of


individuals, from stay-at-home parents to young


professionals, have developed a voracious appetite for speculating in FX markets. Retail FX as a trend started in the late 1990s, but only gained major momentum from 2006 onward, as economic turmoil embroiled global capital markets.


Volume growth


Aite Group estimates that the gross notional value of retail FX contracts has tracked a remarkable rise from an estimated US$23 billion per day in 2001 to US$362 billion per day in 2010. Although not seen in the chart below, 2011


saw a modest decrease in volume relative to 2010 but it is still on track to break US$400 billion per day by 2013.


Yet, due to internal netting at the hands of specialist brokers offering this service, less than half the volume makes its way to the interbank market. Tis vast volume is all the more surprising because most retail FX growth circumvented securities brokerages, banks and financial advisors, the traditional intermediaries for new financial products. Simply put, mainstream financial institutions ‘missed the boat’ with regards to FX, but are starting to see the benefits of making up that lost time.


Javier Paz


Aite Group believes that the ongoing entry into retail FX of securities firms and wealth management divisions of banks will push FX trading into the investing mainstream at a faster rate than observed in the past 10 to 12 years.


The retail FX trader


To estimate the top line number of people investigating or participating in retail FX, Aite Group evaluated the online traffic arriving to more than 600 retail broker websites. As of May 2011, it quantified a global retail FX audience of more than 28 million unique visitors.


Retail FX Trading Volume by Key Global Jurisdictions, 1995 to e2013 (daily volume in US$billions) Source: Aite Group


8 | INSTITUTIONAL FX SERVICES - THE BROKERS HANDBOOK 2012/2013


What is now becoming clear to traditional investment firms is that retail FX is effectively opening up a vast new investment demographic and not just in developed countries. FX is sparking the imagination of investors and traders much like stock trading did in the late


Industry Report


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