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Population Growth: 15-to-75-Year-Old Group Source: Aite Group


Aite Group estimates that retail FX is a US$1.4 billion per year business in Japan, where the country boasts the largest FX trader population in the world. As of 2Q 2012, the Financial Futures Association of Japan reported a total of more than 4 million total accounts and 607,000 active traders. Tis compares favourably to the 145,000 active traders in the United States for the same period. Te ratio of active traders relative to all traders fluctuates somewhat over time, jumping noticeably during periods of higher volatility. U.S. traders transact more often and in bigger notional amounts than Japanese traders, while the latter are much more predisposed to buy and hold higher yielding pairs, particularly AUD/JPY.


It stands to reason that most retail traders have nowhere near the knowledge, capital, or operational efficiency of sophisticated buy-side players. Nonetheless, the profitability of retail FX traders in the United States—the only country where brokers are required to disclose this kind of information— showed a very respectable 35% profitability during 2Q 2012.


Internet Penetration 2000, 2010 and e2020 Source: Aite Group


But this quarterly figure may well hide a more positive annual performance.


An August 2012 Aite Group survey of U.S. investors and traders revealed that 67% of traders experienced FX gains of at least 1% for the past 12 months, compared to 16% with breakeven, and 17% with losses. Furthermore, retail FX profitability was on par with that seen in stocks (69%), options (68%), futures (66%), and ETFs (65%), and well ahead of index trading profitability (54%).


Market structure


Retail FX is dominated by about 50 medium and large retail FX brokers. Te majority of these firms grew organically, developed their own IT solutions and are just now starting to adopt IT and enterprise solutions from outside firms. A handful of them are heavily invested in technology development and provide turnkey/white-label solutions to new entrants.


Te majority of brokers have adopted a principal model wherein the firm runs its own order book


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


and offsets FX risks internally whenever possible, while offsetting the remainder with an average of 6 liquidity providers.


Conversely, agency and ECN/ DMA FX brokers offset all of their volume on the interbank market, with an average of 15 liquidity providers. Te vast majority of liquidity taken by retail FX brokers originates from banks and firms like Integral and Currenex, while a smaller portion also taps FX marketplaces (Hotspot FX, FXall, EBS Prime, and so on).


Prime brokers and technology companies like Traiana have served an important role in the development of retail FX worldwide, as facilitators of credit and of technology that lowers transactional costs.


Competitive brokerage landscape


United States: Te U.S. retail FX market experience is aided by ample trader protections and clear retail FX rules, but some regulations have made it hard and onerous for FX brokers to grow their business. Aite Group believes the firms


Industry Report


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