From the FXWW Chatroom: The shrinkage in the share of FX trading by fast money investors by 30 % is likely the result of regulatory pressures and FX rigging investigations which caused significant retrenchment by FX prop desks. At the same time, unexpected events such as the SNB abandoning its currency ceiling and the inability of hedge funds to benefit enough from the big FX themes of the past three years likely caused retrenchment in the FX activity by hedge funds. In all, less trading by prop desks and hedge funds reduced one important source of market liquidity and is likely behind the decline in FX market depth over the past three years.
(JPM)
On the other hand, global banks may be reaping the rewards of their role as key middle-men in foreign exchange swaps, a market which is bigger than the spot one and keeps growing in importance. Trading in these instruments, which allow investors to hedge currency risk when purchasing assets abroad, increased to a record-high $2.4 trillion from $2.2 trillion three years before. The rise was driven in large part by increased trading of swaps involving the Japanese yen, a testament of how Japanese investors have scrambled to escape punishingly-negative yields in their country by flocking into foreign assets and then striping out the currency risk. The announcement of ultraloose monetary policy in Japan three years ago also led to a surge in the over-the-counter currency options market, which has now cooled again–trading volumes have dropped nearly a quarter since, to $254 billion in April of this year.
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