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CME Group, the world's largest and most diverse derivatives exchange, today released results from a new global study that reveals market participants' growing focus on electronic trading, risk management and cost control is driving the record growth in global foreign exchange (FX) markets. The Global FX Market Study provides fresh insights into several trends that are reshaping the $3.2 trillion a day global FX market.
"This study confirms that electronic trading venues need to provide state-of-the-art execution and post-trade services. CME Group is well positioned to further expand its reach as a major player in this fast-growing market," said Derek Sammann, Managing Director, CME Group FX products. "Our execution platform is leading edge for multiple user types and our post-trade services capabilities, including clearing, directly address the requirements of traders, risk managers and regulators."
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).
The research was conducted by ClientKnowledge, a leading wholesale financial services research and consulting firm. A summary of the survey is available at http://cmegroup.com/trading/fx/global-fx-survey.
CME Group offers the world's largest regulated FX trading complex and the second largest electronic marketplace for FX trading in the world. The exchange provides users with liquid, transparent markets, guaranteed execution and central counterparty clearing risk management on 41 individual FX futures and 31 options on futures products. Last year, over 144 million FX contracts with a notional value of over $18 trillion traded at CME Group. For more information on CME Group FX products, visit http://www.cmegroup.com/fx.
*Methodology: the survey polled 933 market participants, including 333 banks, 333 money managers and 267 'non-traditional' money managers or 'leveraged' traders including hedge funds and Commodity Trading Advisors (CTAs). Participants were drawn from a global distribution. The research was conducted between June and August 2007.
CME Group (http://www.cmegroup.com/) is the world's largest and most diverse derivatives exchange. Formed by the 2007 merger of the Chicago Mercantile Exchange (CME) and the Chicago Board of Trade (CBOT), CME Group serves the risk management needs of customers around the globe. As an international marketplace, CME Group brings buyers and sellers together on the CME Globex electronic trading platform and on its trading floors. CME Group offers the widest range of benchmark products available across all major asset classes, including futures and options based on interest rates, equity indexes, foreign exchange, agricultural commodities, and alternative investment products such as weather and real estate. CME Group is traded on the New York Stock Exchange and NASDAQ under the symbol "CME."
The Globe logo, CME, Chicago Mercantile Exchange, CME Group, Globex and E-mini, are trademarks of Chicago Mercantile Exchange Inc. CBOT and Chicago Board of Trade are trademarks of the Board of Trade of the City of Chicago. All other trademarks are the property of their respective owners. Further information about CME Group and its products can be found at http://www.cmegroup.com/.
For the past 14 years ClientKnowledge has interviewed participants in the FX market to provide a global picture of emerging trends and the performance of FX providers. This allows us to provide actionable market data and advice to our clients. To find out how ClientKnowledge can help your business go to: http://www.clientknowledge.com/.
