Institutional FX trading: a dying profession?

19 February,, Lagos – The foreign exchange market holds the title as the world’s largest financial market, boasting of close to $6 trillion in daily volume at peak levels, as of 2014. The market grew phenomenally over the last decades. As of two decades ago, volumes averaged $1.2 trillion daily turnover, according to data from the Bank for International Settlement's 1995 global survey. This marked the first time volumes exceeded the $1 trillion mark.

Dwindling FX volume

However, we could say the law of diminishing returns has set in, as daily volumes in the FX market has reduced significantly from the 2014 peak. This could be attributed to issues like the market-rigging scandal that erupted in 2013, which resulted in mega fines in billions of dollars levied upon several banks. In turn, this resulted in many traders being suspended or down right fired from the currency trading desks, thus casting a dark shadow over the industry.

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Fall in institutional FX trading employment levels

The FX market is built on decades of globalization, deregulation and growth in financial services and is unlikely to loose its significance. But the best days for the markets may be over. Over the years, institutional FX trading employment levels in the market’s biggest players have been shrinking, thanks to stricter regulations, the fading emerging market boom as well as a secular slowdown in world growth and trade take their toll.

Data shows a 30% decline in the number of traders employed in Europe at the top 10 foreign exchange banks over the last three years. Also, information from regulators in the two largest FX trading centers in the world -- Bank of England and New York Federal Reserve -- showed last month that trading volume has also dipped to its lowest level in the past three years.

The SNB effect

Furthermore, huge losses from the January 15, Swiss Franc event led to changes in big bank’s risk-taking rules, as they clamped down on the number of smaller hedge fund style operations they issue credit for, as well as a reduction in leverage ratios they give others, therefore halting the growth of highly leveraged speculative trading.

In addition to post global financial crisis, regulatory changes have led to a reduced willingness and ability of these banks to expose themselves to risks. They have also contend with higher capital costs and rising costs of doing business as spending on risk management surveillance and technology rises, while these banks can no longer trade currencies on their own behalf. The rise of automated systems have also rendered the need for human labor less necessary.

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