Downsized FX Markets: Causes and Implications

17 Pages Posted: 22 Dec 2016

See all articles by Michael Moore

Michael Moore

University of Warwick - Warwick Business School

Andreas Schrimpf

Bank for International Settlements (BIS) - Monetary and Economic Department

Vladyslav Sushko

Bank for International Settlements (BIS) - Monetary and Economic Department

Date Written: December 11, 2016

Abstract

For the first time in 15 years, FX trading volumes contracted between two consecutive BIS Triennial Surveys. The decline in trading by leveraged institutions and "fast money" traders, and a reduction in risk appetite, have contributed to a significant drop in spot market activity. More active trading of FX derivatives, largely for hedging purposes, has provided a partial offset. Many FX dealer banks have become less willing to warehouse risk and have been re-evaluating their prime brokerage business. At the same time, new technologically driven non-bank players have gained firmer footing as market-makers and liquidity providers. Against this backdrop, FX trading is becoming increasingly relationship-driven, albeit in an electronic form. Such changes in the composition of market participants and their trading patterns may have significant implications for market functioning and FX market liquidity resilience going forward.

JEL Classification: C42, C82, F31, G12, G15

Suggested Citation

Moore, Michael John and Schrimpf, Andreas and Sushko, Vladyslav, Downsized FX Markets: Causes and Implications (December 11, 2016). BIS Quarterly Review December 2016. Available at SSRN: https://ssrn.com/abstract=2887763

Michael John Moore (Contact Author)

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

Andreas Schrimpf

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Vladyslav Sushko

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

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