Magazine article American Banker

Foreign Exchange Flourishes, but Banks' Share Declines

Magazine article American Banker

Foreign Exchange Flourishes, but Banks' Share Declines

Article excerpt

NEW YORK -- The global foreign exchange market has doubled in size and grown more risky in the last five years, according to a new study of currency trading. But banks have a smaller share of the market, with the largest banks more dominant within the industry's piece of the business.

Daily market volume is now about $150 billion, up from $75 billion in 1979. The increase is mostly due to worldwide investment activity and new financial instruments, such as currency-related futures, options, swaps, and money and commodity funds, said the study by the Group of Thirty, an economic research group.

But a majority of the 40 banks surveyed said they detected loss of some depth and flexibility in the currency market and evidence of some decline in the competence of dealers in foreign exchange. Compared with an earlier study, purely financial transactions now predominate over transactions based on trade.

Banks now account for a smaller share of currency trading because of the growth of activity by securities and commodity firms, futures arbitrageurs, and the international money funds.

The banks responding to the survey said increasing concentration in their sector was due to the ability of the largest banks to offer new products, their willingness to deal in large sizes, their more experienced traders, the size of their foreign exchange sales forces, and their tighter bid-ask spreads.

Other factors cited were the largest banks' bigger base of corporate customers for products other than foreign exchange, their global currency trading networks, their willingness to hold major open positions, and the amount of capital they have committed to the business. One bank said another factor was the ability of large banks to quote reasonable prices without delay.

The study, entitled "The Foreign Exchange Market in the 1980s," was conducted from May to August 1985. Responses came from 40 international banks and 15 securities houses in 12 countries. Also responding were 50 multinational corporations with large foreign exchange operations and 17 international money managers. …

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