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Why We Won't be Trading Places

06 April 2011 Written by 

London handles 37% of all global forex trades (tokyo is third, with just 6%).
Mike Baghdady, on a great British story

What does Britain do better than the US, that's worth ‚'in one day' what Germany produces in an entire year, and has gained 20% in transactional volume since it was last measured? It's the City of London's share of the global forex market, and it's never been bigger

In September, London expanded its role as the world's largest centre for currency trading, with its share rising more than two percentage points to handle 37% of all forex trading conducted globally. Second came the US with 18%, followed by Japan with 6%

The latest triennial survey of turnover in the forex markets by the Bank for International Settlements (BIS) revealed that between April 2007 and April 2010, the UK not only continued to be the single largest centre of foreign exchange activity, it also increased the average daily turnover in the UK forex market by 25% in the period to $1,854bn

At the same time, the BIS estimates, the $4 trillion worth of currencies traded a day is some 70 times the value of goods and services that actually change hands. But what’s more attention-grabbing is the 48% jump in ‘spot forex trades’ to $1.5trn a day over the past three years.

The ceaseless growth in the forex market is being spurred by an increase in global investing, especially in emerging markets and commodity-producing countries, as well as being accelerated by computer-driven trading and hedge funds.

Investors are turning to other markets for investment returns and generating more forex trading in the process, thanks largely to the ease of trading over electronic platforms themselves.

It’s not just investors, but funds of all descriptions – including hedge, mutual and sovereign-wealth – that are seeing the currency markets as a distinct asset class and not just a way to make an investment priced in another currency, reflecting a broader search for diversification, which has also led to increased investment in commodities, land and other assets beyond stocks and bonds.

The currency trading market dwarfs US stock trading, which in April averaged about $134bn per day, according to data compiled by the Securities Industry and Financial Markets Association, with trading in US Treasuries averaging $455bn per day in April, down from an average of $570bn for all of 2007

After three quarters of trading this year, we’ve seen stocks and commodities come full circle to the same prices they were at when we started 2010, thanks mainly to uncertainty

This uncertainty has been compounded by upsets this year, like the eurozone sovereign debt crisis and a panic that the US was heading for a second recession. But there have also been surprises, such as China’s well-managed comedown from the adrenaline-needle-in-the-heart stimulus administered to its faltering economy in 2008, which has led to positive corporate results there, once more

But it’s emerging-market currencies that are topping risk-hungry investors’ buy orders, with the market share of 23 currencies growing to 14% in April, from 12.3% in the previous survey in 2007. There have been significant increases in demand for the Turkish lira, Korean won, Brazilian real and the Singapore dollar.

Australian and Canadian dollars have also seen their shares rise by a percentage point, to 7.6% and 5.3% respectively, buoyed by their status as commodity currencies benefiting from soaring demand for raw materials from China and other emerging nations.

The IMF calculates that China holds forex reserves of around US$2.45trn, nearly 30% of last year’s global total. It may, then, be only a matter of time before Shanghai moves onto the coveted FX leader board – but they’re not going to be causing London any concerns in that department anytime soon.

Mike Baghdady is running an apprentice programme to rival Richard Dennis’s Turtle Trading experiment of the 1980s and is seeking applicants to join him, with no prior trading experience necessary. trainingtraders.com

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