Downsized FX markets : causes and implications

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.