As a reflection of the continued importance of the Euromoney FX survey, the number of votes this year rose by 18% over last year, following a 11% increase from the year before that. Volumes have also risen by 17%, to $208.6 trillion from $177.6 trillion, following a 6% increase the previous year.
However, $8.8 trillion of this increase is attributable to changes in the structure of this year’s survey, which increased the collection of volumes from clients’ top-20 counterparties. It had previously limited the collection to the top 10. Adjusting for this, year-on-year volumes rose 12.5% by $22.2 trillion.
From a markets perspective, the rise in volumes can also be attributed to market volatility experienced amid the European sovereign debt crisis in 2011, when activity spiked in the third quarter – a period in which central bank intervention led to increased trading – which also produced record quarterly revenues.
The most important effect of these bigger volumes is an increased market share concentration among what are dubbed flow monsters (the top five banks), which now account for 55% of total volume, up from about 52% last year. Crucially, it indicates that the industry is consolidating. The top-five market share is now more evenly dispersed, with the top four banks now registering market shares in excess of 10%, the first time this has occurred in the 34-year history of the Euromoney FX survey.
The FX market is now dominated by the large industrial-scale players: Deutsche Bank, Barclays Capital, UBS and Citi. Meanwhile, concentration of market share in the top 10 has also increased, by 1.4 percentage points to 78.75%.
This development reflects the rapid adoption of electronic trading in FX markets in recent years – the ratio of e-trading to total volume has risen from 36.5% to 38.6% from last year. In this year’s survey, trading on the top four single-dealer platforms, rose 5.29%, with Citi’s platform, Velocity 1.9, recording the biggest uptick in volume, rising 3.74% from last year’s survey.
Out of those top four banks, Citi is the main mover in 2012, jumping two places to second, and closing the gap on Deutsche Bank, which has taken top position for an eighth straight year. Over the 12-month period covered by the survey, Citi’s volumes rose by $10 trillion to $25.6 trillion (up 62.6%), while Deutsche’s rose by 9%. It is also interesting to note that given the backdrop of the European debt crisis and the pressure on European bank balance sheets, there appears to be no apparent shift in volume away from European banks towards US banks, with the exception of Citi.
Citi’s gains in market share amount to the biggest one-year swing since 2005, when Deutsche toppled UBS as the number-one FX bank. The gains are broad based, but Citi has outperformed in some of the key regions and client categories. For instance, in western Europe, which has the largest regional component in the survey, accounting for 43% of total volume, its client volumes rose 65%, while the amount of business it traded with non-market-making banks – which constitute the largest client component of the survey, 36.5% of total volume – rose 64% globally.
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"Europe is obviously the key battleground," says Jeff Feig, global head of G10 FX at Citi. "Banks are about 35% of total volume. If you could crack that, you could crack Europe." Looking at Citi’s performance across products, the bank garnered its biggest increase in swaps trading, where volumes increased 87% year on year, boosting its market share by 4.55%, the largest product market-share increase this year, as it climbed one spot to third in the overall rankings.
"Of all the sectors, banks are the most price competitive, and they tend to deal a lot of short-dated swaps. So one of the areas we focused on was offering much more aggressive swap pricing over Velocity," says Feig.
That had the knock-on effect of helping to drive up Citi’s client spot volumes, which rose 49%. Deutsche’s spot volumes were unchanged, Barclays Capital’s rose 21% and UBS’s rose 40%. In swaps, Deutsche’s volumes rose 29%, UBS’s rose 5%, and BarCap’s rose 21%.
While volumes rose across all vanilla products, in options volumes fell 57% to $4.7 trillion, in a year littered with extreme bouts of volatility in the FX derivatives market. That included the largest-ever intra-day movement in volatility, when on September 6 euro-Swiss franc one-month volatility fell from 23% to 6% within minutes. Not all option market makers escaped unscathed.
The rankings in the options category, in the second year that options volume data have been collected, show the biggest changes of any product category. While Deutsche maintains its top spot, it has experienced further erosion of market share, losing 3.55%. Meanwhile, Barclays Capital and UBS have made big strides, rising two places to second and third, respectively, as they gained in excess of 2.5% of market share.
The biggest losers were Goldman Sachs and Credit Suisse, two of last year’s leading three. Goldman Sachs’s share collapsed more than 5% to 4.55%, in falling eight places, while Credit Suisse fell three places to third in losing 1.75% of market share. The biggest improver was Morgan Stanley, which has risen five places to fifth after picking up 2.88% in market share.
Although Deutsche's overall market share was eroded again this year, it still maintains top spot in three of the top-five client segments: banks, leveraged funds (20.3% of survey volume) and FX trading platforms (incorporating retail aggregators). Furthermore, it has increased its volumes by 54% with non-financial corporates, a key client focus for a bank, as it rises one place to third by replacing Royal Bank of Scotland, and closing the gap on Citi and HSBC, which have 25% of the market volume.
With real-money investors and insurance company clients (17.5% of survey volume), Citi has leapt from fifth place in last year’s survey to first, with a 72% increase in volumes, while Deutsche, which has been the leading real-money counterparty since 2008, has fallen to third. Over the period, total real-money volumes rose 19%, the third-fastest-growing client group behind FX trading platforms and corporates.
Volumes in the FX trading-platform market rose 72% to $19.5 trillion, 9.3% of the overall survey volume. Deutsche maintained its leading position but Citi has moved from fourth spot to second by increasing its volume traded with these clients by 200%. It should be noted that the FX trading-platform volumes are a volatile statistic, where defining aggregators, retail brokers, white-label vendors and agency brokers is problematic.
In the leveraged-fund sector, volumes rose 8%. UBS was the stand-out improver, lifting its market share by 2.39% and gaining one place to third, behind Deutsche and Barclays. JPMorgan and HSBC also gained market share.
This year’s survey highlighted a growing contribution to overall volumes from both North America and Asia, with their share of total volumes rising 2.53% and 1% respectively. Although western Europe remains the world’s largest FX region, its share of the market fell 3% to 43% this year, while the fourth-largest region, central and eastern Europe, lost a quarter of its previous share of the global market. This appears to reflect the contraction in counterparty credit during the height of the European sovereign debt crisis last year. CEE now makes up less than 4% of global turnover.
Although it is a commonly held view that Asia is the FX market’s fastest-growing region, the survey shows that, of the four main regions, North America has recorded the largest year-on-year increase, with volumes rising 29% compared with 24% in Asia. Of the smaller-volume regions, Africa is the standout, with volumes growing 185% to just less than $1 trillion, the largest percentage increase of any region.
This confirms an increasing focus on frontier markets, a trend that seems set to continue. Latin America looks as if it will overhaul Australasia in the coming years, as the sixth-biggest region by volume, after growing volumes 34.5%, while Australasia volumes contracted from last year.
In the battle for the biggest region, UBS has toppled Deutsche as the number-one volume player in western Europe for the first time since 2004, although its volumes have increased by only 7%. Indeed, it does appear that the switch is more the result of Citi increasing its client volumes by 65% in jumping one place to third and taking market share from Deutsche and Barclays Capital.
Moreover, aside from CEE and Australasia, where volumes fell, western Europe recorded the slowest year-on-year growth rate, 10%.
The rise of UBS to number one in western Europe comes after the much-anticipated roll-out in the third quarter of last year of its new single-dealer platform, UBS FX Trader Plus, with its revamped pricing and algorithmic hedging tools. According to George Athanasopoulos, the bank’s global co-head of FX, the real benefits will come in 2012.
"The bulk of the improvement will come this year, obviously algo hedging came on stream in September, so the market share data will have had only a third of the year," he says. Furthermore, the impact is higher in Europe because most of its e-FX resources were in Europe, but UBS has since added more resources in the US and Asia, he adds.
For North America, the most obvious region that could show clients were wary of European bank counterparty risk and thus favoured US bank counterparties, both Citi and JPMorgan showed the biggest percentage increases in volume, registering rises of 49% and 45%, respectively. Nonetheless, for Barclays, which says that North America is its fastest-growing market, volumes rose 41%, although its overall position was unchanged in second behind Deutsche Bank.
"The firm’s acquisition of Lehman Brothers in the US was transformational and enabled us to widen our footprint across our client base and products in North America," says Nick Howard, head of EM and FX distribution at Barclays. "Since 2009 we have deepened these client relationships to grow our North American FX franchise. We have consciously focussed on delivering an integrated global coverage model, and our clients tell us we are getting this right."
Asia was the largest voting block, contributing 34% of respondents, while making up 19.4% of total volume.
It’s a region that Deutsche has held a stranglehold on since 2008, opening up a gap of 10% in market share in recent years. That has now closed to just 5% this year, with Citi increasing its turnover with Asian clients (including Japan) by 81%, to $6 trillion, as it moved up one place to second. Barclays and HSBC, in third and fourth spot, respectively, increased volumes by 29%. Credit Suisse achieved it highest-ever position in Asia, moving eight places to seventh, after its volumes rose 165%.
The order of rankings in central and eastern Europe is notoriously volatile. Deutsche regained the top position that it lost in 2010, with a market share of 17%, the highest share since 2009, while last year’s leader, JPMorgan, slumped four places. Citi jumped three places to third, increasing volumes by 47% to $868 billion. Commerzbank, which ranked third as recently as 2010, before falling to 15th, rose nine places after volumes increased 146%. Volumes in CEE bucked the overall trend of the survey and fell, by 11.3%.
Citi’s big swing in market share makes it the most improved by that measure of the top-10 banks, improving its raw volume by 63%. However State Street has recorded the biggest increase in market share across the whole survey, up 142%.
After State Street’s global ranking slumped six places to 22nd in last year’s survey, it has quickly rebounded, gaining five places to reach 17th this year. With a predominantly real-money client base, State Street’s position with these clients gained six places to ninth, after it slumped to 15th in the global rankings in 2011. It has also made an impression on the leveraged-fund sector, increasing its volume 257% to climb seven spots to 18th.
Other notable improvers were Westpac Banking Corp, which increased its overall volume by 70% this year to break into the top 20 counterparties for the first time. That’s best reflected in the leveraged-fund sector, where it improved 12 places to 20th, perhaps because it appears on more counterparty dealing lists as a result of changes in the survey structure.