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Many believe the Bank for International Settlements survey to be released in September, which is conducted every three years, will show volumes having fallen.

Definitive data isn’t easy to find on the size of the foreign exchange market. There are many ways of trading currencies globally, and unlike equities trading there’s no central point at which trades are reported. The BIS’s survey, therefore, is keenly awaited.

From an average daily global turnover of $1.2 trillion in 2001, the foreign exchange market grew to $5.3 trillion in 2013, according to the BIS surveys. While other markets stuttered – particularly during the financial crisis – the foreign exchange market kept growing.

But as the BIS prepares to publish the results of its latest survey, undertaken in April 2016, some contraction in the market’s size is now widely anticipated as a confluence of macroeconomic and structural factors have combined to drive down turnover.

Yaacov Heidingsfeld, chief executive of TraderTools, a provider of FX liquidity aggregation technology, said: “I absolutely believe the spot market to have contracted significantly since the last BIS survey. Given the pressures they face, banks are far less able to hold risk and credit is less widely available, which inevitably impacts turnover.”

It is not only the retrenchment of banks that has dented the FX market’s growth, however. Macroeconomic factors have also played their part. Aside from some spikes in volatility around major risk events – such as the Brexit vote – and central bank policy decisions, low interest rates and a general convergence in monetary policy among major economies have contributed to a market with less obvious FX trading opportunities than in times gone by.

Stephen Jefferies, head of currencies and emerging markets trading in Emea at JP Morgan, said: “Market turnover is cyclical and when volatility is low, systematic high-frequency trading firms and hedge funds tend to do a lot less volume.

“Despite some spikes, central banks have largely dampened volatility in recent years, which has led to extended periods of market quietness.”

While the true extent of any contraction will be confirmed when the BIS publishes its preliminary survey results in September, other data sources give some indication of what to expect. ICAP’s FX platform business, EBS, reported an average daily volume of $90.9 billion for the first half of 2016 – 14% less than the 2013 average. Meanwhile spot volume on Thomson Reuters’ FX platforms in the first half of 2016 was $107.5 billion – 16% down on the 2013 average.

Semi-annual turnover data, which is produced on a national rather than global basis by the Bank of England and the Federal Reserve Bank of New York, tells a similar story. While newly published data for April 2016 shows a small bounce, average daily turnover in the UK in October 2015 was $2.1 trillion, 21% lower than a year earlier and the lowest daily turnover since 2012. In the US, volume fell by 26% during the same period, from $1.1 trillion to $809 billion.

The macroeconomic backdrop explains such dips in volume to some extent, but some participants are in little doubt that the data is also proof of a declining commitment to market-making, which reduces liquidity and trading volumes.

Some platforms are already initiating new projects to preserve liquidity in the face of falling volume.

Changing behavior takes time…

On the record, banks have made all the right noises about the global code of conduct being drafted for the foreign exchange market, which is set for completion by May 2017. Having a single set of principles, they say, will remove inconsistencies and make it much easier to enforce strong behavioral standards across jurisdictions.

Speaking at the launch of the first phase of the code in May, market participants’ group chair and CLS chief executive David Puth said: “The success of the code lies with foreign exchange market participants and I am pleased to report that some of the larger institutions that have been involved with its development are already moving towards adoption internally.”

But trust in the banks that previously dominated currencies trading may take longer to rebuild than some would like to think. Surveillance and enforcement by both management and regulators has increased since the scandal, but that doesn’t necessarily mean client interests are being better and more honestly served.

Stephen Grady, global head of trading at Legal & General Investment Management, said: “When we talk to banks at the moment, we don’t always get the sense they have fully acknowledged the massive trust deficit caused by various scandals that have occurred in the recent past.” He added: “Although FX is low margin, its high turnover means it can be very lucrative for investment banks compared to other asset classes, so any changes to business practice could compromise revenue.”

The first phase of the code of conduct appears to have been well received and work is now underway on the second phase, which will cover further aspects of execution, including the contentious practice of ‘last look’, which allows banks to reject a client order at a quoted price.

While banks may profess to be committed to the code of conduct, questions remain over how adherence to a voluntary set of principles will be incentivized in the long term.

An interim update on adherence that was published alongside the first phase of the code in May revealed little detail on the mechanisms that might be introduced.

David Clark, chairman of the Wholesale Markets Brokers’ Association, said: “The code of conduct will move the industry towards a more sophisticated principles-based approach to conduct, but all of the countries involved have different legal structures and approaches to supervision; therefore agreeing on an adherence framework that works for everyone will take time.”

EBS, for example, will require users of its fastest market data to transact 40% of their average daily flow as a market maker later this year.

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