LeapRate’s Retail FX Volume Index drops 13% in February as lower volatility and higher margins take their toll

It has been a very strange two months for the Retail Forex industry.

Exiting 2014 with a lot of momentum and several of the sector’s leading brokers reporting month after month of record trading volumes, there was a lot of reason to believe that 2015 was going to see a continuation of the good times.

Then came January 15.

As any of our readers will know, January 15 saw the surprise announcement by the Swiss National Bank that it would no longer defend the implied 1.20 floor on the EURCHF, sending the currency markets into instant turmoil as the Swiss Franc appreciated instantly more than 20% against the Euro and most other major currencies. And in the process, generating huge losses for several of the world’s leading forex brokers and liquidity providers – clients which made (huge) money on the Franc move had to be paid, while the clients who lost (huge) to the brokers only had a fraction of that amount on deposit with the brokers thanks to the large leverage most brokers provide.

While many if not most Forex brokers were hedged on paper, risk management systems seemed to break down due to the one-time spike in the value of the Franc.

Today, everyone who follows the industry knows and understands the term negative client balances.

From a pure volumes perspective, January was a great month – in fact the second best ever month for retail forex volumes at $358B ADV, second only to October 2014’s $360B. But as we described above it wasn’t all good news for many brokers.

The February fallout?

Well, it seems as though many liquidity providers to the sector either pulled out altogether, or raised the margin required from forex brokers – thereby effectively lowering the leverage which forex brokers could offer their trading clients.

Sources: LeapRate research, monthly and quarterly volume reports of various Forex ECNs and Forex brokerage firms.

While the FX liquidity sector is going through a shakeout, the near-term effect on volumes, as expected, has been negative. Some brokers which were hit hard by January 15, such as FXCM, saw a very large erosion in February volumes for reasons which we believe go beyond industry dynamics. But overall, even those brokers who got through the CHF spike relatively unscathed also saw a drop in trading volumes.

Gerald Segal, LeapRate Managing Director, commented:

The big question in most industry minds is: is this downturn temporary? Conditions for healthy trading volumes remain in place with currency volatility staying high, led by the benchmark (and most heavily traded) EURUSD pair making 1%+ moves almost every day lately.

However industry dynamics have changed. Some of the largest brokers out there either are no more (e.g. Alpari UK), or have been severely wounded (e.g. FXCM). Brokers are rearranging their liquidity provider and prime broker agreements. It should be a very interesting few months in the industry as these issues continue to play out.

The LeapRate Retail FX Volume Index is a monthly measure of activity, stated in billions of dollars per day. It is calculated using proprietary formulas developed by LeapRate. The data input into the model are based on examining monthly and/or quarterly activity levels put out by various retail FX brokerage firms; similar activity levels announced by other FX aggregators such as Forex ECNs (e.g. Thomson Reuters, ICAP-EBS, Hotspot FX) and FX settlement firms (e.g. CLS Group); as well as anecdotal evidence we encounter as part of our general research activities in the Forex sector.

About LeapRate
LeapRate is an independent research and advisory firm, covering the world of online Forex, Binary Options and CFD trading. LeapRate is followed by thousands of traders, investors and other Forex Industry participants via our website, TwitterRSS, and our Forex Industry News email newsletterOther LeapRate services include:

  • Forex Yellow Pages directory of leading brokers and service providers to the FX sector worldwide.
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