exchange, directly with a customer, indirectly through a voice broker or indirectly through electronic means, categorised as electronic broking systems, multibank trading systems or single-bank trading systems. The survey also collected data by execution method broken down by transaction type and counterparty. The transactions distinguished were: spot transactions, outright forwards, foreign exchange swaps and options. The counterparty categories reported comprised: reporting dealers, which are typically banks; other financial institutions, which include hedge funds, pension funds and smaller banks; and non-financial customers. In total, around one third of all foreign exchange transactions are executed electronically. 5 Disaggregating the triennial survey by transaction type shows that electronic execution methods are most prevalent in the spot market, accounting for over half of turnover on a global basis (Table 1). Electronic broking systems, such as Reuters Matching or EBS, account for around 32% of all spot market transactions, while single- and multibank electronic trading platforms represent 17% and 8%, respectively. Among non-electronic methods, the most important way of executing spot transactions is directly between banks and their customers (“customer direct”). Electronic execution methods are used less frequently for more complex instruments. Around 30% of outright forward transactions take place electronically, predominantly through electronic trading systems. In contrast to 4 White labelling is an arrangement whereby a smaller bank outsources the provision of foreign exchange services for its clients to a larger bank (Barker (2007)). Prime brokerage allows large banks to provide sophisticated clients, such as hedge funds, with the ability to trade foreign exchange in the bank’s name using the bank’s credit rating (Foreign Exchange Committee (2005)). Algorithmic trading strategies fully automate the process of entering data, applying decision rules and executing the chosen trades (Pelham (2006)). Margin trading for retail customers has become increasingly important in recent years, particularly in Japan (Terada et al (2008)). This has contributed to the blurring of the distinction between wholesale and retail customers. 5 Data were collected on a “gross-gross” basis, meaning that there is double-counting of local and cross-border inter-dealer transactions. Data on the size of this effect for each transaction type and counterparty appear in Table E.1 of the triennial survey. The turnover data used in Tables 1 and 2 are scaled by this adjustment, and are therefore net of local and cross-border double-counting. Incidence of electronic methods is highest for spot market transactions … … and lower for more complex instruments … allowing new market segments to emerge
88 BIS Quarterly Review, March 2009 Foreign exchange market turnover by execution method 1 Daily averages in April 2007, percentage share by transaction type Electronic methods Inter- dealer direct Voice broker Customer direct Broking systems Multibank trading systems Single- bank trading systems Total Spot transactions 13
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