London Moving Ahead of NYC as Leader in Forex

London surpassed New York as the world’s foreign exchange trading center, FT’s Peter Garnham reports.

London’s dominance of the global foreign exchange market continues to grow sharply as the share of New York and Japan slips, a survey has revealed. The UK’s share of foreign exchange trading volumes jumped from 31.3 per cent in April 2004 to 34.1 per cent in April 2007, the latest triennial survey from the Bank for International Settlements has revealed. This was more than double that of the US, its nearest rival, which saw its share of the market fall from 19.2 per cent three years ago to 16.6 per cent.

The news of London’s rising pre-eminence in the world’s largest financial market will come as a fresh blow to New York, which has seen its position as a financial centre come under competitive pressure.

Analysts said London’s pre-eminent global position allowed currency investors to benefit from economies of scale. “The biggest investors like to trade where there is liquidity,” said David Woo at Barclays Capital. “Once you obtain critical mass, it has a tendency to feed off itself.” Mr Woo added that most of the world’s large currency investors were now based in London.

The city has also benefited as the preferred trading centre for Asian central banks, which have built up massive foreign exchange reserves in recent years. Analysts said London’s time zone made it a much more convenient place for them to trade than the US. “London has always been seen as more international than the US. It’s clear that it is staying ahead of the market,” said Rob Close, chief executive of CLS Bank, which settles more than half of global currency trades.

The survey showed that global average daily volumes on the foreign exchange markets exploded by 71 per cent from $1,880bn in April 2004 to $3,210bn in April 2007. The BIS said the massive increase had been fuelled by increasing activity from hedge funds, particularly those using quantitative trading models, and increased interest from retail investors. Greater use of foreign exchange as an asset class by institutions, such as pension funds, had also boosted volumes.

However, Japan’s share of the global foreign exchange market slumped to its lowest level in at least 12 years, according to the BIS report. Currency trading volumes in Japan fell from 8.3 per cent of the global total in April 2004 to 6 per cent in April 2007 — the lowest level since the survey began in 1995.

An interesting story, but I discount the notion of critical mass/feeding on itself. Very few economic systems work this way, and when they do they have the annoying tendency to suddenly go south leaving people wondering what happened to their money…we usually call them bubbles. Also, this article indicates that Switzerland’s share of the forex market has doubled. When exactly does this critical mass occur? Has Switzerland reached it, is it close to reaching it, or will this growth slow, reverse, etc.?

via Soren Dayton

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Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.