Do Higher Trading Volumes Mean It’s All Good?

ICAP, one of the world’s top interdealer brokers, reported an increase in trading volumes for December last year. According to their research, average daily volumes on electronic trading carried out on BrokerTec and EBS platforms surged by 635 billion USD, which translates to a 3% increase from December 2011.

ebs.jpg Overall repo trade volumes, on the other hand, were up by 3% year-on-year. This was a result of the small uptick in U.S. repo trading and the 5% increase in EU repo trading.

Average daily trade volume of fixed-income products on the BrokerTec platform were up by 5% year-on-year while daily trade volume of U.S. Treasury notes climbed by an annualized 16%. However, average daily spot forex trade volume on EBS platforms declined by 91.8 billion USD or 4% from the previous year.

Before we go any further, let me first distinguish the two platforms. BrokerTec is a trading platform that allows investors to trade fixed income assets such as U.S. Treasuries, European government bonds, and European Repo. On the other hand, the EBS (Electronic Broking Services) trading platform is used to trade currencies on the FX spot market.

So yup, you read that right. In December, trading volumes for fixed income assets surged but trading activity in the FX spot market dropped. What the heck?

According to some analysts, the drop in the in EBS trading volume was caused by the decline in volatility in the currency market. They point to the ultra-low interest rates of the ECB, Fed, and the BOJ, saying that further easing from the central banks reduced price swings among the euro, dollar, and the yen.

The figure is consistent with the drop in trading activity that some forex brokers reported. Lower volatility during the latter part of the year might have given investors very little incentive in taking big positions in the currency market.

There are those who speculate that this trend would carry on for a little while and may give investors enough reason to keep their money on fixed income securities instead of the forex market. But then again, we could see a comeback to the forex market with the Fed already thinking of withdrawing some of its stimulus measures and the ECB being more optimistic on its outlook for the economy.

What do you think?