By Anirban Nag and Laurence Fletcher
LONDON, Dec 8 (Reuters) - Daily turnover in the foreignexchange market fell 6 percent to $5 trillion a day in October,as trading in the yen and the euro declined, an analysis by theBank for International Settlements showed on Sunday.
Volumes hit a high of $5.3 trillion in April, led by a surgein yen trading as investors positioned for the Bank of Japan tointroduce aggressive monetary stimulus to help revive theeconomy. That resulted in the yen weakening sharply against mostmajor currencies.
But interest faded somewhat in the second half of the yeardue to the sheer weight of bets against the yen.
At the same time, uncertainty over when the Federal Reservewould begin withdrawing its stimulus and a political stand-offover the U.S. budget prompted many investors to stay on thesidelines, holding down volumes. That has hurt revenues for anumber of large banks who rely on trading activity to bolstertheir bottom lines.
Activity in the euro also took a hit, the BIS said in anupdate to its three-yearly snapshot of the foreign exchangemarket, which was first released in September.
It said spot trading in euro/dollar between September 2011and October 2013 fell by $400 billion, leading to a drop in theeuro's share.
The BIS analysis said spot trading overall had fallen to$1.8 trillion a day from above $2 trillion in early 2013. Incontrast, trading activity in FX swaps, often used to hedgepositions and exposure to assets, has fluctuated between $2trillion and $2.2 trillion per day since early 2011.
HEDGE FUNDS AND ALGOS
Despite the drop in volumes, the BIS analysis showed thatthe cost of trading currencies had dropped. This has attractedmany new participants from hedge funds to machine-driven tradersto the foreign exchange market in the past few years.
Data showed hedge funds and high-frequency trading firmstogether account for 11 percent of currency market volumes. Andnon-reporting banks - usually smaller, regional commercial orpublicly-owned banks - made up around 24 percent of the market.They are clients of large FX dealing banks but do not engage inmarket-making in major currencies.
Hedge funds' influence in some areas was more dominant -they account for 17 percent of forwards volumes and 21 percentof options volumes. This was boosted by a rush into dollar-yenoptions early this year to bet on Japan's easy monetary policy.
But some trades by hedge funds - which run money for wealthyclients and institutions - have gone awry.
Carry trades - borrowing a low yielding currency to investin a search for higher returns - and bets on market trends havesuffered as differentials between interest rates have fallen andcurrencies have traded in narrow ranges.
As a result, the assets run by currency hedge fundsspecialising in computer-driven trade slid to around $10 billionfrom more than $30 billion before the credit crisis.
Nevertheless, macro funds, which trade a wide variety ofassets including currencies, have more of an influence, and werelikely drivers of yen volumes in late 2012 and early this year,according to the BIS review.
High-frequency traders, who trade their own money withlightning-fast computers, are becoming important players in themarket, accounting for 30-35 percent of volumes on the EBStrading platform.
- Bank of Japan