Trading between banks and financial customers surged by more than one third between 2001 and 2004 as the hedge fund industry reasserted its dominance over the world’s largest financial market.

Meanwhile, dealing volumes in over-the-counter derivatives, privately negotiated contracts that are pegged to the future direction of interest rates or currencies, surged by more than 112 per cent to $1,200 billion a day.

The figures are contained in a survey of the foreign exchange and derivative markets by the Bank for International Settlements (BIS).

The BIS, which serves as a central bank to the world’s central banks, undertakes a comprehensive survey of the markets once every three years. The latest survey, which took place in April, polled more than 1,200 banks and other financial institutions in 52 countries. Its findings are held in high regard, largely because most foreign exchange and derivative deals are transacted away from the public scrutiny of a recognised exchange, making it difficult to collect accurate data.

The BIS findings reveal an unexpected jump in foreign exchange turnover. Dealers had estimated that the market would be worth around $1,600 billion a day, up from $1,200 billion in 2001. The BIS attributed the higher than expected rise in trading volumes to the “growing importance of hedge funds” in the market.

The results are likely to interest regulators, who have expressed mounting concern at the risks which some hedge funds appear willing to shoulder in pursuit of above-average returns. Ironically, trading volumes in the last survey were depressed following the near-collapse of Long Term Capital Management, the US-based hedge fund that lost billions of dollars in the emerging market crash of 1998.

The US dollar retained its dominance as the most traded instrument in the world, accounting for 88.7 per cent of daily turnover, down from 90.3 per cent in 2001.

However, trading volumes in sterling jumped the most, rising from 13.2 per cent in 2001 to 16.9 per cent this time. Other winners included the Korean won and the Mexican peso, which both took their share of the overall market above one per cent for the first time. Russia’s foreign exchange market, meanwhile, more than trippled to an average turnover of $30 billion a day, handing it 0.7 per cent of the total market and making Moscow the 14th biggest centre for currency dealing.

The euro’s share of turnover dipped slightly from 37.6 per cent to 37.2 per cent.

London remains the foreign exchange capital of the world, accounting for 31 per cent of all dealings. The US handles 17 per cent of turnover while Japan accounts for 8 per cent and Germany 5 per cent.

MOVING ON UP

Global foreign exchange and over-the-counter derivatives market turnover (daily averages in April in US dollars)

Foreign exchange

Year Amount

1989 $590 billion
1992 $820 billion
1995 $1,190 billion
1998 $1,490 billion
2001 $1,200 billion
2004 $1,880 billion

Total over-the-counter derivatives turnover Year Amount

1995 $200 billion
1998 $375 billion
2001 $575 billion
2004 $1,220 billion

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