Trading in foreign exchange markets jumped by more than a third in the past three years to $5.3 trillion a day, or around 90 percent of Japan's entire annual economic output, a leading central bank survey showed on Thursday.
The three-yearly survey by the Bank for International Settlements showed growth was driven by the rising power of hedge funds, insurance funds and other non-bank institutions, and London cemented its dominance as the center for forex trading.
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The U.S. dollar remained by far the most dominant currency, while the euro saw its share of total trade drop to the lowest since the currency's inception in 1999, reflecting the impact of the euro zone sovereign debt crisis which began in 2010.
"Volatility, central bank intervention and regulatory developments were some of the primary themes in the FX markets over the past three years," said David Puth, Chief Executive of FX settlement system CLS Bank.
"Today, the FX market is more liquid, efficient and transparent ... It is reasonable to assume that daily turnover will continue to increase over the coming years."
Average daily volumes settled by CLS between April 2010 and April 2013 - the period covered by the BIS survey - increased by 42.5 percent.
TRADING IN YEN SPIKES, EURO WANES
The survey showed the dollar remained king in the foreign exchange market, making up 87 percent of all trades in April 2013, a rise from around 85 percent three years ago.
Because two currencies are involved in each transaction, the BIS gives the sum of the percentage shares of individual currencies out of 200 percent instead of 100 percent.
Meanwhile, the Japanese yen's prominence shot up, with trading in the currency increasing by 63 percent since 2010. The yen's global share of FX trading has grown to 23 percent from 19 pct in three years.
The BIS said a huge chunk of this increase took place between October 2012 and April 2013, a period marked by a significant shift in Japan's political and central bank landscape which resulted in aggressive monetary stimulus.
Although remaining the second most-liquid currency, the international role of the euro diminished over the last three years. Its share dropped to 33 percent in April 2013 from 39 percent in 2010.
The proportion of trade done in sterling and the Swiss franc dropped, while trading in the likes of the Mexican Peso and the Chinese renminbi rose significantly.
Euro/dollar remained by far the most dominant currency pair with a share of 24 percent, down from 28 percent in 2010, while dollar/yen trading jumped to 18 percent from 14 percent.
MORE LOCAL THAN GLOBAL
The survey also showed trading was becoming more locally concentrated, a reversal in the trend in the survey since 1998, and was increasingly gravitating to large financial centers.
The United Kingdom maintained its lead as the world's foremost trading center with a 41 percent share followed by the United States at 19 percent. Singapore overtook Japan to become the world's third major trading center.
The BIS said the share of cross-border FX transactions fell to 58 percent from 65 percent in 2010, the lowest since 2001.
The survey, in which 53 central banks and monetary authorities participate, showed growth driven mainly by "other financial institutions", who made up 53 percent of trading.
Reporting dealers - large commercial and investment banks and security houses which regularly deal through electronic platforms like EBS or Reuters - made up 39 percent.
A breakdown of "other financial institutions" showed a quarter of trade was done by non-reporting banks. These are usually smaller, regional commercial or publicly owned banks.
Transactions with non-financial customers contracted significantly over the past three years.
The survey showed that FX swaps were the most-actively traded instruments, making up 42 percent of all FX-related transactions. Conventional spot trading made up 38 percent.
In the FX OTC derivatives market, trading in FX options increased the most, growing by more than 60 percent, while outright forwards grew by 43 percent.
The BIS plans to publish in November detailed results of April 2013 activity.
(Additional reporting by Jessica Mortimer and Anirban Nag; graphic by Vincent Flasseur; Editing by Susan Fenton)