LONDON, June 1 (Reuters) - Electronic currency-trading platforms are hoping that volumes will pick up in the foreign exchange market after Britain’s referendum on European Union membership, and history suggests that could happen.
Volumes in the $5 trillion a day market rebounded after a September 2014 referendum on independence for Scotland, amid sharp price swings and palpable relief that the vote was out of the way.
More volatility usually boosts volumes, boding well for banks and traders who make money during sharp moves. Six months after the Scottish referendum, volumes peaked at $5.4 trillion a day, up from $4.9 trillion, following the Swiss National Bank’s sudden removal of its cap on the Swiss franc in January 2015.
The Brexit vote on June 23 is not the only risk factor ahead. Uncertainty over when the Federal Reserve will raise interest rates gain and whether the Bank of Japan might opt for more stimulus could also lift volatility in the near term. So could the U.S. presidential election in November.
“While market behaviour is very hard to predict, history has shown that rate adjustments and elections can have an impact on volumes and volatility,” Chris Concannon, the chief executive at BATs Global Markets, which owns Hotspot, a large foreign exchange trading platforms, told Reuters.
“The Brexit vote is, however, unprecedented, but either way would likely impact short-term volatility,” he said when asked whether the vote will lead to higher volatility and volumes.
Volumes in the currency market, a success story for banks over the past decade, have faded from those early 2015 peaks. Banks have cut back on their own trading and the leverage they give clients to trade with.
The industry was also hit by a market-rigging scandal that culminated in dozens of traders being suspended or fired and banks being fined billions of dollars. Some cut back their FX trading significantly.
Data from EBS, Thomson Reuters and BATs Global’s Hotspot show volumes in the spot market have dropped 10 to 15 percent from a year go. And volatility is pretty subdued, as measured by Deutsche Bank’s index. Officials say referendum risks have had an impact.
“It’s probably fair to say that the Brexit issue has resulted in a very slight diminution of trading volumes,” said ICAP CEO Michael Spencer. ICAP owns the electronic platform EBS, which competes with Thomson Reuters in currency trading.
That apart, global trade flows have slowed and regulatory changes have made banks less willing to take on trading risks. Last week, the Bank for International Settlements issued a new global FX code in response to the rigging scandal, raising hopes that greater transparency would lead to higher volumes.
“I hope the work we have done will lead to an (overall) increase in volume. It is certainly a goal and I do feel that the code will lead to a more smooth-flowing market,” said David Puth, CEO of the global settlement bank, CLS.
Opinion polls suggest the June 23 referendum on whether Britain will to stay in the EU is likely to be close. Analysts say either way, volumes should pick up along with price swings after the vote.
“There will most likely be a pickup in sterling assets following the referendum,” said Brad Bailey, research director at Celent, a research and consulting firm.
“A vote in favour of a UK departure will be more dislocating to the FX market and markets overall as participants consider short, mid-, and long-term implications for Britain, and for the potential of additional departures from the European Union.”
Reporting by Anirban Nag, editing by Larry King