How big is the Trading Volume in Retail FX?

The Retail FX trading surveyed by the Bank for International Settlements is in the vicinity of $185 billion, just about 3.5% of the $5.3 trillion in the global interbank market. But here is the most important detail to this figure. Of the $185 billion, $78 billion was registered as FX spot trading and with this figure comes $74 billion are in "Forex Swaps". (Figures based on BIS)

And how it affects 'Traders & Investors' trading experience.

Accounting for the discrepancy, includes "retail forex trading volumes" are housed internally by autorized "market maker/brokers" that are registered and licensed as a "Market Maker" (dealing both in securities, stocks, and FX trading) by the exchanges and proper regulatory agencies.  Among which are financially required to have a capital balance maintained in the amount of USD20M. That is if these companies are within the US jurisdiction. The regulating bodies of the CFTC, NFA for registered brokers especially when the Dodd & Frank Act has been embodied by these regulatory including the major banks.

"Housed Internally" literally means is that trade positions executed are not hedged externally but within the books of the company being an authorized market maker. But what about if the company/broker claims to be one but is not really registered? Transparency is a MUST! A side note: That is why some broker companies got into trouble when the SNB decided to no longer pegged their currency. ( names omitted but on public record). 

However, taking this into consideration, more than  50% of retail volumes are executed internally on a market making basis. The actual amount of "non-hedged volumes" are within the range of 60%-65%, based on the BIS’s $78 billion data received todate. The rest of the executed order flows are within Tier 3 regional banks, where brokers outside of the US are utilizing these banks for additonal retail driven as resource liquidity. As part of the interbank requirements, these regional banks also do declare order flows to be registered as retail trading.

NOTE: Beginning in 2008, the NFA required registered forex dealers to increase their capital reserves in stages, ending with $20 million in net capital reserves for each forex broker by 2009. Few forex brokers in the United States could meet these requirements, and many were forced to close or relocate outside the U.S.

Regulatory report 1: After being charged by the NFA in 2012 for ‘unfavorable price slippage practices’, "Broker X" (name omitted) followed with a countersuit against the regulator in court. The matter was finally settled with "Broker X" receiving a reduced $2.9 million fine and penalty from the NFA in September. However, the "Bank X" was notified that there are other companies and banks that are transferring funds via credit cards to trade forex. Certain bank policies now follows a continuation of anti-forex actions which are currently being checked by the regulatory agencies of certain countries where these companies and/or brokers are operating.

So what does this mean to investors and traders alike? To have proper due diligence with companies, brokers and banks that they intend to deal with. And ask the right questions, where full transparency would not only be appreciated but to the extent that investors would now be more vigilant in choosing which of the financial instruments best suits them with the right institution. And this is on top of knowing how to properly cover trade positions that are open and learn to level-off the playing field in trading the foreign currency market.

Resource Data from and Due Diligence

Bank for International Settlements

US SEC Regulatory Agencies:
Legal & Capital Requirements for Market Makers / brokers / others

Commodity Futures Trading Commision CFTC
National Futures Association

Other regulatory agencies outside of the US not listed