Truely a $5 trillion market?

First post after introduction.

Out of curiosity, the babypips school said it’s a $5 trillion market for Forex. Is that $5 trillion the total leverage? or it is the true dollar amount from each trader/bank/company?

For example, if average a day leverage 100:1 then Forex has $50 billion transaction? or it is really truly $5 trillion transaction?

Anyone ever thought about that question?


It is the daily turnover which is why forex is the largest and most liquid financial market. Don’t get confused by leverage your forex broker gives you.

The most recent comprehensive survey of the worldwide foreign exchange market was done in Apirl 2013 by the Bank for International Settlements (BIS). Their Triennial Survey (performed every 3 years) generates the “bible” of worldwide foreign exchange metrics.

The BIS reported that worldwide foreign exchange turnover (volume) averaged [B]5.3 trillion USD per day[/B] during the month of April 2013.

There will be another Triennial Survey conducted in April 2016, with the results of that survey released in September 2016. In the meantime, however, the BIS periodically estimates changes in the Survey metrics. The most recent estimate — that I am aware of — puts the daily average FX turnover at around [B]$5 trillion,[/B] down somewhat from the April 2013 Survey total.

So, what does that $5 trillion represent? And is it real money, or a “leveraged” figure?

Every 3 years, the BIS surveys over 50 of the world’s central banks (e.g., the U.S. Federal Reserve System, the Bank of England, the European Central Bank, the Bank of Japan, etc.), and those central banks provide the FX turnover figures for their respective nations.

The turnover (volume) figures provided by the central banks (to the BIS) were gathered from the major commercial and investment banks in their countries, and those commercial and investment banks handle foreign currency transactions [B]in cash.[/B]

Transactions between banks — and between banks and other very large financial entities — are cash transactions, not leveraged transactions. This includes transactions between retail spot forex brokers and their liquidity providers (banks).

Here’s an example. A retail forex broker extends leverage to a retail customer, but the offsetting position taken upstream by that broker with one of their banks is a [B]cash position[/B] for the full notional amount of the customer’s leveraged trade. This cash position becomes part of the turnover figure reported by that bank.

So, the major commercial and investment banks around the world report their [B]cash FX turnover[/B] (volume) to their respective central banks, and those central banks transmit all that data to the BIS. The BIS then makes adjustments to the [B]gross data[/B] to remove local and cross-border double-counting, and reports the aggregate total as “net-net” worldwide foreign exchange turnover.

The $5.3 trillion figure reported in 2013 (which is now estimated to be closer to $5 trillion) is the world’s current net-net daily (cash) foreign exchange turnover.

For more on the 2013 Triennial Survey, refer to this post —

There is a link in that post to the entire 2013 Triennial Central Bank Survey, as well as a link to another post in which [I]gross turnover, net-gross turnover,[/I] and [I]net-net turnover[/I] are explained.

Clint, keep in mind that the BIS figure includes a large proportion of swaps and forwards. They are based on credit, thus can be considered leveraged transactions, albeit not in the way we think about it in retail trading. You also can’t really think of them in cash terms as they are agreements to do exchanges sometimes well into the future. Thus, you and I may do a swap transaction today for $1bln, but that $1bln wouldn’t actually change hands today. It could take years for it to fully happen, and actually the final $ value of the agreement could end up being substantially different than the initial notional value.

And any time you start thinking about these derivatives you run into issues of notional vs. real economic value. We saw that with the CDS market.

Good point, John.

I’ll have to refine my answer to the OP.

Where have you been hiding out, by the way? — Haven’t heard from you for a loooong time.

Do you think the 2016 figure will be below the 2013 figure? I am not really keeping up that much with stats on daily turnover etc and focus more on my little contribution to the $5T+ daily turnover :). Would this be the first decrease since they kept tracking this?

Just asking Clint as you seem to have the data in front of you (no need to do the research on my behalf if you do not have it, I can do that)

Been hiding out in Jolly Old England working on my PhD researching retail forex trader performance, believe it or not. :slight_smile:

Hello, Rambo

No, I don’t expect a decline in total worldwide turnover.

In a moment, I’ll crunch some numbers, and show you why I think that.

But first, click on THIS LINK to download the [B]BIS Quarterly Review for December 2013[/B] (a little over a year ago), which had a pretty comprehensive review of the FX market at year-end 2013, in light of the 2013 BIS Triennial Survey.

Scroll to page 27 of the Quarterly Review, and fasten your seatbelt. The following 14 pages are pretty heavy-duty reading for folks who are not banking professionals.

Okay, now for some number-crunching —

From 2004 to 2007 (pre-financial crisis), worldwide FX turnover increased by about [B]69%.[/B]

From 2007 to 2010, (post-financial crisis), turnover increased by about [B]20%.[/B]

From 2010 to 2013, turnover increased by about [B]35%.[/B]

All of these increases were [I]distorted[/I] by special conditions and circumstances.

The 2004-2007 period was the blow-off phase of the bubble in financial derivatives, and the extraordinary growth in FX turnover during that period is widely believed to be a part of that bubble.

The 2007-2010 period, by contrast, was a period of depressed growth in financial derivatives, as the world economy struggled to recover from the collapse of the financial bubble.

And the 2010-2013 period was skewed by a special circumstance, as well. The period end-point (April 2013) happened to be the highest-volume month on record, following policy changes enacted by the Bank of Japan in early April 2013. If FX turnover had been measured in February or March 2013, instead of April, the worldwide net-net turnover figure likely would have been lower than $5.3 trillion, possibly substantially lower.

So, how to determine a [I]multi-year trend[/I] in worldwide FX turnover?

Just to throw some numbers at the wall, and see what sticks —

If we discount a chuck of the 69% increase from 2004 to 2007, to compensate for the financial bubble, maybe the gain in that period would have been reported as 50% instead.

And if we add a kicker to the 20% increase from 2007 to 2010, to compensate for the seriously depressed world financial situation, maybe the gain in that period would have been reported as 35%, or thereabouts.

And, finally, if we discount some of the 35% increase from 2010 to 2013, to remove the “Japanese effect” from April 2013 and the months immediately following, maybe the gain in that period would have been reported as only 25%, give or take.

So, if these manipulations of the numbers bear any relation to reality, then maybe there is a continuing upward trend in FX volumes — which, nevertheless, is slowing.

If we accept the worldwide turnover reported by the BIS in 2004 — $1.97 trillion, and then we apply the “adjusted” percentage increases imagined above, we get:

2004 — $1.97 trillion

2007 — $2.96 trillion — up 50% from 2004

2010 — $3.99 trillion — up 35% from 2007

2013 — $4.99 trillion — up 25% from 2010

And finally, extrapolating that series into 2016, we might guess that the 2013 to 2016 period will see a volume increase of 15%-20%, which would translate into a reported FX turnover for April 2016 of $5.73 trillion - $5.98 trillion.

All of the above is pure guesswork — just a thought-experiment. Don’t give it any credence. If the world economy recovers and begins to boom between now and April 2016, the foreign exchange market might be going like gang-busters. And it might eclipse that $5.98 trillion guesstimate by a wide margin.

Wow. Congratulations, John.

So, in the near future, we’ll be addressing you as [I]Dr. Forman.[/I]

After you’ve reached that milestone, I hope you’ll still be able to spend some time here with us.

Yeah, I’m sure I’ll be more active in the future. I’ll have to think about whether I should change my username. Dr. Rhody? Dr. Trader? :33:

Welcome to the crazy world of trading and you’re in the right school to get started, good luck.
On the Five trillion, yup, its for real…

Forex is a trillion dollar business; thousands of multi billion dollar companies trade the market 24 hours a day; personally I even thought the market was more than $5 trillion.