Overall foreign exchange trading volumes dropped last year, but trading by retail investors is on the rise, according to a new report from Greenwich Associates.

The firm says that global FX volume declined by 6% in 2009, but trading by retail aggregators rose by 16%, pushing their share of trading volume up to 12% from 11% in the previous year.

“With the downturn in equity markets and high levels of volatility among global currencies, FX trading gained popularity among retail investors around the world during the global financial crisis,” it says, noting that the beneficiaries of this trend have been firms that provide execution services to retail traders.

Foreign exchange trading by retail investors is most popular in Japan, the firm reports, where a boom in retail FX trading has given rise to a host of retail aggregators. Collectively, they generated over half of the US$6.4 trillion in FX customer trading volumes in Japan in 2009, up from 27% in 2008. “Although retail trading volumes in Japan fell off considerably with the onset of the global financial crisis, they have since rebounded,” says Greenwich Associates consultant Tim Sangston. “The aggregators that service this retail business have become by far the biggest source of FX trading volume in Japan.”

Greenwich says that these retail aggregators actually generate 28% of all spot trading volume in global FX markets, up from 24% in 2008. “Those numbers indicate that retail aggregators generate some US$375 billion in spot transactions per capita every year — a figure that ranks them among the most active and important accounts in global foreign exchange markets,” says Greenwich Associates consultant Peter D’Amario. “By way of comparison, the typical bank generates about US$75 billion in spot transactions each year.”

This rise in retail FX trading is also attracting increased regulatory scrutiny, Greenwich notes. The U.S. Commodity Futures Trading Commission has issued a proposal that would impose new requirements on retail brokers covering registration, disclosure, record keeping, financial reporting and operational standards; and, most importantly, it would cap the amount of leverage available to retail traders.

IE