Electronic foreign exchange trading volume has doubled in each of the past two years, far outstripping overall FX trading volume growth, according to a new report from Greenwich Associates.

This latest research by consulting firmGreenwich Associates finds that overall FX volume grew by about 25% from 2003 to 2004, driven by corporate hedging, banks and hedge funds, in response to U.S. dollar fluctuations, global political uncertainties, and rising commodities prices. Yet electronic FX volume more than doubled from US$7 trillion in 2003 to almost US$16 trillion in 2004. In particular, sharp increases in bank e-trading volumes helped drive the growth.

Greenwich reports that electronic trading’s biggest draw has been its speed, efficiency, and convenience, as opposed to better pricing. It notes that the FX market remains split between enthusiastic electronic traders and those that don’t trade electronically at all. Most FX users that have not yet traded electronically tell Greenwich that they simply see no compelling reason to change the way they trade.

However, Greenwich suggests that the cost-benefit calculations of these e-trading holdouts could change radically if the main interbank FX trading system (known as EBS Prime) successfully expands into the wider market. “In its current incarnation, many FX users see the benefits of e-trading as simply not worth the risk of losing direct contact with salespeople from whom they receive market color and other valuable information,” says Greenwich Associates consultant Peter D’Amario. “In addition, some users do not feel that the benefits of e-trading outweigh the costs of getting started with the technology. But that analysis could change dramatically if suddenly users were granted access to an electronic system that promised to provide even more liquidity and tighter spreads.”

The firm adds that it remains to be seen if the business models of the market’s niche providers will be strong enough to withstand the expansion of EBS Prime, assuming the company is able to convince its bank consortium to continue to provide liquidity to the system. “If the inter-bank system is able to execute its expansion plans, its extension into the customer side of the business will have profound implications for these service providers, and indeed for FX as a whole,” says Greenwich’s Tim Sangston.