Canada is a real laggard in the use electronic trading in foreign exchange markets, despite the growing numbers of retail investors drawn to the business, according to a new report from Greenwich Associates.

Greenwich says that for the first time, “buy side” foreign currency traders in 2006 executed more than half of total global FX trading volume through electronic trading systems. “The increase in electronic forex trading activity over the past 12 months has been nothing short of remarkable,” says Greenwich Associates consultant Peter D’Amario. “In 2005, e-trading systems captured less than 30% of total reported global FX trading volumes.”

Every year, Greenwich Associates interviews approximately 3,000 users of foreign exchange around the world about their trading practices; 1,600 of them are classified as “top tier” due to their size, trading volumes and overall importance in the market. Among “top tier” users, the proportion of companies and institutions using e-trading systems jumped from 44% to 53% between 2005 and 2006. At the same time, the total e-trading volume generated by respondents more than doubled from a reported level of US$17 trillion to over US$35 trillion in 2006.

The increasing use of electronic trading in foreign exchange is not only improving the fortunes of the many competing e-trading platforms, it is also contributing to the meaningful growth of the global FX market (global FX trading volume increased by approximately 17% from 2005 to 2006). As Greenwich Associates consultant Giovanni Carriere explains, “Electronic trading systems encourage volume growth by making currency transactions easier and cheaper, by aggregating and increasing liquidity, and by extending market access to investors that otherwise would not be able to participate — especially retail investors.”

In last year’s report on the foreign exchange market, Greenwich Associates predicted that the benefits of e-trading would entice hold outs to experiment with electronic trading. Indeed, it found that the proportion stating that they have no plans to ever trade FX electronically dropped to 36% in 2006 from 43% the prior year. “These results suggest an important shift in attitudes toward e-trading,” says Greenwich Associates consultant Frank Feenstra. “For several years, the FX market was essentially evenly split between e-traders and abstainers. This year it seems the tide has turned — users that in the past have spurned e-trading systems are becoming converts.”

And, e-trading is taking an increasing share of FX volume. In 2005, users of e-trading systems told Greenwich Associates they executed 53% of their total foreign exchange trading volume through e-trading systems. In 2006, that share jumped to 60%, and e-traders say they expect to be conducting 63% of their total FX trading business electronically in 12 months’ time.

E-trading systems have achieved their highest levels of penetration in Europe, where 60% of FX users now trade electronically. Half of FX users in North America trade electronically, but that average number spans a deep divide between the practices of U.S. and Canadian users, it found — 61% of FX users in the US trade currency electronically, as compared with only 22% of those in Canada. Trailing North America in e-trading adoption is Asia, where only 41% of FX users trade electronically. Here too, however, the regional average encompasses wide variation. In Japan, for example, only about a third of FX users trade electronically. In the rest of Asia, that share is 50%, and the data suggest that this gap will only widen in coming years.

Trade flows generated by retail investors are making up a growing share of the global FX market — a phenomenon made possible by the newly pervasive reach of electronic trading platforms. Greenwich Associates research suggests that retail trade volumes appear to be growing steadily, as indicated by the growth in volumes of retail aggregators and other financial institutions. Retail trading flows to the global market through “retail aggregators” — companies that extend market access to retail traders — and bank retail networks. Both businesses reach their retail customers and transact their trades primarily through electronic systems. As D’Amario explains, “One of the reasons that FX trading volumes have grown so rapidly and so consistently over the past several years is that new technology has allowed an entirely new customer base to enter the market — for better or for worse.”