Data Trends for Investment Professionals


Finally: A comprehensive, global FX volume database

There is a paradigm change towards increased transparency in the currency market.  CLS has just published the first true global foreign exchange (FX) volume database.  Commercially available for the first time via Quandl, this database is the most accurate, most comprehensive and timeliest gauge of currency trading volume ever published.  CLS’ new FX volume data has been described by one of our customers as “the missing link”.  This post explains why.

The Challenge of FX Trading

FX is one of the hardest markets from which to profit.  Currencies are incredibly volatile and masquerade as normally distributed only to pop violently in the wake of major market events. “Impossible” 5-sigma moves are not uncommon, even in major currency pairs – as highlighted by the Brexit announcement.

Other than the infamous carry trade, which tempts traders with consistent, low volatility returns while leaving them short event risk, there are no risk premiums on offer from FX.  No inherent beta means investors work hard for profits while contending with the impact of intermittent interest rate moves from central banks. More than perhaps any other market in the world, currency markets are driven by positioning and liquidity and speculation.

Furthermore, currency traders labor under a marked information disadvantage compared to their counterparts in the equity and fixed income worlds.  The entirely over-the-counter global forex market is vast, fragmented and opaque.  There are no centralized exchanges where FX trades.  As a result, while quoted currency prices are easily observable, executed currency volumes are not.

FX Volume Peaks - September 2016
EURUSD, USDJPY, NZDUSD and USDSGD volumes peaked at 3:00PM on September 6. Eight hourly spot volume (USD billions) in September 2016 by currency pair, with one line for each day in the month. Source: CLS Analytics

“Volume Confirms Price”

This makes trading FX more difficult.  Stock traders take volume data for granted and leverage it to the maximum.  Price can reveal where the market is moving, but only volume can tell how significant the move is.  At the simplest level, “volume confirms price”: rising volume at the start of a trend suggests the trend will continue, while flat or falling volume suggests the trend will reverse. Trading with price but no volume data is like driving with a compass but no speedometer: you know the direction you’re going, but you have no idea how much ground you’ve covered.

Apart from trading, volume is also essential to judging market liquidity, transaction costs, and portfolio risk.  It’s impossible to estimate the capacity of a strategy, or the friction for a transaction, or the speed and cost to liquidate a position, without knowing the volume profile of the underlying market.  Many strategies, portfolios and algorithms that price well on paper fail when volume is entered into the equation.

Currency traders have devised a number of mechanisms to cope with the scarcity of reliable FX volume data.  It’s possible to estimate FX transaction volumes using various proxies: currency futures, currency ETFs, short-term rate hedges like libor futures and so on.  It’s also possible to gauge the “real” final demand for various currencies, based on trade patterns and balance of payments data.  Central banks and public companies are obliged to publish their holdings and activities, albeit with a lag.  Putting all these sources of information together, many currency traders have built their own currency volume datasets.

Now there’s a better way.

CLS FX to the Rescue

Formed by a consortium of the leading FX banks, brokers and dealers in the world, CLS is the world’s largest provider of multi-currency transaction settlement services.  Every day, CLS settles approximately $5 trillion USD of payment instructions relating to underlying FX trades across 18 currencies.  This gives them unparalleled visibility into the actual executed currency market (not just the quoted market); a unique position that is reflected in their unique data.

This is a game-changer; the missing link.  Now, for the first time, currency traders have access to the same spectrum of information, tools and techniques that stock and bond traders have long taken for granted.  Quandl has three databases on offer: hourly, daily, and monthly volume data for 18 currencies and 33 pairs. The data is aggregated by hour and trade instrument (spot, swap, outright forward) for each currency pair.

We are excited to see what innovations the markets can deliver, armed with this new currency volume data. In the meantime, check out this alternative data in action post that demonstrates the power of volume FX data.