Dramatic growth in trading volumes and a seemingly bottomless well of liquidity are transforming global foreign exchange markets.

According to Greenwich Associates, worldwide foreign exchange trading volume surged 36% from 2006 to 2007, continuing a steady run of double-digit annual growth. Banks and hedge fund managers are increasing their presence in FX as they diversify portfolios with international assets, and the market continues to attract new users, ranging from hyperactive hedge fund traders to a growing cohort of retail investors.

Much of this new business is being facilitated by electronic trading technology, which provides institutional, corporate and retail players alike with instant access to deep pools of liquidity at very low cost.

Globally, hedge funds were the biggest driver of growth in FX trading volumes last year. The amount of forex trading volume generated by hedge funds increased some 180% from 2006 to 2007. While hedge funds accounted for just 11% of global volume in 2006, their share jumped to nearly 20% in 2007.
 
The spread and advancement of algorithmic trading strategies is giving an important boost to hedge fund trading volumes.

“On a global level, hedge funds are, by far, the leading users of algorithmic trading strategies,” said Greenwich consultant Frank Feenstra.