By Veronica Brown
LONDON, Nov 18 (Reuters) - Turnover growth in London's $1.68 trillion-a-day currency market is expected to have slowed in the six months to October as a consequence of the global financial market turmoil, a Bank of England official said on Tuesday.
London's position as the global hub of currency trading was cemented with figures in April from the Foreign Exchange Joint Standing Committee (JSC) showing a one third rise in daily turnover from the preceding six months.
But Paul Fisher, head of the Bank of England's Foreign Exchange Division and reserves management, said the JSC's next survey detailing October FX turnover figures could show a slowdown because market volatility prompted some liquidity providers such as hedge funds to draw in their horns.
"We're just getting most of the results for the October JSC survey and by all accounts October was an absolutely dreadful month for activity in FX markets," he told delegates at a conference hosted by FX Week in London.
"So it should be very interesting to see just what sort of slowdown we observe in our survey, but until we see the results we just don't know," he added.
Slowing growth in overall FX volumes would contrast with some recent surveys.
Leading FX settlement bank CLS, for example, said the average number of daily FX payment instructions surged to a record high in October, a month characterised by sharp price swings across asset classes as fallout from the global credit crunch mushroomed.
HEDGE FUNDS RETREAT
In recent years, phenomenal growth in global FX volumes has been driven by hedge funds, central banks and other investors adding to liquidity provided by traditional players such as interbank dealers.
Interest among funds in currency as an asset class has boomed, with a proliferation of currency overlay and alpha-generation strategies.
But Fisher said that the pullback of hedge funds was a significant factor, as they are major providers of liquidity across markets including FX. He also said consolidation in the banking sector is a challenge for the FX market.
"The pullback of hedge funds and of retail aspects of sovereign wealth funds, asset management type activities, all those sectors ... could lead to reductions in turnover," he said.
Barclays Capital strategists said in a research note this week that hedge funds have cut positions "very significantly" recently in order to raise much-needed cash.
However, the market might well see a rise in the number of trading platforms or venues as improved technology helps investors to find different ways of trading FX.
Foreign exchange market volatility rose significantly in October, with huge dislocation in all markets causing investors to unwind positions rapidly.
This was most notable in major demand for U.S. dollars, Japanese yen and dollar/yen options contracts. Implied volatility on one-week and one-month dollar/yen currency options spiked to their highest in decades, even surpassing levels seen at the time of the Long Term Capital Management and Russia debt default crises in 1998.
Fisher said an ending of the search for yield, involving the use of low-yielding currencies to fund purchases of higher-return assets, could well see sustained increase in FX market volatility.
"We're no longer going to have that wall of money crushing down onto spreads, crushing down on ranges being traded," he said.
(Editing by David Stamp)