The BIS report says that strong growth in turnover appeared to be underpinned by two related factors. First, the presence of clear trends and higher volatility in foreign exchange markets between 2001 and 2004 led to momentum trading, where investors took large positions in currencies that followed persistent appreciating trends. These trends also induced an increase in hedging activity, which further supported trading volumes.

Second, interest differentials encouraged so-called “carry trading”, ie investments in high interest rate currencies financed by short positions in low interest rate currencies, if the target currencies, like the Australian dollar, tended to appreciate against the funding currencies, like the US dollar. Such strategies fed back into prices and supported the persistence of trends in exchange rates. In addition, in the context of a global search for yield, so-called “real money managers” and leveraged investors became increasingly interested in foreign exchange as an asset class alternative to equity and fixed income. These factors dominated other forces that contributed to the decline in trading activity between 1998 and 2001 – consolidation in the banking sector, the growth of electronic broking and international concentration in the corporate sector – which continue to have an impact today.

Source: BIS

London research company ClientKnowledge, says that electronic transactions represent a growing proportion of all trades, including more than half of client volumes rising to more than 75% by 2010. The technology infrastructure needed to enable and support those trades is now fundamentally interlinked with the infrastructure needed to support and render profitable non-electronically transacted trades.

ClientKnowledge says that there has been a substantial shift from the real money management sector to the leveraged/highly active sector including hedge funds.

Leveraged/highly active investors and client banks were the two largest segments in 2005, with a respective share of 38% and 37% of daily FX traded volumes.

ClientKnowledge also says that Irish tech company Cognotec and Reuters through the acquisition of AVT, are the leading FX technology suppliers.

Cognotec - a leader in FX e-commerce

Briain Maccaba, who worked as an economist at the Confederation of Irish Industry in the 1980's, founded Cognotec in 1991.

The firm has about 140 of its 200 strong payroll based in Dublin.

The company had revenues of $28.1 million in 2005 and made a profit of $3.7 million. It expects revenues of over $40 million in 2006.

Cognotec says that online dealing has meant trading volumes have migrated to the bigger global players much more quickly than anticipated. Greenwich Associates found that Citigroup, UBS and Deutsche Bank together earn 30% of the total revenues from the top 30 banks globally. In addition, Cognotec experienced online trading volumes increase by 128% over the last year. As a result, formulating a customer-lead technical strategy for the dealing operation has emerged as a priority for many banks.

Every trading institution is now forced to decide where, and at what cost, it can reach its customers. The number of foreign exchange distribution channels is rising. Along with multi-bank platform FXall other initiatives have emerged, such as HotspotFXi and Currenex's sell-side play.

For a number of smaller enterprises 'White Labeling' - where a leading market-making bank distributes its technology to a smaller bank downstream which then brands the product as its own - can offer an answer. Cognotec says that large dealing operations which haven't yet formulated a white label strategy need to do so quickly - this is a market that will be saturated quickly as the pressure on smaller institutions increases.

Last May, Cognotec announced the launch of its new, next generation solutions platform, Cognotec RealStream^TM. Based on new, leading-edge technology, the first phase of Cognotec RealStream presents Cognotec RealStream-Margin, an integrated web-based solution designed for banks looking to target the increasing growth in flows originating from investors actively trading FX as an asset class.

Cognotec is targeting the top 100 banks in the world, which it has divided into three categories. Contracts with so-called ‘tier one’ banks can be worth more than $20 million over three years, tier two deals are worth about $10 million and tier three are worth up to $5 million.

Briain Maccaba told Finfacts that the company will have revenues of $100 million before contemplating an IPO.

Maccaba welcomed the Government's recent announcement that the State will invest up to €3.8 billion in R&D in the period to 2013.

"We've been unable to produce scalable tech companies because of the lack of depth in scientific research. A comparable country like Israel, has over 70 companies on Nadsaq," he said.