A surge in currency trading earlier this year and favourable regulatory treatment of the foreign exchange business have unleashed an intense fight on Wall Street, with banks battling one another for a larger share of an increasingly fractured market. Volatility in major currencies has created opportunities for Wall Street banks to make money facilitating client trades. In recent months, Bank of America, Goldman Sachs, Morgan Stanley and other banks that historically had smaller foreign exchange businesses than major rivals have stepped up efforts to gain market share, according to traders, recruiters and other people familiar with the business. They are taking on Deutsche Bank, Citigroup, Barclays and JPMorgan Chase, which have long dominated currency trading. Smaller firms like BTIG, Newedge, FXCM and Gain Capital Holdings have further fragmented the market. Competition is particularly intense among banks because the foreign exchange sector is under fewer new regulations than other areas of trading, like derivatives or corporate bonds. That means banks can fund currency trading with less capital than they need for other businesses. “This is one of those products that looks good to regulators and looks good to shareholders and looks good from a capital perspective,” said George Kuznetsov, head of research and analytics at consulting firm Coalition. Trading volumes in major currencies rose in the first half of the year, supported by a massive monetary easing program in Japan and expectations that the US Federal Reserve will start pulling back from its bond-buying program. Such central bank moves spurred companies to hedge their currency risks, industry sources say. A slowdown in fast-growing markets like China and Brazil also affected currencies, with particular ripple effects on resource-rich Australia. With the prospect of less demand for raw materials from emerging economies, the Australian dollar has dropped to lows against the US dollar not seen since 2010. Average daily trading volume in major currencies jumped to US$5.6 trillion in June, a record, up 15 per cent from US$4.9 trillion in May, according to CLS Bank, which operates the largest foreign exchange settlement system. Volumes have declined in recent weeks, but the competition remains fierce. “There’s a very low barrier of entry to this game,” said one senior foreign-exchange executive at a major bank. “Just Google how you would send money overseas - you’d find a number of FX providers that probably didn’t exist 10 years ago.” Although policy moves and favourable capital treatment have turned currency trading into a bright spot for banks, the business is far from lucrative. A broker typically earns just fractions of a cent for every dollar’s worth of a trade, and banks have been cutting prices to gain market share. Foreign exchange contributed just 8 per cent of fixed-income revenue at the top global investment banks last year, down from 36 per cent in 2008, according to Coalition. While the first half of this year was a good one for Wall Street, foreign-exchange volumes are down 24 per cent so far in the third quarter, Barclays analysts said in a note on Tuesday. Yet, for many banks, foreign exchange trading is an alluring business if only because new regulations are making other businesses unviable. Under international capital rules designed to ensure banks have enough capital to cushion against losses, foreign exchange is treated as less risky than other fixed-income businesses. That is because assets involved in foreign exchange trading are essentially cash, said Coalition’s Kuznetsov. Even Swiss bank UBS, which pulled back from most fixed-income trading businesses to conserve capital, opted to stick with currency trading. Michael Karp, chief executive of the Options Group, an executive search and consulting firm, said that while banks are cutting staff in many fixed-income trading areas, foreign exchange “is the one place where banks are expanding and looking to get back in action.” Since last year, big banks have been snapping up executives from competitors to bolster their foreign-exchange trading businesses. In the spring, Bank of America hired Jim Coulton and Babak Eftekhari from Goldman Sachs to take on senior forex trading roles. JPMorgan in May hired Ron Karpovich, an architect of cross-border payment systems at Royal Bank of Scotland Group, to build out its software for payments by corporations in foreign currencies. Morgan Stanley hired Giovanni Pillitteri late last year from Citigroup as head of FX electronic trading. Matthew Miller, co-founder of consulting firm Shift Forex, said he has been getting a lot of calls from recruiters and clients asking if he can suggest candidates for foreign-exchange positions at big banks. “They all seem to have a need for people, whether on the retail side or the institutional side,” he said. The industry has also spent millions of dollars developing and marketing new foreign-exchange trading technology software in recent years, Miller said, with development costs ranging from US$50,000 for a small platform to US$500,000 or more for larger ones. “People have made significant investments in technology,” said Troy Rohrbaugh, JPMorgan’s global head of interest rates, foreign exchange and public finance.