Forex trading shrinks sharply in dismal end to 2013 A slump in foreign exchange spot trading deepened at the end of 2013 despite greater clarity on US monetary policy, with investors unwilling to take fresh risks at the end of a punishing year. Average daily trading volumes at ICAP, the world's biggest interdealer broker, fell to $71bn in December, a 23 per cent drop from the same month in 2012 and the lowest level since ICAP bought its currency trading business EBS in 2006. The figures mark the end of a dismal year for currency investors, who cashed in on the yen's rapid depreciation in the first half of the year but saw their profits wiped out when they misread the Fed's intentions on the timing of "tapering" its asset purchases. Many "systematic" currency hedge funds had been suffering ever since the launch of quantitative easing, which broke down the previous correlations between asset classes and rendered their models ineffective. FX Concepts, once the world's biggest currency hedge fund, collapsed in the autumn. But discretionary funds were also wrongfooted by the Fed's decision in September to delay tapering, as were several leading banks, which reported big drops in fixed income and foreign exchange revenues in the third quarter. With uncertainties exacerbated by October's US government shutdown, many investors chose to sit on the sidelines until the situation became clearer. "Volumes were strong January-May when investors were confident that they were catching the FX wave, and then pulled back big time after June when tapering did not play out as expected and other asset markets were more reliable," said Steven Englander, strategist at Citigroup, though he had observed some "bursts of enthusiasm" among investors at the end of the year. The forex market has also been afflicted by the continuing probe into suspected manipulation of benchmark rates, which has led to the suspension of a number of senior traders. Some fund managers say the resulting gaps in staffing will force dealing banks to be more conservative in taking risk. ICAP's figures show average daily trading volumes throughout the second half of the year around a fifth lower than in the same months of 2012. Trading volumes on EBS are not necessarily representative of trends in the overall spot market, since EBS has lost ground recently to rival platforms. A spell of low volatility in major currency pairs has also helped banks handle a much bigger proportion of trading in-house. However, figures published by Thomson Reuters for its currency trading business show a similar pattern of busy trading in the first half of 2013 followed by a prolonged slump - albeit a less sharp one. The Chicago Mercantile Exchange has reported more positive trends in its forex derivatives business, where low volatility makes hedging cheaper and retail investors who follow different trends play a bigger role.