Sharp currency moves and a dollar slump have prompted many retail investors to turn to foreign exchange to yield returns in troubled markets.

The world's largest banks are looking for a wider margin than the razor thin spreads available from interbank trade.

Volumes in foreign exchange trading are huge, averaging around $3.2 trillion per day, according to the Bank for International Settlements; but the overwhelming majority of this trade is carried out by banks and brokerages.

The sharp fall in the dollar -- it fell by 11 percent against the yen between August and November -- has provided valuable trading opportunities for embattled investment banks to generate returns.

One of the biggest players in forex trading, Citi, a top three player in the FX market, announced last week that it was teaming up with Copenhagen-based online trading bank Saxo to offer its clients currency trading.

The retail FX market is expanding rapidly and offers banks the benefit of diversifying their FX flows, said Sanjay Madgavkar, Global Head of FX Margin trading at Citi in New York. Considering the growth potential and the opportunity to create a new set of client relationships, entering this space was very attractive for us.

SOARING REVENUES

Lars Christensen, co-chief executive of Saxo Bank, the most high profile player in retail foreign exchange, said top-line revenues for August and October were $35-$40 million for each month, about twice the level of the previous year.

Citi's Madgavkar puts the total volume of retail trade at around $100 billion per day.

Deutsche Bank, the biggest player with just under 20 percent of the foreign exchange market according to Euromoney magazine, is aggressively marketing its online DBFX platform.

DBFX uses the technology from the bank's Autobahn platform that was set up for interbank trades and opens up trading to the bank's retail client base.

The plan is to build a multi-product retail platform and we see the growth rate from the retail sector as being much, much more rapid than from institutional clients, said Eric Michelsen, head of online flow retail products at Deutsche.

Goldman Sachs is also set to dip its toe into the retail forex market with the announcement last week of the purchase of a 10 percent stake in CMC Markets, a London-based global foreign exchange and spread-betting company.

However, some think the reputational risks of enabling individual investors who may not be able to afford to lose substantial sums in what are notoriously volatile markets outweigh the possible revenue stream.

Interdealer forex brokerBGC last week said it would not allow investors with less than $1 million in liquid assets to trade FX citing possible reputational risks if vulnerable investors lose large sums.

But these risks can be managed, said Citi's Madgavkar.

We are putting controls in place to make sure that clients are experienced traders and are fully aware of the risks of losses that they could incur.

A slew of forex trading companies in the U.S. have been shut down after hapless investors found that the money they thought they were investing disappeared.

In October, a South Florida court ordered four individuals to pay $1.39 million in compensation and fines for a foreign currency options scam involving 400 individuals.

The latest turn in the case brought the total sum that the company must pay to authorities to more than $20 million and this is just one of many cases pursued by the Commodity Futures Trading Commission.

However with other revenue streams drying up, interest from the world's largest banks is unlikely to diminish any time soon and their involvement is likely to reassure investors who may have heard scare stories, says Christenen at Saxo.

The fact big banks are taking an interest in this space adds credibility and it's making it more and more difficult for the weaker players who don't uphold standards to survive.

(Editing by Ralph Boulton)

Deutsche Bank Citigroup