February 18, 2014

I’m taking up a collection to save the endangered FX trader:

A widening probe of the foreign-exchange market is roiling an industry already under pressure to reduce costs as computer platforms displace human traders.

Electronic dealing, which accounted for 66 percent of all currency transactions in 2013 and 20 percent in 2001, will increase to 76 percent within five years, according to Aite Group LLC, a Boston-based consulting firm that reviewed Bank for International Settlements data. About 81 percent of spot trading — the buying and selling of currency for immediate delivery — will be electronic by 2018, Aite said.

The push toward electronic trading probably will lower costs for customers and boost transparency of pricing, according to Cormac Leech, an analyst at Liberum Capital Ltd. in London. It may also squeeze margins for banks, he said.

Human traders have maintained their role in the foreign-exchange market while disappearing in areas such as equities because most trading takes place away from exchanges. That means clients don’t have a central repository showing the flow of completed orders, forcing them to piece together information about the direction of rates from traders and salesmen with knowledge of other clients’ orders. People were also needed because early computerized trading systems weren’t reliable and couldn’t handle larger transactions, according to dealers.

If Cormac Leech in the third paragraph is right, it will be the first time transparency has helped customers as a whole in a financial market. In all other markets, such a transition results in dealers holding less inventory and spreads narrowing but becoming much more brittle – more intra-day volatility. We will see!

It was a positive day for the Canadian preferred share market, with PerpetualDiscounts up 10bp, FixedResets gaining 7bp and DeemedRetractibles winning 11bp. Volatility was minimal. Volume was average.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 0.2001 % 2,415.8
FixedFloater 4.76 % 4.35 % 30,960 17.72 1 -0.1502 % 3,563.8
Floater 3.00 % 3.11 % 53,570 19.40 4 0.2001 % 2,608.4
OpRet 4.61 % -0.30 % 67,536 0.11 3 -0.0256 % 2,687.8
SplitShare 4.87 % 5.01 % 59,885 4.32 5 0.0241 % 3,012.1
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0256 % 2,457.7
Perpetual-Premium 5.67 % 1.45 % 96,759 0.08 12 0.0364 % 2,335.4
Perpetual-Discount 5.55 % 5.64 % 151,194 14.40 26 0.0951 % 2,389.4
FixedReset 4.85 % 3.71 % 211,849 6.49 80 0.0699 % 2,490.9
Deemed-Retractible 5.11 % 4.08 % 161,436 1.69 42 0.1131 % 2,426.8
FloatingReset 2.65 % 2.68 % 162,170 7.10 6 0.1477 % 2,438.4
Performance Highlights
Issue Index Change Notes
PWF.PR.A Floater 1.15 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-02-18
Maturity Price : 19.29
Evaluated at bid price : 19.29
Bid-YTW : 2.73 %
MFC.PR.F FixedReset 1.25 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.70
Bid-YTW : 4.51 %
BAM.PR.X FixedReset 1.34 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-02-18
Maturity Price : 21.19
Evaluated at bid price : 21.19
Bid-YTW : 4.38 %
Volume Highlights
Issue Index Shares
Traded
Notes
RY.PR.Z FixedReset 289,384 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-02-18
Maturity Price : 23.23
Evaluated at bid price : 25.25
Bid-YTW : 3.74 %
MFC.PR.I FixedReset 68,150 Scotia crossed 50,000 at 26.05.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-09-19
Maturity Price : 25.00
Evaluated at bid price : 26.00
Bid-YTW : 3.44 %
NA.PR.S FixedReset 65,946 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-02-18
Maturity Price : 23.19
Evaluated at bid price : 25.12
Bid-YTW : 3.93 %
MFC.PR.E FixedReset 64,875 TD crossed 50,000 at 25.59.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-09-19
Maturity Price : 25.00
Evaluated at bid price : 25.59
Bid-YTW : 3.15 %
ENB.PR.P FixedReset 57,345 Nesbitt crossed 47,300 at 24.10.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-02-18
Maturity Price : 22.79
Evaluated at bid price : 24.04
Bid-YTW : 4.20 %
CU.PR.E Perpetual-Discount 50,640 Scotia crossed 42,600 at 22.90.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-02-18
Maturity Price : 22.52
Evaluated at bid price : 22.90
Bid-YTW : 5.35 %
There were 36 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
BAM.PR.N Perpetual-Discount Quote: 19.90 – 20.10
Spot Rate : 0.2000
Average : 0.1218

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-02-18
Maturity Price : 19.90
Evaluated at bid price : 19.90
Bid-YTW : 6.07 %

PWF.PR.R Perpetual-Discount Quote: 24.55 – 24.75
Spot Rate : 0.2000
Average : 0.1250

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-02-18
Maturity Price : 24.14
Evaluated at bid price : 24.55
Bid-YTW : 5.64 %

BAM.PR.R FixedReset Quote: 25.02 – 25.24
Spot Rate : 0.2200
Average : 0.1579

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-02-18
Maturity Price : 23.51
Evaluated at bid price : 25.02
Bid-YTW : 4.08 %

SLF.PR.D Deemed-Retractible Quote: 21.10 – 21.33
Spot Rate : 0.2300
Average : 0.1704

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.10
Bid-YTW : 6.59 %

CIU.PR.C FixedReset Quote: 20.10 – 20.50
Spot Rate : 0.4000
Average : 0.3471

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-02-18
Maturity Price : 20.10
Evaluated at bid price : 20.10
Bid-YTW : 3.87 %

GWO.PR.M Deemed-Retractible Quote: 25.69 – 25.87
Spot Rate : 0.1800
Average : 0.1309

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-03-31
Maturity Price : 25.25
Evaluated at bid price : 25.69
Bid-YTW : 5.51 %

6 Responses to “February 18, 2014”

  1. GAndreone says:

    The FX collection will be very much appreciated as a supplement to my pref share dividend income. Thanks James.

    What I can tell you is that I started trading on the CME futures exchange during the last 2 years and I have never had a more relatively profitable period in FX during the past 30 years.

    This exchange also offers Options of futures contracts for FX and other commodities. More importantly it provides trade volume information that was never made available by interbank trading. This has made trading currencies much more reliable.

    Bid/Ask spreads on FX have been reduced from 10 to less than .5 pips on most currencies during the past 30 years. This is a great benefit.

  2. jiHymas says:

    Sure, exchange trading means that spreads narrow and it’s easier for retail to play.

    But is that really the purpose of the market? I contend that – usually – exchange trading and greater price transparency will harm the market at the institutional level, and that’s where the economic value of the market lies. I’m not interested in retail’s ability to trade CAD 1-million at a reasonable spread – I’m interested in Imperial Oil’s ability to trade CAD 100-million at a reasonable spread.

    Algorithmic Trading and FX Market Liquidity

    A key question facing FX markets is whether high frequency traders are really increasing the liquidity of FX markets or merely creating a liquidity mirage that dries up when it is needed most. The evidence from the 2007–09 global financial crisis is inconclusive. Following the collapse of Lehman Brothers, some segments of the FX markets were disrupted, but liquidity remained in the spot markets for the major currencies (where high-frequency traders are most active), albeit at much wider spreads. Everyone backed away from market and credit risk, not only high frequency traders. This episode highlights an important point. High-frequency traders engage in market making because it is profitable but are under no requirement to make markets or provide liquidity. Although some banks may behave in the same way, most will make markets for their customers to maintain their reputation and to win other more lucrative business. But few players will take on risks without some reward.

    ‘Patchy’ liquidity in FX a concern for the future:

    A reduction in the number of liquidity providers in foreign exchange is creating an unstable market environment that could put the industry in a dangerous position in the event of another financial crisis, according to senior industry officials who spoke at the FX Week Europe conference in London last week.

    “The issue is not really what [HFT firms are] trying to do, it’s that they might not be there the whole time. I have no problem with that – just don’t call it liquidity. The market has moments when liquidity falls away and comes back again and it’s a lot patchier than it’s been historically. There are fewer market-makers and less risk capital being deployed, and you’re already seeing the consequences in the market. The concern is that in the event of another crisis, my gut tells me it would be unpleasant,” said Kevin Rodgers, global head of foreign exchange at Deutsche Bank in London.

    Don’t get me wrong – I’m all in favour of competition and narrow spreads! But there’s a baby in all that bathwater that is often forgotten about.

  3. GAndreone says:

    Just for you information, in USD.JPY I routinely see $100M not move the market more than 5 to 10 pips. Normal daily traded volume for that pair on the CME exchange is about 120k contracts or $15G.

  4. jiHymas says:

    OK, for intra-main-line currency trades, stick an extra zero on my example.

    And I’m not sure just how relevant CME volume is to my definition of liquidity. I am interested in ‘real money’ trades, where Imperial Oil takes a bunch of its USD money and spends it in Canada in Canadian dollars on Canadian goods, services and takeovers, etc.

    While I don’t have any figures, I suggest that the bulk of CME positions are not ‘real money’ trades. They’re speculative and will be closed out, very often on the same day; and even if the contract itself is settled physically, the guy taking delivery will have another strictly financial operation to offset it.

  5. jiHymas says:

    Don’t get me wrong! I think that as a matter of public policy, exchanges and regulations should do all they can to encourage speculation – or at least not hinder it.

    But the only reason Speculation = Good is because it lowers trading costs for the real money traders.

  6. GAndreone says:

    This link is helpful in determining the amount of speculative versus real money being traded at the CME

    http://www.cmegroup.com/trading/fx/cftc-tff/main.html.

    Please note that the value of a contract varies with the currency. For CAD one contract is $100k.

    The COTS report (this report) is used by reall money traders when making bets in the currency market. The elephant in the room when trading CAD is RBC.

    The average daily volume of CAD at the CME is about 60k contracts or $6G with recent peaks of $12G. I think this is sufficient liquidity but you would know better from your bond trading experience.

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