6 Responses to “February 18, 2014”

1. GAndreone says:

   February 18, 2014 at 10:03 pm

   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:

   February 19, 2014 at 2:48 am

   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:

   February 19, 2014 at 9:18 am

   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:

   February 20, 2014 at 1:04 am

   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:

   February 21, 2014 at 2:58 am

   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:

   February 23, 2014 at 9:11 am

   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.