Top 10 Currency Traders % of overall volume, May 2006 Source: Euromoney FX survey[3] Rank Name % of volume
1 Deutsche Bank 19.26
2 UBS AG 11.86
3 Citigroup 10.39
4 Barclays Capital 6.61
5 Royal Bank of Scotland 6.43
6 Goldman Sachs 5.25
7 HSBC 5.04
8 Bank of America 3.97
9 JPMorgan Chase 3.89
10 Merrill Lynch 3.68
Unlike a stock market, where all participants have access to the same prices, the forex market is divided into levels of access. At the top is the inter-bank market, which is made up of the largest investment banking firms. Within the inter-bank market, spreads, which are the difference between the bid and ask prices, are razor sharp and usually unavailable, and not known to players outside the inner circle. As you descend the levels of access, the difference between the bid and ask prices widens. This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread. The levels of access that make up the forex market are determined by the size of the “line” (the amount of money with which they are trading). The top-tier inter-bank market accounts for 53% of all transactions. After that there are usually smaller investment banks, followed by large multi-national corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail forex market makers. According to Galati and Melvin, “Pension funds, insurance companies, mutual funds, and other institutional investors have played an increasingly important role in financial markets in general, and in FX markets in particular, since the early 2000s.” (2004) In addition, he notes, “Hedge funds have grown markedly over the 2001-2004 period in terms of both number and overall size” Central banks also participate in the forex market to align currencies to their economic needs.
[edit] Banks
The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. A large bank may trade billions of dollars daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, trading for the bank's own account.
Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for small fees. Today, however, much of this business has moved on to more efficient electronic systems, such as EBS (now owned by ICAP), Reuters Dealing 3000 Matching (D2), the Chicago Mercantile Exchange, Bloomberg and TradeBook(R). The broker squawk box lets traders listen in on ongoing interbank trading and is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago.
[edit] Commercial companies
An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants.
[edit] Central banks
National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Milton Friedman argued that the best stabilization strategy would be for central banks to buy when the exchange rate is too low, and to sell when the rate is too high — that is, to trade for a profit based on their more precise information. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.
The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives, however. The combined resources of the market can easily overwhelm any central bank. Several scenarios of this nature were seen in the 1992-93 ERM collapse, and in more recent times in Southeast Asia.
Tuesday, July 24, 2007
Market size and liquidity
The foreign exchange market is unique because of:
its trading volume,
the extreme liquidity of the market,
the large number of, and variety of, traders in the market,
its geographical dispersion,
its long trading hours - 24 hours a day (except on weekends).
the variety of factors that affect exchange rates,
According to the BIS [1], average daily turnover in traditional foreign exchange markets was estimated at $1,880 billion. Daily averages in April for different years, in billions of US dollars, are presented on the chart below:
Global foreign exchange market turnover:
$621 billion
$1.26 trillion in derivatives, ie
$208 billion in outright forwards
$944 billion in forex swaps
$107 billion in FX options.
Exchange-traded forex futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts. Forex futures volume has grown rapidly in recent years, but only accounts for about 7% of the total foreign exchange market volume, according to The Wall Street Journal Europe (5/5/06, p. 20).
Average daily global turnover in traditional foreign exchange market transactions totaled $2.7 trillion in April 2006 according to IFSL estimates based on semi-annual London, New York, Tokyo and Singapore Foreign Exchange Committee data. Overall turnover, including non-traditional foreign exchange derivatives and products traded on exchanges, averaged around $2.9 trillion a day. This was more than ten times the size of the combined daily turnover on all the world’s equity markets. Foreign exchange trading increased by 38% between April 2005 and April 2006 and has more than doubled since 2001. This is largely due to the growing importance of foreign exchange as an asset class and an increase in fund management assets, particularly of hedge funds and pension funds. The diverse selection of execution venues such as internet trading platforms has also made it easier for retail traders to trade in the foreign exchange market. [2]
Because foreign exchange is an OTC market where brokers/dealers negotiate directly with one another, there is no central exchange or clearing house. The biggest geographic trading centre is the UK, primarily London, which according to IFSL estimates has increased its share of global turnover in traditional transactions from 31.3% in April 2004 to 32.4% in April 2006.
The ten most active traders account for almost 73% of trading volume, according to The Wall Street Journal Europe, (2/9/06 p. 20). These large international banks continually provide the market with both bid (buy) and ask (sell) prices. The bid/ask spread is the difference between the price at which a bank or market maker will sell ("ask", or "offer") and the price at which a market-maker will buy ("bid") from a wholesale customer. This spread is minimal for actively traded pairs of currencies, usually only 0-3 pips. For example, the bid/ask quote of EUR/USD might be 1.2200/1.2203. Minimum trading size for most deals is usually $100,000.
These spreads might not apply to retail customers at banks, which will routinely mark up the difference to say 1.2100 / 1.2300 for transfers, or say 1.2000 / 1.2400 for banknotes or travelers' checks. Spot prices at market makers vary, but on EUR/USD are usually no more than 3 pips wide (i.e. 0.0003). Competition has greatly increased with pip spreads shrinking on the major pairs to as little as 1 to 2 pips.
its trading volume,
the extreme liquidity of the market,
the large number of, and variety of, traders in the market,
its geographical dispersion,
its long trading hours - 24 hours a day (except on weekends).
the variety of factors that affect exchange rates,
According to the BIS [1], average daily turnover in traditional foreign exchange markets was estimated at $1,880 billion. Daily averages in April for different years, in billions of US dollars, are presented on the chart below:
Global foreign exchange market turnover:
$621 billion
$1.26 trillion in derivatives, ie
$208 billion in outright forwards
$944 billion in forex swaps
$107 billion in FX options.
Exchange-traded forex futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts. Forex futures volume has grown rapidly in recent years, but only accounts for about 7% of the total foreign exchange market volume, according to The Wall Street Journal Europe (5/5/06, p. 20).
Average daily global turnover in traditional foreign exchange market transactions totaled $2.7 trillion in April 2006 according to IFSL estimates based on semi-annual London, New York, Tokyo and Singapore Foreign Exchange Committee data. Overall turnover, including non-traditional foreign exchange derivatives and products traded on exchanges, averaged around $2.9 trillion a day. This was more than ten times the size of the combined daily turnover on all the world’s equity markets. Foreign exchange trading increased by 38% between April 2005 and April 2006 and has more than doubled since 2001. This is largely due to the growing importance of foreign exchange as an asset class and an increase in fund management assets, particularly of hedge funds and pension funds. The diverse selection of execution venues such as internet trading platforms has also made it easier for retail traders to trade in the foreign exchange market. [2]
Because foreign exchange is an OTC market where brokers/dealers negotiate directly with one another, there is no central exchange or clearing house. The biggest geographic trading centre is the UK, primarily London, which according to IFSL estimates has increased its share of global turnover in traditional transactions from 31.3% in April 2004 to 32.4% in April 2006.
The ten most active traders account for almost 73% of trading volume, according to The Wall Street Journal Europe, (2/9/06 p. 20). These large international banks continually provide the market with both bid (buy) and ask (sell) prices. The bid/ask spread is the difference between the price at which a bank or market maker will sell ("ask", or "offer") and the price at which a market-maker will buy ("bid") from a wholesale customer. This spread is minimal for actively traded pairs of currencies, usually only 0-3 pips. For example, the bid/ask quote of EUR/USD might be 1.2200/1.2203. Minimum trading size for most deals is usually $100,000.
These spreads might not apply to retail customers at banks, which will routinely mark up the difference to say 1.2100 / 1.2300 for transfers, or say 1.2000 / 1.2400 for banknotes or travelers' checks. Spot prices at market makers vary, but on EUR/USD are usually no more than 3 pips wide (i.e. 0.0003). Competition has greatly increased with pip spreads shrinking on the major pairs to as little as 1 to 2 pips.
Thursday, July 12, 2007
Friday, July 6, 2007
Thursday, July 5, 2007
Pound Targets 2.0200 as BoE Hikes
By DailyFX - As expected the Bank of England hiked its overnight rate by 25bp to 5.75% expanding its interest...
... rate advantage against the dollar, euro and the yen, but in its post rate hike statement the UK central bank tempered its hawkishness by noting that, CPI inflation is likely to continue to fall back to around the 2% target in the course of this year.
Still the MPC members left the possibility of further rate hikes
on table by stating that, Credit and broad money continue to grow
rapidly. The pace of expansion of the world economy remains
robust .Although pay pressures remain muted, the margin of spare
capacity in businesses appears limited and most indicators of pricing
pressure remain elevated.
From the wording of the statement it is clear that UK central bankers
continue to be concerned about the double digit growth of the countrys
M3 money supply and will remain vigilant in containing further credit
expansion. Therefore, while for the time being the BoE appears to be
sidelined, chances are good that it will raise rates once again to 6%
level before the years end and this theme should provide support for
the pound against the other majors over the next several months.
In the near term the currency could come under some profit taking
pressure in a classic buy the rumor sell the news dynamic. Indeed, the
unit had a very hard time breaking above the 2.0200 barrier in the
aftermath of the release and was actually pulled lower right after the
news before rebounding smartly. Whether it can clear the 2.0200 level
and head higher from here, will depend in large part on US data in the
next two days.
If both ISM services and the NFP miss their targets the pound could
well catapult higher, zeroing in on the 2.0500 figure. If US economy
show material signs of slowdown, the pound will effectively become the
only show in town for speculative capital seeking to capture ever
increasing yields. If on the other hand, the market sees some positive
news out of the US docket, cable could come in for a round of profit
taking as traders will reason that BoE will stand down for at least
several months in a row before implementing further rate hikes.
Nevertheless, the pivotal 2.000 level which only a short while ago was
considered to be resistance in the pair, will now become support as
relative growth and relative interest rate differentials make cable the
magnet of speculative order flow in the currency market for the time
being.
DailyFX Research Team
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: research@dailyfx.com
FXCM, L.L.C.® assumes no responsibility for errors, inaccuracies or
omissions in these materials. FXCM, L.L.C.® does not warrant the
accuracy or completeness of the information, text, graphics, links or
other items contained within these materials. FXCM, L.L.C.® shall not be
liable for any special, indirect, incidental, or consequential damages,
including without limitation losses, lost revenues, or lost profits that
may result from these materials. Opinions and estimates constitute our
judgment and are subject to change without notice. Past performance is
not indicative of future results
... rate advantage against the dollar, euro and the yen, but in its post rate hike statement the UK central bank tempered its hawkishness by noting that, CPI inflation is likely to continue to fall back to around the 2% target in the course of this year.
Still the MPC members left the possibility of further rate hikes
on table by stating that, Credit and broad money continue to grow
rapidly. The pace of expansion of the world economy remains
robust .Although pay pressures remain muted, the margin of spare
capacity in businesses appears limited and most indicators of pricing
pressure remain elevated.
From the wording of the statement it is clear that UK central bankers
continue to be concerned about the double digit growth of the countrys
M3 money supply and will remain vigilant in containing further credit
expansion. Therefore, while for the time being the BoE appears to be
sidelined, chances are good that it will raise rates once again to 6%
level before the years end and this theme should provide support for
the pound against the other majors over the next several months.
In the near term the currency could come under some profit taking
pressure in a classic buy the rumor sell the news dynamic. Indeed, the
unit had a very hard time breaking above the 2.0200 barrier in the
aftermath of the release and was actually pulled lower right after the
news before rebounding smartly. Whether it can clear the 2.0200 level
and head higher from here, will depend in large part on US data in the
next two days.
If both ISM services and the NFP miss their targets the pound could
well catapult higher, zeroing in on the 2.0500 figure. If US economy
show material signs of slowdown, the pound will effectively become the
only show in town for speculative capital seeking to capture ever
increasing yields. If on the other hand, the market sees some positive
news out of the US docket, cable could come in for a round of profit
taking as traders will reason that BoE will stand down for at least
several months in a row before implementing further rate hikes.
Nevertheless, the pivotal 2.000 level which only a short while ago was
considered to be resistance in the pair, will now become support as
relative growth and relative interest rate differentials make cable the
magnet of speculative order flow in the currency market for the time
being.
DailyFX Research Team
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: research@dailyfx.com
FXCM, L.L.C.® assumes no responsibility for errors, inaccuracies or
omissions in these materials. FXCM, L.L.C.® does not warrant the
accuracy or completeness of the information, text, graphics, links or
other items contained within these materials. FXCM, L.L.C.® shall not be
liable for any special, indirect, incidental, or consequential damages,
including without limitation losses, lost revenues, or lost profits that
may result from these materials. Opinions and estimates constitute our
judgment and are subject to change without notice. Past performance is
not indicative of future results
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