e-FOREX Magazine October 2008

Foreword

Foreign Exchange (FX) is the most powerful market in the world. But this is no news. According to the BIS survey one may conclude that the total turnover in global foreign exchange markets is more than 6 times larger than trading in U.S. Treasury bonds and 30 times greater than trading on the New York Stock Exchange (take a look into my last report within e-FOREX 6/2008). Just as a reminder to new readers of this column, the estimated daily traded FX volume is some US$ 3,500 bn a day (6/2008). read more

Leader

Once upon a time, retail forex was the wild child of financial markets. It existed on the fringe of the financial markets, and was plagued by insolvency and fraud. That was then. Now, regulation of the industry in most major markets is rigorous: retail forex firms today are subject to lengthy audits covering everything from capitalization to marketing practices. In fact, retail forex today is actually one of the better regulated -- and more transparent -- financial markets in the world. read more

Marketplace

Has e-FX reached a level of maturity, or is this just an interim level of growth? While the recent turbulence in the global markets enabled stress testing of e-FX systems, it has also provided a better idea of what issues next generation e-FX systems need to address. read more

Features

The desire to electronically trade Non-Deliverable Forwards has really increased in recent years. This has been greatly facilitated by the bilateral Master Confirmation Agreement for Non-Deliverable Forward FX Transactions, which not only provides participants with the legal framework within which they operate but also underpins the business processes and rules to which automated trading systems must adhere. read more

With increasing interest in emerging market currencies, the use of NDFs is set to grow. Frances Maguire finds out if automation will follow for these over the counter instruments read more

FX Mythbusters

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Algorithmic FX Trading

In recent years, the FX market has witnessed the emergence of a new trend in electronic trading: algorithmic trading strategies designed to capture execution opportunities in increasingly automated and fragmented marketplace. This article examines the changing market reality in the FX market, assessing the potential for growth in adoption of FX algorithmic trading, as well as identifying possible pitfalls. read more

ClientKnowledge research among some 600 real money and leveraged investors in the summer of 2008 showed a significant switch away from algorithmic fund management approaches, and away from pure FX alpha funds towards overlay programs (see Fig 1). At a time when banks are running scared of poorly understood exposures, how can this be the time to advocate more algos in sell-side dealing rooms? read more

In the early 90s, had you suggested to an FX spot broker that his job could - and might - be replaced by a machine, or you told a spot trader that he or she could buy or sell currencies instantly, at the touch of a button, at an amount and price pre-screened for credit and displayed on a computer screen, you would have been told in no uncertain terms that ‘a computer can’t buy you a beer’. Or, put another way, that machines would never replicate the essential element of personal relationships that determined what prices were offered by the traditional ‘sell side’ banks and brokers to their ‘buy side’ customers. read more

Two trends conspire to challenge established technologies used by banks, hedge funds and any institution trading actively in financial markets, including foreign exchange. The first is the increasing speed with which computers make algorithmic trading decisions, quote and trade; the second is globalization meaning that traders must transact on multiple ECNs, exchanges and other venues. These ECNs are dispersed across major trading centers including London, New York, Chicago and Tokyo. ‘Distance latency’, the time taken for a message to travel between trading centers, is an increasing issue for traders but is governed by an immutable constant – the speed of light. read more

Standards

Broker-dealers have provided equity trading algorithms for their clients for some time now. However, many of the algorithms developed for equity trading such as VWAP, TWAP and Implementation Shortfall are ill-suited for Foreign Exchange (FX). The FX markets are too fragmented and the execution methods of FX are very dissimilar to those of the equity markets. As a result, the growth of FX algorithms made available by broker-dealers and banks has lagged behind those accessible in the equity space. read more

FOCUSFOCUS on Liquidity Management - key perspectives on aggregation and discovery

Liquidity Management, as it relates to financial services companies, is a topic that has received a growing of attention in recent months. New reports, from TABB, AITE, Financial Insights and ClientKnowledge, examine Liquidity Management solutions being considered by various institutions and document some of the early adopters in the marketplace. These reports discuss the explosive growth of interest in this area and describe an overall approach to Liquidity Management in the context of managing transaction flows and cash positions throughout the enterprise. read more

The FX market has changed considerably since the advent of electronic trading. While such a development has been clearly beneficial to the market and all its participants by instilling more efficiency into the process, reducing operational risk and allowing for greater volumes to be traded, it has opened a Pandora’s Box in terms of liquidity. read more

Liquidity aggregation has become a vitally important trading tool for buy-side FX firms. The decentralised, segmented and over-the-counter nature of the FX market means that liquidity has always been dispersed but in the last ten years the number of sources from where liquidity can be sourced has increased enormously. Consequently the importance of liquidity aggregation solutions – tools that enable FX traders to view all of the various sources of liquidity on one screen – has increased accordingly. This has obviously led to an increase in the number of solutions being developed and made available to buy-side firms. read more

New Release

"Very user friendly but very sophisticated," is how Udi Sela, currently Pre Sales Director at SuperDerivatives describes its options pricing product, SD-FX. We tend to agree. With the release of its FX Next Generation version SuperDerivatives has once again shown its exceptional ability to respond to customer demand for new product features. read more

Retail Forex Client

Retail FX is proving to be a massive draw for banks, brokers and financial institutions. These businesses are eager to benefit from the growing retail FX market, which has recently seen tremendous growth. Yet, getting into this specialist area using in-house technology and knowledge is not as easy as many first thought; the answer for many is White Labelling. read more

Are exchange traded FX currency products set for new growth? Frances Maguire looks at what investment strategies exchange-traded currency futures and options offer retail investors looking to diversify and enhance their trading strategies. read more

Product Review

We review Kontrol, the JDFX new back-end risk management software aimed primarily at the Retail FX broker; And ITP, it’s Institutional Trading Platform. e-FOREX spent over a week at the JDFX offices located in central Zurich evaluating their software and IT infrastructure. read more

Tradertalk

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e-Forex Interview

With, Greg Michalowski, Vice President Chief Currency and Market Analyst at FXDD, a privately held New York based Forex broker capitalized in excess of all regulatory requirements. Founded in 2002, FXDD is partly owned by Tradition, the largest inter dealer broker in Continental Europe and the third largest worldwide. read more