The U.S. Active Trader Market: Report Preview

The following is a short excerpt from an Active Trader report to be published on the week of February 27.  

One of the most revealing findings in the Aite Group investor survey was the high percentage of Americans holding financial assets who trade securities online. At the highest level, Aite Group partitions U.S. households as: 

• Traders: 54% are individuals who “trade or have traded online”
• Future traders: 24% are investors who “don’t trade now but would like to learn to do so”
• Passive investors: 22% are investors who “don’t trade now and don’t intend do so in the future”

Additionally, the trader group is split into four segments: active investors, active traders, more frequent traders (MFTs), and inactive traders:

• Active investors: Place one to 35 trades per year
• Active traders: Place from 36 to 120 trades per year
• More frequent traders (MFTs): Place more than 120 trades per year; this segment alone is responsible for more than 90% of retail trades placed
• Inactive traders: Reported being traders, but did not place trades in 2011 

Figure 1: The U.S. Investor and Trader Market by Activity Level, 2011 

Japanese Retail FX Update: Life After Leverage Reduction

Trading activity in the Japanese retail FX market remains remarkably resilient despite two rounds of leverage reduction. The estimated US$ 71 billion in daily trading volume of December 2011 is just shy of the US$75 billion daily volume seen three years earlier. The August 2010 FX margin policy change raised the maximum leverage to 50:1 from levels as high as 700:1; while the August 2011 cut took the maximum leverage to a mere 25:1—this present rate is well below the 50:1 maximum leverage in the United States and 200:1 common leverage offered in the U.K.

Figure 1: Japan: Retail FX Daily Volume

Copy Trading and the Three Pillars of the Wealth Management Business

Stagnation in the revenue creation capabilities of wealth management firms has developed a fertile soil for new ideas to come forth. Yet, signs of demand-saturation in new products (like those seen in new ETF issuance) suggest that wealth management trends have to be discovered and acted upon earlier and earlier in their life cycles.

Copy trading  is one emerging financial service holding promise because it improves the outlook of all three pillars of wealth management (asset gathering, trading volume, and fees), particularly during this period of low yields and uncertain economic conditions. There is no clear leader in the copy-trading space, but there are a handful of technology specialists in a race for scale, looking for institutional partners to grow their unique brand of copy trading. Aite Group anticipates that this will be the year when copy trading will make serious inroads into retail investing. 

TRADING VOLUME MULTIPLIER

The challenge of meeting a huge demand for safe investment vehicles

Anyone who has noticed how bond demand since 1Q 2007 has kept the U.S. retirement fund industry its asset acquisition in the black will understand that retail investors have not stopped clamoring for safe trading/investment instruments. A similar move is afoot in the ETF world, where bond ETFs now comprise 14% of all ETF assets – up from 5% at the end of 2006. 

Wait a minute, are we not entering a growth stage that should favor stock demand? I have discussed in other blog entries how macro events are setting the stage for continued investor concern, but there is one new element that threatens for this negative spiral of investor confidence to continue. Banks, the traditional creators of financial instruments, are understandably in bunker mentality.

Yes, the Volker rule, stagnation in OTC derivatives regulations, ring-fencing plans in the UK, (out-of-touch) high-frequency trading/short-sell-bans rules from ESMA, and new rounds of bank recapitalization requirements seem to be having a bit of an impact on bank trading ops (JP Morgan, Goldman Sachs, etc).

A proposal to generate back jobs and $3.5 trillion in lost wealth

The past five years have given policymakers and regulators the chance to implement traditional and extraordinary policy options. The worst outcome appears to have been averted, but we are in a path that is unsustainable whether or not we continue to reduce the size of the government or tax the rich, as some desire. Perhaps it’s time to consider policies that are more sensitive to the pain of American investors - and which could indirectly help in job creation.

$3.5 trillion. This is the approximate amount U.S. households lost from 2005 to 2009 even after getting unprecedented help from the U.S. Federal government. 

Capital markets are in disarray and will yet get messier before a clearer picture emerges. I’ve stated in previous writings that the biggest problem we are confronting is a messy and highly interconnected capital markets. The subprime mortgage crisis leading to a credit crisis is a notable example of this problem.

The job creating engines are stuck in the mud and will remain so until the current system breaks down and leaves policymakers/industry no choice but to replace it with something. That collapse appears too-close-for-comfort, but why not take this time to focus our energy on rebuilding a smarter set of policies that foster sustainable economic and job growth?

Capital Markets Vortex Calling: Anyone Home?

I use the term legisgulator as proxy for “legislator and regulator”, but also perhaps because it has a nice guttural ring to it. Legisgulators are modern-day emperors unable to appreciate their nakedness or, in other words, unable to see that their well-meaning rulemaking is, to put it bluntly, worthless.   

If my attention grabber intro has not been too intense for your sense of convention, you might yet extract value out of this irreverent article.

Legisgulators on both sides of the Atlantic are busy dotting the Is and crossing the Ts on derivatives regulations, oblivious to a vortex of collapsing capital markets headed their (our) way. This peculiar crowd firmly believes in creating its own climate, and historically this has an element of truth – just not today.

Maybe they can only see the tree, not the jungle. Or maybe their inaction highlights another systemic shortcoming, i.e., that the legislative process also needs serious fixing.

MONKEY BUSINESS

Pushing the envelope of the jungle concept I just referred to, I will compare problems in capital markets

Cloud-computing in FX Markets

I am participating in what will be a great opportunity for brokers, banks, and technology firms to become 'less cloudy' on the effects of cloud computing on FX markets. This is a trend I would describe as emerging but beyond the tipping point - in other words, more firms than you think are already using it but not many talk about it. Register for this event HERE:

Date: 6th December 2011 

Time: 2.00pm GMT 

Cloud-computing stands to democratise the foreign exchange industry by introducing a shared resource model, which advances the fundamental economics of trading these markets. Combined with a regulatory environment predicated on reducing systemic risk and increasing transparency, and the game looks set to change for the incumbent providers of foreign exchange liquidity. This webinar will act as a forum to debate the implications of cloud-based trading technology on the microstructure of the FX market. Panellist will discuss the application of cloud-computing in foreign exchange from new business opportunities, impact on liquidity, risk management and transparency, as well as meeting prudential requirements under incoming Dodd-Frank, Emir and Mifid II. 

Discussion points 

- What is cloud computing? 

- What impact does cloud computing have on the microstructure of the foreign exchange market i.e. on trading and liquidity? 

- How will it affect the profitability of banks and their market-making activities? 

- Could cloud computing spell the end of single bank platforms? 

- Is regulation going to have a significant unnatural change on the structure of the market? 

- What role does cloud-computing play in managing systemic risk and price transparency? 

Speakers Include 

Moderator: Saima Farooqi, Executive Editor, FX Week 

Javier Paz, senior analyst, AITE GROUP 

Harpal Sandhu, Chief Executive Officer, Integral 

IBFX bites the dust, acquired by Monex (JP)

Interbank FX (IBFX) has been acquired by Monex, a mid-sized Japanese broker which has been active acquiring assets to enhance its global footprint. In April 2011, it bought TradeStation and it is through TradeStation that it seems to carry out this merger. 

The combination of Monex, TradeStation, and IBFX under the same roof is powerful and makes the group a force to be reckoned with. I will discuss more about the combined firm in a later blog entry, but I wanted to focus on why this great company went up for sale, and relatively cheaply.

I've known for months that IBFX was up for sale, but it was not an outcome CEO Todd Crosland was

The short but absurd tale of three investors

I wrote this in a moment of levity.. which is my way of coping with increasingly surreal capital markets. I interact with central bank/government personnel on a regular basis, so there is no policy-maker bashing agenda!

The short but absurd tale of three investors*  

“It was rumored that three major investors had fled the markets and taken refuge in the mountains, carrying with them untold amounts of liquidity which was dearly missed. Word got around that these investors were hiding in a cave, so seven notable central bank chiefs went to see what they could do to persuade the missing trio to come out and make the world whole again.

Huddled in the dark, cold cave, the investors became better acquainted. One of them was there because he was afraid of deflation and sick of getting skinned – so he cashed in all his blue chips and bought U.S., Japanese, and German bonds. “Funny,” another one said. “I am here because I am afraid of inflation and utter chaos just around the corner. So I cashed in my stocks and bonds, bought all the gold I could get… and this shovel—to dig out more of the shiny stuff.” The third investor was embarrassed. Always a follower of the latest trend, he had followed the two other investors into the cave but didn’t know he was supposed to sell all his stocks or buy a shovel.

Outside of the cave, the seven central bankers exchanged theories of how to get the investors out. Afraid of being perceived as agreeing with one of its cross-oceanic peers, the first central banker proposed to the group: “What these guys need is someone to show them that annual inflation will be below, but close to 2.1%. Zhat’s the key”–Revealing a slight accent.

Dodd-Frank FX Deadline Costly to SEC Firms

Posted originally on July 1, 2011 at the Aite Group Blog

Dodd-Frank has opened a door to U.S. banks to offer retail currency trading (aka FX or Forex) as of July 22, 2011, but is about to close that same door to U.S. securities firms. Although theoretically securities firms will still be able to offer FX, the Securities and Exchange Commission is not likely to pass retail FX rules by the July 15 deadline to prevent its registrants from being shut out of FX, a lucrative business with significant growth potential.

Some firms affected by this likely SEC inaction include Charles Schwab, T.D. Ameritrade, E*Trade, and Interactive Brokers. As of July 16, only a dozen or so CFTC-registered FX dealers and Citibank (the only registered bank for now) will be able to offer retail FX to clients. To our knowledge, CFTC-registered futures commodity merchants (FCMs) not registered as a retail foreign exchange dealer (RFED) will also have to stop offering retail FX.