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.

Active Japanese Currency Traders, TFX Activity Soar to New Highs

Posted originally on May 16, 2011 at the Aite Group Blog

The number of active retail FX traders in Japan rose to 643,000, a record high, for the quarter ending in March 2011. The 7.7% increase follows six quarters that each averaged 600,000 active traders. Much of this increased level of activity that took place did so in a quarter that saw a major earthquake and a record low level in USD/JPY (U.S. dollar/yen). As with retail FX’s institutional peers, price volatility attracts retail traders.

But the picture for Japanese brokerages is not too rosy. The level of volume from active over-the-counter (OTC) traders is up 3% from December 2010, but down 26% from last year’s overall level; the overall number of retail FX traders in Japan decreased 171,000 for Q1 2011 to 3.49 million. Gaitame.com, the largest Japanese FX broker, cleaned its books of dormant accounts and lost a large number during Q4 2010 due to a technical mishap — it decreased its account count by 204,000 to 326,000.

The number of registrants with the Financial Futures Association of Japan that offer retail FX has decreased 11%, from 88 firms a year ago to 78 firms today. This consolidation was inevitable given the tough leverage restrictions imposed by the Japanese regulators last year and still pending for this summer.

There are plenty of positives coming from a unique Japanese product for FX traders, called Tokyo FX (TFX). The TFX is an on-exchange product, but Japanese brokers are able to act as market-makers for it. The number of retail TFX traders totaled 327,000 at the end of March 2011, with 20% of them active. The TFX volumes have increased 25% from Q4 2010 and 40% from a year ago. Better yet, TFX account balances average JPY 569,000 (US$7,000) compared to JPY 191,000 (US$2,360) for the average OTC FX account.

Legislative Update: U.S. Banks and Retail Currency Trading

Originally posted on May 13, 2011 at the Aite Group Blog

There is an unusual level of expediency at most regulators over requirements and deadlines imposed by the Dodd-Frank Act. As we approach the July 21 anniversary of this landmark legislation, regulators from seven U.S. regulatory bodies —  CFTC, SEC/FINRA, OCC, FDIC, Federal Reserve, NCUA, and FCA – have an important task ahead: setting up rules for retail currency trading.

Retail FX (also known as Forex) deals with regular people who wish to day-trade the dollar against the euro instead of buying Apple and selling Microsoft. Many financial institutions in the market have not yet realized how popular retail FX is, and could miss an opportunity to influence the rules that will govern the space for the foreseeable future.

The OCC and the FDIC have recently announced rules governing retail FX, and are in the public comment stage. The rules for the OCC, most of which are modeled after the CFTC rules, would go into effect as of

Resistance Is Futile: TradeStation Succumbs to Forex Appeal

Originally posted on April 11, 2011 at the Aite Group Blog

Active trader darling TradeStation (NASDAQ: TRAD) announced today the launch of its TradeStation Forex Inc. subsidiary. Its arrival to Forex continues to solidify the arrival of well-capitalized financial firms into a space dominated by brokers that only offer FX services to a retail public: Deutsche Bank (DBFX, 2006), Citibank (CitiFX Pro, 2007), and TD Ameritrade (thinkorswim, 2009). Interactive Brokers (IB) and Man Financial have offered retail FX since at least 2005, but neither has created a separate entity for it or promoted it actively.

A little perspective about this move by TradeStation is in order. The firm debuted in 1982 at the onset of the trading software revolution, and went public in 1997. TradeStation launched its brokerage business

Strong Yen: Curse or Blessing for Retail FX in Japan?

Posted originally on March 29, 2011 at the Aite Group Blog

A complex yet impressive picture of retail FX traders is emerging from Japan. A recent Aite Group report sizes the retail FX market in Japan at 3.6 million, using data from the country’s Financial Futures Association (FFA) and data compiled from almost 40 medium and large retail FX brokers. An estimated 597,000 traders were considered active during Q4 2010.

The relevance of understanding Japanese active-trader patterns resides on the direct correlation that trading volumes and currency pair preferences have with retail FX broker revenue.

The Wall Street Journal recently reported that as much as US$ 171 billion (30%) of US$570 billion traded daily on USDJPY (dollar/yen) can be attributed to Japanese individuals. Without a doubt, the leverage of 50:1 offered to retail traders on their margin deposits plays a big role on how a large number of small traders can have a sizeable impact on the overall market. By contrast, the leverage used by institutional traders is somewhere between 2:1 and 5:1.

The WSJ article was written around the flash crash of sorts experienced in the dollar-yen market on March 16, taking place shortly after 5 p.m., Eastern time (5 a.m. on March 17, Japan time). This is

The Search for Active Traders: Charles Schwab Acquires OptionsXpress

Posted originally on March 22, 2011 at the Aite Group Blog

OptionsXpress agreed yesterday to an all-stock offer from Charles Schwab, valued at US$1.0 billion. Was this a marriage of convenience, or a case of a target in distressed situation? I’d say probably a little of both.

It was a slightly more than two years ago that TD Ameritrade acquired options powerhouse thinkorswim for US$606 million in cash and stock. This purchase changed the dynamics among the big stock brokerages, and Charles Schwab has now responded in kind.

There is no doubt that optionsXpress is a clear leader in options. A fair amount of growth has relied on picking up clients who subscribe to one of several education and brokerage services offered by