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Michelsen, Saxo Bank: saw surging volumes in December |
Foreign exchange is a market that has long confused players in other assets. And despite its acceptance as an asset, the way it behaves has remained an enigma to many. For much of 2006, FX has seemingly defied logic. What has been particularly striking is the fact that even though the market seemed mired in narrow ranges, with implied volatilities in the majors posting record lows on a regular basis, volumes have not only held up but even continued to grow. When the majors did finally break out of narrow ranges towards the end of November, the market reacted spectacularly. There was no huge gap in levels, which might have been mildly disappointing to those struggling to make their 2006 budgets, but there was a massive surge in volumes across the board.
Not surprisingly then, several trading venues reported record levels of activity. For EBS, November was the busiest month it has ever had, and as the company’s chief executive, Jack Jeffery, points out, what takes place on its screens is a fair reflection of what is happening in the broader market.
EBS says a total of $210 billion traded on its screens on November 22 and that its daily average across the month was $151 billion. Similarly, CME says that its FX volume was 38% higher in November than in the same month in 2005. Daily turnover climbed to 508,000 contracts, worth $62.7 billion a day in notional terms, and the exchange reported that open interest, one of the best gauges of a market’s health, had also climbed to record levels.
CME reports that activity remained high into December, and for the first time in its history it traded more than a million contracts in a single day. On December 8 more than 1.25 million lots with a notional value of $157.8 billion changed hands. Although some of this volume was undoubtedly driven by calendar rolls, it easily surpassed the previous high of 892,000 contracts posted on June 13 2006.
Eric Michelsen, vice-chief executive at Saxo Bank, agrees that activity has remained high. He adds that the surge has been driven by both institutional and retail clients. According to Michelsen, volume started to noticeably pick up in the days leading up to the majors’ break-out. Saxo Bank reported a record level of activity on December 1, when it traded more than $25 billion for the first time in its comparatively short history. Michelsen says that by mid-December, Saxo’s daily December volumes were around a third more than they had been in November.
Market players, especially those operating trading venues, wonder whether the current levels of activity are sustainable. The indications appear to suggest that they are, unless the market becomes completely stagnant again. Even then, the way fresh participants have flocked to it suggests that growth in FX volumes might well prove structural rather than cyclical. As Michelsen points out, Saxo cut the spread on its euro/dollar and dollar/Swiss franc quotes to its retail clients at the start of December and the impact was immediate, with both new customers signing up to deal and old ones re-emerging. It seems that if the trading venues deliver the services clients want, the clients will come. The trick will be to keep them there once they have arrived.
