"Did you hear how badly our options desk's done..."
One of the first things I was taught when I joined the market was to always be careful about what I said in public.
...Talking of brokerage
Cantors versus Tullets
Careless talk costs jobs
Citi joins the FICC club
Bob Hope and no hope
After I wrote last week about RBS shutting down its FX prop trading desk, a couple of readers were swift to point out the irony in the timing of the decision. The desk’s closure came just before the majors finally broke free of the tight range that had constricted them for much of the last six months.
Whenever the market moves, many participants, analysts and observers scratch their heads and look for the reasons why. Various theories have taken hold to explain this latest bout of dollar weakness, some plausible, some ludicrous. What is clear is that the FX market has always had a bogey man to blame if rates move or stay still. In the old days, it may have been ‘the Russian’. In the days of intervention, the Bundesbank (Buba) or Bank of Japan were often cited. “Buba’s on the bid,” was a refrain that often did the rounds. Negara, the Malaysian central bank, was another name that got the market all hot and bothered.
Today, it seems any move, or for that matter non-move, is blamed on China. Ask dealers why the market is not moving, and many will casually claim China is playing around with option barriers and using its muscle to defend a range. Ask them why euro/dollar finally broke above 1.30 last week and you are likely to hear that it’s either because China decided it didn’t want to defend the 1.2950 barrier of the 1.26/1.2950 double no touch option it was long of, or perhaps even because it was starting to diversify its reserves.
The truth is, very few people really know for sure. I’ve yet to find someone who actually sees China’s spot business. So its influence is either over-stated or the People’s Republic is superb at covering its tracks. Ultimately, whether or not China was the catalyst that got the market moving is irrelevant. Most traders are simply grateful that there is some action.
As we move into December, the question is will the volatility last? The market is full of hope, but, as the old saying goes, there are only two hopes: Bob Hope and no hope. The spike in implied volatility looks like nothing more than that; a tick up in what is an established downtrend.
Another rumour doing the rounds is that it’s been a bad year for FX-focused hedge funds and many are facing big redemptions before the end of the year. Only some swift profit generation will save them. But talking to hedge fund sector specialists suggests the merchants of doom and gloom may well be disappointed, because only a few large redemptions are actually on the cards. My betting is that the market will shut up shop as soon as it can, like it always does, and enjoy the festive season.
I heard a funny story this week of how one well-known consultant told an audience at a recent conference that there was no electronic trading of FX options. Sure, the majority of business is still channelled through the voice brokers, who continue to play a key role in price discovery and liquidity sourcing, but electronic options definitely very much exist, as readers of Euromoney will be fully aware. Several banks make options available to clients on their portals; Volbroker is apparently going well and, as I wrote recently, Reuters has re-entered the fray.
I hear that although Reuters Matching for FX Options has only had a soft launch, it is doing relatively well. Whether or not it can crack into the majors remains to be seen. However, Reuters had the sense to include six emerging market currencies on the system, as well as adding straight-through processing capability. The success of the system is likely to be very dependent on cost. I hear that brokerage on emerging market options can be as high as $100 per million dollars of notional traded. Reuters is charging a flat rate of $10 on all currencies. It’s going to be an interesting battle. Talking of brokerage...
Banks hate paying it, brokers hate cutting it. When it comes to commission levels, nothing has changed. But with ever-decreasing spreads, it is inevitable that the banks are looking at their explicit trading costs. I know of two top-10 Euromoney banks that now have a specialist brokerage negotiator in place. These are set up as a cost centre, judged on how much they can get their overall brokerage bill down, and they are looking at how much they pay across assets to leverage bigger discounts from their bookies.
Of course, the brokers will readily complain that their commissions have been cut to the bone. They should remember that the next time they splash out on a yacht and send it immediately for refurbishment, as I hear the head at one shop has done. It reminds me of an old mate who had an Aston Martin with a sticker in the back saying: “My other car’s a Porsche.” And indeed it was, but he used to turn up for golf days in his wife’s Fiat Tipo so as not to annoy his clients.
The out-of-court settlement over a staff poaching spat in Singapore between Cantor Fitzgerald and Tullet Prebon garnered a few column inches in the press. I heard a couple of weeks ago that the court transcripts were hilarious. So far, I’ve not been able to get my hands on them to verify if this is true, but I hear that one broker’s testimony resembled something out of the film Jerry Maguire. The film’s taglines included: “Everybody loved him, everybody disappeared,” as well as: “Show me the money!”
Careless talk costs jobs
One of the first things I was taught when I joined the market back in the days when more currencies were pegged than floating was to always be careful about what I said in public. It’s a lesson the younger generation should remember.
I got a phone call from an old colleague who was sitting next to a couple of young traders from a major FX player on a recent flight back to London from a European city I won’t disclose. These two muppets spent the entire journey loudly discussing the bank’s performance this year. When I called the institution to ask if it really had only made 60% of its budget in FX options, I got the standard “no comment” response. I also got a “thank you” for disclosing how I had managed to get the figures, plus another couple of tasty titbits I’m saving up for a later date. I understand a memo has been circulated.
News that Citi is at long last going to try and break down its rigid silos will surely get the rest of the market worried, assuming of course that the beast of global banking can actually pull it all together and form its fixed income, currencies and commodities (FICC) group.
For the moment, it seems that most people in Citi don’t really know what the outcome will be – you could almost joke that they are being a little bit FICC about it, but that is pretty weak, even by my standards. It seems that people in the institution have different interpretations of what it all means, and their views depend very much on which business area they are located in. I have heard the reorganisation described as a reverse take-over by the emerging market group of the traditional trading areas. Not surprisingly, contacts in both the fixed income and currency areas downplay this.
As well as potentially leading to synergies, such as the rolling out of common trading platforms and risk-management technology, the buzz is that two layers of management are going to disappear. This is very much only a rumour, so I can’t personally give it too high a credibility rating, but I will say it has come from a normally reliable source.