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Foreign Exchange

Can’t believe you wanna leave

It’s been a mixed week for the new kids on the block, FXMarketSpace – the 50/50 joint venture between Reuters and the CME. “The first centrally cleared, global foreign exchange platform for the over-the-counter market,” as it likes to proclaim itself, announced on Tuesday that it has received its authorisation from the UK’s Financial Services Authority as an alternative trading system.

It also trumpeted that it had successfully completed its testing programme for customers, which included a bout of live trading.

So, all appears to be well at the nascent platform as it readies itself for its expected imminent launch. However, the day before it posted the good news, FXMS’s chief operating officer Bryan Hunter suddenly left the firm. The reasons why are as yet unknown, but sources at the company say his departure came as a major surprise.

Hunter was one of FXMarketSpace’s management triumvirate, along with Rick Sears and Mark Robson. Like Sears, Hunter came over to the company from the CME, where he had been a director of its FX business. Prior to the CME, Hunter had worked in the cash market for several major institutions. One well-placed source described the Hunter and Sears combination as being like Jagger and Richards, which makes his sudden exit even more surprising.

So far I haven’t heard anything officially from FXMS about why he left. I managed to get in touch with Sears in Miami on Thursday, where he had flown for the day to attend a board meeting even though he was interrupting a family holiday in Austria. “He’s no longer with the firm and we wish him well in his future pursuits,” was Sears’ only comment. No doubt more will come out in due course.

Tell me what’s funny

A few years ago when I was working for the now defunct BridgeNews, better remembered as Knight Ridder to those in the FX market, one of my colleagues in the US insisted that a story he’d written be filed with the dateline “Airforce One” on it. Journalists are a funny bunch. By that I mean funny peculiar, rather than funny ha-ha.

The level of intellect in most news rooms is extremely high – perhaps higher than that found on even the largest trading floors, even if the latter are increasingly filled up with pointy-heads.

And yet journalism is a relatively poorly remunerated “profession”. It’s my and my far more successful wife’s former careers in the FX market that fund our lifestyle today, not my salary as a scribe. Money can’t be the motivator for most journalists. Many, and most of my Euromoney colleagues fall into this category, genuinely love writing; others, such as the former US colleague I mentioned above, are driven by ego.

Anyway, this week’s column comes to you from France where I’m meant to be skiing with my family. Where we go is a quaint village that has a bit of a resort tacked on to the back of it. It’s nothing like Verbier or any of the other popular resorts. If the market’s been strange this week, I reckon it will be because half the London FX community is in Verbier taking advantage of the UK school half-term holidays.

My European readers will be aware that this year’s ski season has been pretty disastrous. Much has been made of the impact of global warming, which I’m sure exists but which I can’t help but feel is being just a little bit overstated.

My wife, who used to trade FX options, once theorized that there is only so much volatility in the world. Her view was if one asset was having a bit of an old wang, dang, doodle, then another would be doing nothing. We gave my wife the nickname Annie Dotal, because her views based on anecdotal evidence were invariably right. So if any of my pointy-head readers have any proof that Annie’s theory is correct, could they please give me a shout.

Slippin’ and slidin’

Sticking with theories about finite amounts of something, I wonder if there is a fixed amount of precipitation in the world. It is unusual but not unknown for there to be no snow in my little village in France. A local told me that back in 1963 it did not snow at all; in the UK, in contrast, that was one of the severest winters on record.

This year, the snow out west in North America has apparently been superb, but it’s been dire, so I hear, on the East Coast. When the votes come in for the Euromoney FX Poll, I’m going to try to analyse if this has had an impact. For instance, UBS has taken clients for years to a Swiss resort called Scoul at the end of each January. The lack of snow there this year prompted me to ask what they did when they got there. Were they locked in a room and forced to vote in the poll? Did they get slaughtered, as we would have done in my day? More likely they all had a BlackBerry fest and tried to sound important. The most doubtful likelihood is that they sat around “discussing the markets and enjoying the beauty and hospitality Scoul has to offer,” as one UBS contact suggested, with her tongue firmly in her cheek no doubt.

In contrast, the 30 or so clients Deutsche took to Beaver Creek in the US had, so I hear, plenty of snow to amuse themselves in. My man says that the poll was mentioned only once and no pressure was put on them to cast their votes for the Teutonic powerhouse. Glad to hear that everything remained above board. I’d expect nothing less.

He got what he wanted

A couple of weeks ago I was asked by Euromoney stable mate Global Investor to moderate a couple of panels at its FX Masterclass in London. The negotiations went along these lines.

“Which panels will you moderate?”

“Anything but the one on rates and monetary policy. I know next to nothing about macroeconomics.”

So guess what? My day started with an attempt to steer a discussion between three excellent economists. One of them, Marc Chandler from Brown Brothers Harriman, did his best to help me it by destroying the stage backdrop before the start. Actually, I do have to say they were all very gentle to me and I also have to thank all the banks who send me macro research on a regular basis. I swotted up on the train to London and I think I just about got away with it.

The rest of the day was good fun. Some strident views were expressed on Kazakhstan in the panel on emerging markets – I do believe that an expletive beginning with ‘f’ was uttered by one delegate who views the country as an “effing basket case.” Others disagreed.

The last panel was on best execution. There was a consensus, as I reported last year, that execution in FX is generally excellent but that the dealing on a fixing rate is stupid, especially for big amounts. Apparently, it’s consultants who have advised the buy side to deal on fixes, giving them the opportunity to abrogate their responsibility to achieve best execution and hide behind a benchmark.

I don't know what you've got but it’s got me

While we’re on the subject of consultants, I was sent an interesting report this week by Celent, a consultancy company that I actually do respect. Written by Axel Pierron and entitled Electronic Platforms in Foreign Exchange Trading, the report summarizes nicely some of the latest trends in the market, including growth rates, market participants, algorithmic trading, technology and whether or not the future is multi-asset, as many believe it is.

Pierron concludes his report by stating that Celent believes the market will continue to grow. “We expect the market to reach $4 trillion by 2009–2010 due to the interest from new market participants and new opportunities in terms of currency pairs,” he says.

He adds: “Changes are coming from the buy side. The importance of new market participants on the buy side and their ability to improve and generate liquidity is blowing the wind of change in FX markets. The segregation of the market between interdealer and dealer-to-client is already being attacked, with the two major interdealer platforms breaching the wall to attract these profitable new customers. The question to ask is not whether the FX market will adopt an exchange model, but when.”

On this last point, I’m really not so sure. If you had asked me a year ago, I would have agreed. I recently did some consultancy work examining what the buy side wants and I was amazed at how much many more traditional firms focus on explicit trading costs rather than implicit. Therefore, the desire to market make is not there in the same way it might be in other markets, such as equities. This may be because of the difference in spreads. In FX they are wafer thin and slippage may be more important than saving a tick.

Of course, for the high-frequency guys price-making is a major issue. The impact these traders have had on the FX market cannot be underestimated. But they are only a portion of the market, not its whole. I hear that the banks are making an effort to capture and even regain business directly. One hedge fund contact says that they are actually making it difficult for him to trade on multibank portals. He is now in the process of reconnecting to several single-bank portals and aggregating the prices himself.

An exchange is obviously a multibank platform that charges its users to deal. This suits some players, but not all. At the end of 2005, Ian O’Flaherty, global head of e-commerce for currencies at Deutsche Bank, likened the electronic market to a pendulum that swung between the buy and sell side. At the moment, I reckon it’s swinging back to the sell side and I’m looking for odds that the market will not have moved to an exchange within the next decade.



People moves

This week...JP Morgan prop trading team jumps ship...available to euromoney subscribers


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  Lee Oliver can be contacted at fx@euromoney.com.           


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