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Foreign Exchange

Slippery slopes

This week, I thought I’d write a slightly different style of column. I have produced more of what I’d call a lifestyle piece after a weekend away skiing with a couple of muckers from Euromoney and two other friends who earn their money legitimately.

Our little team comprised myself, Alex Chambers, Euromoney’s fixed income editor, Chris Hunt – or Chunt as we called him – the publisher of www.euromoney.com, Ben Weinberg from options pricing and risk management vendor SuperDerivatives and the legendary Ron Smith-Galer, the man apparently behind Yoursmineshag.com.

Early bragging rights went to Chambers, who bumped into some ‘billy big dogs’ from the world of credit at Gatwick Airport. They were on their way to Verbier, where half the City seems to go at weekends. Chambers strutted his stuff, revelling in his supposed importance from knowing a few blokes who are eight feet tall when they stand on their wallets. Ron and me were less impressed. “FX is a real business where people have to work hard, so they can’t shoot off willy nilly to the slopes every time there’s some fresh powder. FX is a mature market. It’s not just a case of booking profits now and letting some poor bugger sort the mess out when they learn how to price properly in 10 years’ time,” I argued.

Chambers said my view was narrow-minded and possibly defamatory, so I told him to “poke it.” Ron, who can still menace even at his advanced age, backed me up – so perhaps for the first time since I’ve known him, Chambers shut up. Chunt looked on in bewilderment.

If you like, you could say that our trip was for a bit of team bonding on behalf of Euromoney. In reality, it was more fun than that, even if my two Euromoney colleagues almost didn’t make it back. Both are snowboarders; in other words they are a liability on the slopes. The first to come to grief was Chunt, who fell over – on piste of course – and managed to somehow break a finger and crack his wrist.

Chambers also had an accident, which was potentially far more serious – he fell at least 10 feet off a chair lift. For some reason, he decided to dismount too early. He had booked a couple of private snowboard lessons in a forlorn attempt to try and keep up with me and Ron, who were on good old-fashioned skis. He did improve, but clearly his instructor didn’t manage to impress on him the importance of getting off the lift at the right spot, which we all know as the top. Luckily, he landed on soft snow. The crater he’d made was still there the next day and I almost cried from laughter when I saw it.

I must admit, I was a little worried about what my esteemed editor would say to me when he found out I had crocked one of his key staff and almost brained another. But I didn’t force them to snowboard and I was nowhere near when they had their mishaps. Chunt should still be able to type with his right hand and there’s a good chance Chambers’ copy will improve if he banged his head in the fall. I reckon it should have knocked some sense into him. It can’t have knocked any out.

It was great to catch up with all of Ron’s news, especially about Yoursmineshag.com. He said that the project had fallen slightly behind schedule, but fortunately one of the Kosovan labourers he employs was a bit of a computer whiz kid in a previous life and had sorted out some coding issues. Ron, who got himself a plumber’s qualification when he left the City, also reckons he can utilise his new knowledge to further solve the latency issue. He view is that a pipe is a pipe, whether it’s water or data flowing through it. Ron admitted some potential clients had mentioned that the platform’s name had caused firewall issues, so he is reluctantly considering rebranding. This is a shame, but a good business idea shouldn’t be constrained just because some IT people don’t understand the true meaning of the word “shag”. I wait its launch with bated breath.

                                                                        
EDITOR’S NOTE:
Alex Chambers and Chris Hunt have asked me to point out that Lee Oliver was the only member of the travelling party to miss time on the slopes. He had to retire to his chalet for several hours because of a ‘dicky tummy’ – and as a result of modest alcohol consumption the night before. Chambers has also requested that I inform readers that – having been goaded before the trip that he would end up looking like the Singing Detective because of dry skin and an expected temperature of –20C – it was in fact Lee Oliver’s skin that cracked first, within seconds of leaving the airport.

                                                                        
Carry on trading

Ron and I probably bored the others with tales of what we got up to in the old days on the lira desk at RP Martins. Well, sometimes you do have to blow your own trumpet. I was telling him how carry trading is all the rage. “Nothing new then,” he observed. And he was right. We were pretty good at a simplistic version of it more than 25 years ago. Buying lire and selling Deutschmarks was nearly always a winner, apart from when the lira devalued.

I get the feeling that a firm belief has taken hold in today’s market place. Forget your macro-economics and forget your technical analysis. To make money in FX is easy. You simply buy a higher yielding currency against a low yielding one.

Of course, it’s more complex than that but, as Greg Anderson at ABN Amro pointed out last week, it seems even IMM speculators at the CME are in on the act. “Subtracting longs from shorts gives a net short JPY position of $16.9 billion. This is a record in raw notional terms,” he wrote. He added: “The notional equivalent of the net long GBP position rose to $11.7 billion, which is a record by that measure... But perhaps the best way to look at it is that the IMM is synthetically long GBP-JPY in epic proportions.” In a low volatility environment, how else can people make money? It doesn’t need me to point out that if everyone heads for the door at the same time, it will get ugly, as it did in Iceland and Turkey last year.

Online options – myth or reality

This column has mentioned before that there is a fair amount of electronic dealing of options. Of course, the vast bulk of business is still done through voice brokers or directly between banks over Reuters Dealing. When I wrote a couple of months back that Reuters was relaunching its matching system, there was a degree of scepticism from some quarters about its chances of success, even if the belief that one day the vanilla market will trade electronically generally remains.

I got the chance to look at the platform this week and it looks quite impressive. Of course, it can’t deliver the flexible service that a voice broker can, but it does have some impressive features, which may prove winners if it can start to really attract liquidity. The platform effectively has three main components: straight-forward matching; a five-minute private market for interests, which allows banks to effectively broker each other; and a beefed up conservational dealing that has managed to introduce an STP solution. Previously deals done on Reuters Dealing had to be typed in. The STP functionality will certainly prove attractive because it will significantly reduce ticket processing costs and the rate of exceptions.

Reuters tells me it now has over 100 banks signed up to use the platform and that volumes are steadily growing. Feedback from a handful of my option contacts suggests that its real potential rests in emerging markets and Reuters has been steadily making more of these available. This week it added Turkish lira. Emerging market dealing accounts for around 40% of activity and if the system continues to gain traction, it will put pressure on the voice brokers, especially when it comes to brokerage levels. It’s early days, but recent history has shown that cheaper technological trading solutions can grab liquidity from venues that supposedly offer greater flexibility. Just ask anybody who ever worked on a futures exchange.

Votes for charity

Word reaches me that one bank is offering its clients the chance to have their names put in a hat for a £5,000 cash draw if they simply vote in the Euromoney FX Poll. So what, I hear you shout. Well, the money will be given to the charity of the winner’s choice. The move seems to me far more altruistic than pouring a load of wine down clients’ throats, or taking them skiing, which in the light of this week’s top story may be considered too risky.

I got on to the bank concerned and apparently the idea of a charity draw had been put to me at a lunch I had had with it. I can’t remember, which goes to show just how good the lunch was. I did suggest that they should have provided an excessively over-geared margin account to the winner, giving him or her the chance to turn the £5,000 into more and increasing volumes for next year’s poll. I don’t think the idea was given any more than the one-second thought it deserved. But you never know...

People moves

With bonuses hitting the back of bank accounts, it looks like the transfer window has well and truly opened in the FX market.

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  Lee's biography   

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


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