Dazed and confused
The FX market must always have a bogeyman. Once upon a time it was ‘the Russian’, later it was Negara. This week, I got a call from a mate who is a fixed-income futures broker, saying that bonds had caught a bid because a UK hedge fund was puking out of its long sterling/yen positions and was about to go bust.
“Another day, another dollar,” is what they used to say, supposedly implying that every day is different in the wonderful world of FX. My experience was that many days were identical. Events this week have left me a little dazed and confused, but one thing I noticed sitting on my perch as an outsider is that sometimes things are still remarkably similar.
The FX market must always have a bogeyman – someone who can be blamed for every sudden move up or down. Once upon a time it was ‘the Russian’, later it was Negara. There have been many others. This week, I got a call from a mate who is a fixed-income futures broker, saying that bonds had caught a bid because a UK hedge fund was puking out of its long sterling/yen positions and was about to go bust.
I rang a couple of contacts.
The first said that one of his credit guys had just asked him if he knew anything about a hedge fund going bust; the next told me the seller and then buyer was a group of Russian banks who seemed to be acting in collusion and bashing various counterparties around. “They did a drive by on UBS and then they picked on the French banks,” is what he said. So the song remains the same. The market moves, people then try and add two and two together and come up with the most plausible reason they can think of. This week, it was about hedge funds doing their cods in carry trading. Next week, it will be something else. But the ‘answer’ will almost certainly still be wrong.
In through the out door
Talking of dazed and confused, I was left baffled by an email Royal Bank of Scotland sent out to some clients about the appointment of its new macro prop team led by Nick Munns.
“This is a highly experienced trading team with an outstanding reputation in the market. The team will take up their full responsibilities once FSA registration has been completed. Please join me in welcoming them to RBS and wishing them every success in their new role,” said the message, written by Steve Ashley, RBS’ head of flow delta trading.
RBS was swift to tell me that the new team was in no way a replacement for Andy “Baldy” Baxter and his gang, which was let go at the end of last November – confusion, part 1. In fact, RBS stressed that the team were not even part of the bank’s FX business – confusion, part 2. Instead, they are going to part of the debt markets line – confusion, part 3.
However, Nick Munns, desk head of RBS’s new non-FX prop team, was definitely considered an FX prop trader when he was at JPMorgan. I hear that he did take short-term interest rate positions – which must be like watching paint dry most of the time – but that hardly makes him a debt trader. Somehow, he appears to have become a debt expert in the short walk from JPM on London Wall to RBS at Bishopsgate. Confusion, part 4.
“Perhaps the recent lament of hedge funds, that asset classes and instruments have become too correlated, has helped the JPM FX guys become fixed-income experts so quickly,” was the cynical response of one of my contacts.
And what exactly is “flow delta trading”? Confusion, part 5. One of my muckers reckons it’s a fancy way of saying: “Piggy-backing client orders.” Not so, says RBS. “Our delta flow trading business is a leading provider of interest-rate risk management solutions to financial institutions, corporations and the public sector,” I was told.
“With our detailed understanding of risk modelling and rates markets, combined with one of the strongest balance sheets and credit ratings in the industry, we are able to help our clients identify and manage their risk exposures, mitigate short-term risks and realise strategic value by providing a ‘one stop’ rates service,” the bank added. There’s a lot of risk in that last sentence without even mentioning FX risk, which it may or may not be managing as well now, even if the new team is part of the debt markets business.
The bank did admit: “The newly appointed team is a macro proprietary trading team that... have (sic) a broad trading remit in global interest rate and currency markets. The new team is unrelated to the FX prop team as explained to you previously.”
I have to wonder if all of this is because of that pesky thing called UK employment law. The rules about getting laid off are: “Redundancy may happen because a work place is closing down, or because fewer employees are (or are expected to be) needed for work of a particular kind. Normally your job must have disappeared. It is not redundancy if your employer immediately takes on a direct replacement for you. But it will not matter if your employer is recruiting more workers for work of a different kind, or in another location.”
Ultimately, my cynicism is obviously misplaced. Anyway, I’d wager that the previous team signed wavers against taking legal action in the three-month window of opportunity it had in return for hefty pay-offs. Still, you can see why I got so confused.
Trampled under foot
Scarcely a week goes by without something cropping up in the increasingly important retail sector. I regularly get emails trumpeting the merits of all the latest bells and whistles added to the most sophisticated platform in existence, ever. It’s a competitive pool, so service providers have to keep coming up with various initiatives – some real, some puff – to keep their clients happy.
I’ve mentioned before that the bulletin boards are often amusing and a good source of information. Scanning one recently, I came across news that the British Virgin Island registered but Zurich-based platform, Neuimex Asset Management, had been temporarily shut down by the Swiss Federal Banking Commission.
I contacted the SFBC to ask why and was told that this is the first step in a process to make sure Neuimex is doing what it is supposed to. As a result, Neuimex advised its clients that they could not to withdraw funds.
Naturally, this must be annoying for both Neuimex and its customers. For Neuimex, the damage done may prove hard to reverse. According to Klaus Richter, who looks after business development and introducing broker business at Neuimex, the company hopes to be back up and running within a few days. “The report shows no issue on our side. Just our normal FX business. The only issue is that the lawyer who made the audit has no clue of the business and stopped all accounts. This is absolute nonsense and will lead to a bigger compensation lawsuit,” he said.
Neuimex had originally called itself Neurex but was forced to change its name by Deutsche Börse in 2005 because DB felt the name was too similar to Eurex, which is of course a very large derivatives exchange. Picking names that are seem sort of familiar appears to be a common marketing strategy for many retail platforms.
I have recently had some interesting correspondence with a company called Interbank FX. This prompted an obvious question to Todd Crossland, the company’s chairman and president: “Why is the company called Interbank FX when it isn’t an interbank platform?”
“Our business model is not of a market maker like most of our competitors. We do not have a dealing desk. We route all our customer trades directly through the interbank market of five of the largest money centre banks in the world,” he replied. Not having a dealing desk seems to be the latest gimmick and is an attempt to alleviate the frequent claims that retail FX providers trade against their clients.
FXCM has also introduced a non-dealing desk. According to gripes on the bulletin boards, this hasn’t worked as well as promised. To add to FXCM’s woes, its platform crashed as it was migrating clients to the new service, prompting an apology from its chief executive Drew Niv. “We know our clients were unable to trade on February 25 and for part of February 26,” he wrote. “All clients who suffered a loss on open positions due to the technical failures related to the market opening on Sunday February 25 will be fully refunded the amount of any loss,” he added. I can imagine the US lawyers will have a field day with this one.
“I want to assure you that these technical issues are not indicative of FXCM’s financial stability or health. FXCM has over $100 million in capital and no debt. In addition, approximately $600 million in client funds are traded using our platform, the FX Trading Station,” Niv also pointed out.
Shortly after, FXCM published its unaudited balance sheet. “FXCM is proud of our financial discipline and strong balance sheet... By releasing this information, we hope to set an example for the entire forex industry,” wrote Niv. The company declined to comment on what motivated this show of transparency and whether or not it was connected to the embarrassing and reputation-bashing crash in February.
That’s the way
Meanwhile, Oanda has actually come up with something that looks genuinely innovative by adding five new currency pairs to its FXTrade platform. These are USD/CNY, USD/TWD, USD/INR and EUR/TRY and USD/TRY. Few banks offer these on a streaming basis and Oanda certainly looks to be the first in retail.
What is and what should never be
I’ve always thought that FX inhabited a space that can hardly be considered as the real world. So I was amused when Saxo Bank sent me news that it had unveiled its virtual presence in Second Life. “Do what?” I responded.
For those who don’t know, Second Life is an online community of people pretending to be things they’re not, like successful. It is, in my view, the Dungeons and dragons game for the 21st century. When I was at school, D&D was what all the nerds played, so I was swift to tell Saxo that I had absolutely no interest in examining the site, even in the interests of journalism.
Saxo tried to explain the concept to me. “Second Life is a simulation/online community. You register your own identity, design your own appearance and then schlep around the site having encounters with other people.... people sell things and actual businesses are setting up shop there. There’s a whole ‘Wall Street’ promenade on the site. Second Life has its own currency, too, the Linden dollar, bringing with it the potential for an actual (albeit very volatile) FX market,” Saxo explained to me.
It then offered me the opportunity to go into Second Life and “meet” Stephan Martinussen, its head of product development. I declined and instead got Chris Hunt (or Chunt as he’s known), Euromoney’s web publisher, to do it and he seems to have enjoyed himself. I thought he was odd when I went skiing with him back in January. Funny how first impressions are so often 100% accurate. In his defence though, he does come up with some good ideas, the latest of which is a Blackberry version of the FiX. This will be rolled out in the next few weeks to satisfy the cravings of those readers who find themselves frequently away from their desks.
Saxo isn’t the first financial institution to have a presence in this virtual world. Events there are even reported by Reuters, which has a bureau there, run by “Adam Reuters”. Second Life? Get a life would be my advice.
Last week, I asked why a hedge fund trader would leave for a rival firm. I was told by one mucker that a possible reason is that, unlike banks, hedge funds don’t wipe the slate clean if you have a bad year. In other words, there’s no payout until you make back what you lost. With so many funds seemingly having “done their cods” in 2006, it is no surprise that the transfer season is also in full swing in the hedge fund community. There’s been no let up in activity this week across the board, and with some banks still to payout, further moves are inevitable for a while yet.
Lee Oliver can be contacted at firstname.lastname@example.org.
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