Vol 2 No.

29 October 3, 2011

developments that matter in financial markets

Global Currency Trading Soars Amidst Crisis

When economic integration progresses, interdependence among countries becomes stronger, which, in turn, implies more potential for spillovers. Viviane Reding, Vice President, European Commission

Introduction
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The tensions in the financial markets, which became apparent in early August 2011, have intensified sharply in September 2011 on account of concerns over the downgrade of the US by Standard and Poors, euro zone financial crisis, currency intervention from Japan and Switzerland, etc. These factors have contributed to the volatility in global financial markets. However, currency markets have acted as the pressure valve for the global financial system with trading volumes surging to fresh highs worldwide.

Declining Carry Trade

Record Trading Volumes

ICAP, the worlds premier interdealer broker by trading volumes, reported that the total average daily spot FX volumes on the EBS platform were $186.9 billion in September 2011, an increase of 46 percent year on year. Similarly, NYSE: FXCM, a global online provider of foreign exchange trading, saw the retail customer trading volume touching $363 billion in August 2011, 17 percent higher than July 2011 and 36 percent higher than August 2010, and institutional customer trading volume reaching $120 billion in August 2011, 100 percent higher than July and 96 percent higher than August 2010. Trading volumes surged for exchange-traded foreign currency futures also, with the CME Group reporting that on an average 991,000 foreign exchange contracts changed hands during August 2011, up 11 percent from July and 21 percent higher than the same period last year.

Carry trades (i.e., borrowing funds in a currency with low interest rates and investing the proceeds in currencies that offer higher returns to collect the carrybetween the two rates) have been dealt a blow by the sharp volatility in the currency rates. Popular funding currenciesthe borrowing and selling leg of the trade have usually been the Japanese yen, Swiss franc, and the US dollar. Though the exact size of the market is unknown, the estimates put its size in outstanding deals at more than US$ 1,000 billion. Carry trade is popular with hedge funds and other large institutional investors. Carry trade has now become unattractive in view of sharp volatility in the currency market. However, carry trades are bound to return when the market calms down.

Top 10 Currency Traders (% of Overall Volume, May 2011)

Rank 1 2 3 4 5 6 7 8 9 10 Name Deutsche Bank Barclays Capital UBS AG Citi JPMorgan HSBC Royal Bank of Scotland Credit Suisse Goldman Sachs Morgan Stanley Market Share (in %) 15.64 10.75 10.59 8.88 6.43 6.26 6.20 4.80 4.13 3.64

Drivers of Volatility

Forthcoming Programme

The strains in the debt markets of the US and Europe have emerged as important drivers of volatility. With sluggish growth and very low interest rates in the core major economies, currencies such as the dollar, euro, pound-sterling and yen remain unattractive. Moreover, low interest rates in the US have compressed the yield differential between the dollar and low- yielding currencies such as the Japanese yen. Debt deleveraging in the major economies suggests many emerging currencies will continue to enjoy a growth and yield advantage, which should translate into gains for currencies in emerging economies.

Source: Euromoney FX survey 2011

High-Frequency Trading

INTERNATIONAL PROGRAMME ON COMMODITY MARKETS

October 11-15, 2011 Mumbai, India
For details, contact: Ms Maggie Mobile: +91 9930268329 Email: maggie.rodrigues@ftkmc.com Ms Meena Mobile: +91 9930267956 Email: meena.kulkarni@ftkmc.com

Market Volatility
25 21 17 13 9 5 25 5 Major currency volatility, left scale VIX equity volatility, right scale 85 65 45

Source: www.wellsfargo.com

2008

2009

2010

2011

High-frequency trading (HFT) has increased its presence in the foreign exchange (FX) market in recent months. This development is one aspect of a broader trend facilitated by the wider use of electronic trading in foreign exchange, both in the broker-dealer market and at the customer level. HFT in FX operates on high volume but small order size, low margin, low latency (with trade execution times measured in milliseconds), and short risk-holding period (typically well under five seconds). As such, it occurs mainly in the most liquid currencies. HFT participants in FX tend to be concentrated in three cities: Chicago, New York, and London. Outside these three centres, there are currently very few HFT firms. HFT firms conduct their FX activities mainly on inter-dealer electronic broking platforms such as EBS and Thomson Reuters (London-based companies) and multi-bank electronic communication networks such as Currenex, Hotspot FX, and FXall (US-based companies). They are also active on the Chicago Mercantile Exchange (CME) for trades involving FX futures. Contributed by M Ravindran & Pinky Jain
October 17-21, 2011 Mumbai, India

Published by Financial Technologies Knowledge Management Company Limited Exchange Square, 1st Floor, Suren Road, Chakala, Andheri (East), Mumbai - 400093. India. Tel: +91 22 6731 8842 Fax: +91 22 6726 9541 Email: marketsinmotion@ftkmc.com Website : www.ftkmc.com

Upcoming Programme:
For details, contact: Ms Maggie; Mobile: +91 9930268329 Ms Meena; Mobile: +91 9930267956

INTERNATIONAL PROGRAMME ON EXCHANGE OPERATIONS & ADMINISTRATION

Disclaimer: This Newsletter is prepared to enhance awareness and for information only. The information is taken from sources believed to be reliable but is not guaranteed by FTKMC as to its accuracy. The contents are not meant for taking decisions of any strategic nature or for investments, for which FTKMC will not be responsible.