DJ VINCENT CIGNARELLA: A Foreign-Exchange Trader's Lament --The foreign-exchange markets have become unprofitable to trade --I miss my MTV and my old FX market --Central banks have corralled the FX markets By Vincent Cignarella Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--The market isn't wrong, it is just stupid! So said one veteran trader of the foreign-exchange markets, a statement that is no doubt echoed by many others who are frustrated with the lack of trending activity in the foreign-currency markets recently. More and more, those who are paid to play--seasoned veteran institutional foreign-exchange traders--are becoming disenchanted with a market that appears to them to be broken. The new age of currency wars with many governments attempting to keep their domestic currencies weak in an attempt to export their way out of slow growth has clamped down foreign-exchange movements and severely limited traders' opportunities to make money. That traders aren't making money is hardly going to bring central bankers to tears, but there are consequences to monetary meddling. When central banks artificially constrict market movements in any asset class, pressures build. An unexpected global event could trigger a violent rush for the exits, one central banks will be a loss to contain. Many of the largest banks that trade foreign exchange--from Bank of New York Mellon to State Street to Goldman Sachs --are reporting declining volumes as retail, corporate and professional traders sit on the sidelines waiting for the stalemate to end. As one trader put it, the EUR/CHF cross seems to sum up what is wrong with foreign-exchange trading these days. The cross goes nowhere, so it isn't worth the cost of capital to put on a trade in lieu of something else. This is all because the Swiss National Bank , in an attempt to weaken its currency against the euro, has instituted a floor of CHF1.2000. Though that is far above what the current anti-euro mood would suggest as fair value, the market doesn't dare challenge the SNB edict, so the pair simply stagnates just above CHF1.2000 and has all but ceased to trade. The problem is, there aren't many other trades to choose from. The EUR/USD is said to be so heavily optioned, locking the pair in a 1.3000-1.3500 range that it would take "the end of the world" to break to the downside. By the time you caught up with that it would be 500 points lower, making shorting the euro at 1.2500 useless, one trader moaned. Sterling? Forget it. As one former chief dealer of the central Bank of England put it, "Sterling is 1.6000." My personal experience: it was 1.6000 in 1983 when I first traded it, it was in 2003 when I stopped trading it, and it is 1.6000 today. MTV has changed but not the rate of exchange between the U.S. dollar and the British pound. The Brazilian real and the Turkish lira are basically central-bank-controlled, market participants complain. As for the South African rand goes, "I have no idea what to do with that," another trader said. As for USD/Canada, it has been in a 2% range for months. And the Australian dollar? That is just like trading Canada, but worse. You have to trade Aussie at night and it moves on Chinese economic data, which most traders deem suspect. Who knows if the figures from China can be believed. Even the diminutive New Zealand dollar is a lost cause, one trader groaned. If you take a position over NZD25 million, you are the market. Likewise with the currencies of Norway and Sweden. Take a position in those currencies and you'll have the same position as everyone else on the Street. They are merely a wonderful opportunity to lose money, as the slightest bit of news will have everyone running to the exits and stopped out all at once. It has gotten so bad that even FX traders who have left the professional game and now trade their own money won't touch FX. They trade equities instead. As one former bank foreign-exchange manager put it, "I trade Apple stock; it is like what trading the Deutsche Mark was like years ago. FX, I won't touch it. Too much risk and too little reward."
FX has never been profitable for the buy-side. 40% of Citi's firm-wide profits were attributable to FX (1995).
This is just downright silly... What's with the bizarre idea that the mkt owes a bunch of random FX punters a living?
Fastest selling, most highly leveraged retail product, with super-light regulation .. now has retail punters wondering why they're not uber-rich just yet. Oh, it's because of central banks. Ok..
a) you may look at a cross section and there are winning traders even if you had the whole world trade OU discretizations or mangoes or b) you may know successful guys who trade very different frequencies, such as hft which is irrelevant when attempting to correlate to high liquidity bank trading or c) you may know guys that may sport a highly successful relative track record but who trade much lower notional making a comparison useless I am not saying it must be one of those but your statement is not any less bizarre than the article you are criticizing without providing a lot more details. I am saying this because the article makes some important and true points. Central bank interventions and fiscal involvement are at a historic high in such way that they move the whole market into an extreme imbalance. Exchange rates are supposed to be a reflection for trade imbalances. This is currently NOT the case. Rather currencies are abused to mask fiscal and monetary blunders. Another very true point is that liquidity has incredibly dried up, talk to any institutional trader you want you hear the same story. What the article does not mention is that markets are a lot more erratic in the short frequencies because more and more hft algos push into this space partly because equity hft houses know well that upcoming regulations on the equity side will make their life very hard and fx is still one of the most unregulated markets around. I am not pitying those who cannot adjust to changes in market dynamics. However, falling profitability is fact not some bizarre idea and it highly suggests that the markets are currently making life very hard for guys who have to move 50-200 million around. You equating challenges when moving size with some "FX punters" does your reputation injustice to say the least. Pick whatever market environment you want and I send you a reference to another Mrs. Watanabe who generated 100% returns the past 4 quarters...so what...
Well, I don't see it that way, with all due respect. I mean all the "bad" things that are making mkts challenging at the moment may very well be true. However, I just don't understand where this expectation of constant or ever increasing profitability is coming from. Yes, the spot mkt may not be as wonderful at the moment as it used to be, but so are many others. In fact, many others are actually a lot worse and for similar reasons (I could tell you horror stories about some of the mkts I am involved in). However, these liquidity ebbs and flows are, to me, an inevitable fact of life that people have to deal with on a daily basis. I personally find that it's a much more constructive attitude than the whinging the article consists of.
ha, re constructive attitude I could not agree more. Being stuck up about dry times does not help for sure, but at the same time I have not seen more very seasoned fx prop traders retire for good than in most recent times. Most sounded extremely frustrated. I guess they do not look at returns only but opportunity costs as well. If you have saved up some very comfortable nest eggs and see your kids growing up and have to decide between being stuck in those dreading markets or taking a longer break I am not surprised a lot of guys chose the latter. I dont think they were referring to a "never going back to old times" type of change in market dynamics ( I know a few very well and take their opinions and views on life and the larger picture with utmost respect and know they are honest on those while I would never put much weight on what they have to say about their short term positions or portfolios but maybe we all have just worked too long in this industry ;-) Point was there are market forces at play that really have taken on a life of their own and its not a healthy development (but I guess it applies to all asset classes).
I dunno, mate... In seriousness, I think that finance is overstaffed and people in finance (including myself) are overpaid. I think that as a result of a good decade (or two), we have grown lazy and complacent. As a result, I actually see current mkt conditions as a more or less natural reversion to some sort of a reasonable mean, where being profitable is actually difficult and isn't taken for granted any more. So, and pls feel free to shoot me down, I actually think that the current developments may be healthy in the long run. At any rate, this is just my Z$2c.
Re: amazingIndustry Ah come on. Today - - FX spreads have narrowed. - You'll get arb'd by a machine if you price wrong. - There's no room left for manual screen quoting. Do this at your peril. Otherwise nothing to see here.