Author Bio

High frequency trading (HFT) has gotten a lot of press over the last several years. The so-called “Flash Crash” of May 2010 highlighted the impact HFT can have on the markets, though the focus has mainly been on the stock market. No real surprise there. The average person on the street still thinks of stocks first when the subject of trading comes up. That’s not the only place HFT’s influence is being seen, though, as a recent newswire piece indicates.

Here’s the first part of the Dow Jones story (which can be read on the Wall Street Journal site here):

Electronic inter-dealer currencies-trading platform EBS plans to scrap the fifth decimal place on its currency quotes and introduce so-called half-pip pricing ahead of major changes to the system, people familiar with the matter told Dow Jones Newswires Tuesday.

EBS, owned by ICAP PLC (IAP.LN), has been considering a range of options that will change the way investors are allowed to trade on the system in a bid to repair relations with its core banking customer base. EBS shares a dominant position in currency markets with Thomson Reuters (TRI), but it has come under fire from its core bank clients for allowing trading behavior that seemingly favors so-called high-frequency traders in recent years. Now it is seeking to redress that balance.

This article caught my attention because I recently reviewed a book titled Broken Markets on the subject of market structural changes and how HFTs have been able to exploit them. One of those changes is the move to decimalization made by the stock exchanges in the US in 2000. That helped narrow bid/ask spreads, which lowered trading costs. According to the book’s authors, though, it also created a lot more price points for trades to take place, leading to thinner liquidity at any given point, which is something noted in the Dow Jones story from the forex perspective. It also created greater opportunity for HFTs to come in and do their thing (some of which is highly predatory). The introduction of pipettes (fractions of pips) in forex has served the same purpose.

The move by EBS, as motivated by their customers (mainly the major banks – see The Dominant Players in Forex), is to pull that back a bit. The banks are feeling the pressure in their dealing margins, which have already been squeezed considerably. Back when I started in this business the bid/ask spread on USD/JPY was consistently 10 pips and up. It’s more like 2-3 pips these days most of the time, which means the banks who are acting as market makers are making much less profit per trade.  This spread compression, combined with rapid technological development, has been a big factor in the shrinking of the global foreign exchange business. You can understand why the banks wouldn’t want to see those spreads narrowed further, especially if HFTs are grabbing a rising share of the volume.

If EBS makes the move to limit pipettes to only half pips, as proposed, that could have an impact on retail forex broker pricing. Exchange rates cascade down from the inter-bank market to the retail one, so any development at the top end where EBS operates is likely to filter its way to broker platforms. Not that it’s likely to have a major impact on most individual traders’ strategies.

The other thing EBS is looking to cut down on is the kind of quote stuffing that can lead to illusory liquidity. This quote stuffing happens when an HFT submits quotes/orders to the market really only to identify liquidity and feel out price direction. A high percentage of these orders are quickly cancelled. EBS wants to crack down on this, which could have an impact on price action. That may end up being the bigger thing to keep an eye one moving forward. If it tends to smooth out prices we could find forex becoming that much more interesting for that money flowing out of the stock market.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Author Bio

This month, we were very excited to learn that Currensee would be featured in the magazine Alternative Latin Investor. This bimonthly publication covers the alternative investing industry in the Latin American region. The Latin American (LatAm) markets are among the fastest growing areas for the industry globally.

What was most interesting about the piece was the perspective put on Currensee, as it was being observed through the eyes of the LatAm investment industry.

Titled “Currensee: The Next Step in Forex Trading,” the article began by explaining a few aspects of foreign currency trading that are alluring to the LatAm investing industry. Characteristics like the massive size and liquidity of the world currency market, the speed and flexibility in which transactions can be executed, and being aware of the potential to generate returns during times of volatility are all attracting LatAm investors to Forex.

The ALI’s article discusses two aspects of this program have been particularly appealing to LatAm investors: transparency and diversification.

Because Currensee began as a social network for Forex traders to collaborate, communication has always been an integral component of how Currensee operates. Though today the focus has shifted more towards the Trade Leaders program, communication is still there and it equates to a high level of transparency.

“What’s unique is that our customers can give one another permission to view their actual trading activity and performance… There’s a level of transparency beyond any alternative investment I know of,” says Currensee CEO Dave Lemont.

LatAm investors are also drawn to the program’s ability to achieve “double diversification.” What this means is that as an investor in the Trade Leaders Investment Program, investors benefit from asset class diversification in the Forex market as well as diversification in their individual accounts by choosing from a variety of Trade Leaders. This new method of diversifying is an exciting development for the world of investing.

The article drives home the points around diversification for all investors and the proof is in the numbers – the fact that from 2000-2010, the S&P 500 has dropped a cumulative 3.7%. That means if you’re one of the many who had been adhering strictly to the general 60% stocks/40% bonds rule of thumb, you ultimately lost out.

Lemont says: “The stock market is manipulated by big players and algorithmic traders on a daily basis. The foreign currency market is so much bigger: US$4 trillion a day, with 24-hour trading. We’re not going to get together and move the euro today. But we could get together and move the price of a small-cap stock.”

So although collaborating and trying to move the euro is not likely something investors can achieve, keeping a diversified portfolio is. Keep cool and keep it diversified.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Author Bio

Today’s roster of top tier bulge banks holds some of the most colossal and well-known institutions in finance. JPMorgan Chase & Co., Deutsche Bank, Citigroup Inc., Morgan Stanley and Goldman Sachs; a few names that everyone’s heard, and almost everyone has an opinion about (usually in regards to their size). Of late, JPMorgan and Morgan Stanley have been receiving the majority of media flack with the whole $2B trade loss and Facebook equity underwriting investigation.

Though one bank has been doing a very good job at laying low for the past few months, and it wasn’t long ago that Goldman Sachs could hardly keep itself out of the news for more than five minutes. So one must wonder now, without the media blowing them up left and right, what has this large investment bank been up to?

A CNBC article answered this question by revealing that the bank has been doing a good job of being well, not so large. This fall, the firm is said to name less than 100 new partners; a group of higher ups at the firm that’s shrinking steadily. After scrupulous vetting of these potential hires, the selected few are compensated handsomely (senior partner and CEO Blankfein pulled in an annual salary of $12 million in 2011) while gaining access to prestigious jobs at the firm. This alone would make one question why over the past year Goldman has seen a steady exodus of those employees fortunate enough to hold partner positions at the bank.

After reducing its total employee count by about 8 percent in the last year, as well as laying off about 50 last week, it’s clear that something is amiss with the firms growth pattern. As Goldman deflates as a whole in size, the heft of its partnership base usually lessens in congruence.

So where is this drastic size reduction coming from? Greece.

A few weeks ago, I wrote a post about how a potential Greek euro exit would likely affect the US. One of the main concerns was that it could set in motion a widespread panic amongst investors, who would then impulsively retract their allocated capital. Today, a Bloomberg article showed evidence of this theory starting to make its presence known.

The piece provided insight about how European turmoil is directly correlated to success amongst the investment banking industry. More specifically, the article looks at Greece and their potential abandonment of the euro for a return back to the drachma.

A Goldman analyst showed last week that for a third year straight, revenue from investment banking and trading is in danger of dropping at least 30 percent from the first quarter. The deadly combination of deal volume slowing, wider credit spreads, heightened volatility, and equity and credit markets falling, can all be traced back to fears of a Greek euro exit, followed by the spread of the European sovereign-debt crisis. These ingredients are the direct result of investors putting themselves into a defensive monetary state over the aforementioned euro woes.

This tension is taking its toll on the paychecks of investment bank employees, as 11 analysts reduced earnings estimates for the New York based Goldman Sachs in the past four weeks. The question now is whether these declines are cyclical, or indicative of a general phasing out of the investment banking industry. Boston Consulting Group, Inc. stated in late April that banks of this kind will see very little revenue growth during the next few years and will be forced to cut up to 30 percent of their managers.

Jamie Dimon and Lloyed C. Blankfein, CEOs of JPMorgan and Goldman Sachs respectively, are in adamant agreeance that this is, of course, is nothing more than a phase and the industry will undoubtedly bounce back. David Konrad, an analyst at KBW Inc. in New York, gives a bit of hope to the fighting back of these banks by pointing out that due to their large amounts of capital and strong liquidity, any program coming out of Europe that the market responds positively to will inevitably have a bold impact on valuations. He recalls how stocks have been known to jump up to 30 percent on just a bit of breathing room.

So could all of this drastic shrinking represent the end of the age where grand investment banks rule the financial industry?  Or is it in fact no more than a shock absorption effect occurring as they bend to accommodate European turmoil? As we all know, yes, they are big. But are they really too big to fail?

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Author Bio

A few weeks ago, one of our contributing writers, John Forman, posted on when the best time of day to trade Forex was. The question was inspired by the Q&A session of our last Trade Leader webinar featuring Currensee’s Taylor Growth, who explained the benefits of using a conservative Forex trading strategy.

Recently, we were able to get some insight on this question from another Trade Leader; Gabor, Asirikuy Trading. Gabor trades using a technical strategy based on indicators such as Chart Patterns, Bollinger Band, RSI, Stochastics.

Gabor says:

“It depends on the currency pair. The rule of thumb is that the bigger the liquidity of the market, the better to trade it. Liquidity is changing during the day even for heavily traded pairs. E.g. the London session is considered to be the best time to trade the European majors (EURUSD, GBPUSD, USDCHF). Big liquidity does not necessarily mean directional price movement – we can experience the formation of congestion zones many times during liquid hours. But when balance between bulls and bears is broken during a highly liquid period, chances are that it is going to be a meaningful movement, the beginning of a trend.

To support my statement, I examined one of the short-term trend following systems that I trade at Currensee.

It’s a momentum-based strategy, which trades the H1 EURUSD. If price momentum reaches a certain threshold, the system opens a market order in the direction of the momentum. In other words, if the open/close of the hourly candle is bigger than a preset % of the daily volatility, we enter the market. I ran a simulation of 12-year price data and then grouped the market entries by hour. The result is shown on the chart.



As you can see, most entries are in the overlap of the European / US sessions which starts in the range of 1 p.m. GMT (New York) – 2 p.m GMT (Chicago). This lasts to the last hour of the London/Frankfurt session,  5 p.m. GMT. The Asian / European overlap is the second most busy period from 8 a.m to 10 a.m GMT.”

It is interesting to compare this response to that given by Trade Leader Taylor Growth. Since he is a range trader, he feels that the lower trading volume in the NY afternoon, Asian, and early-European sessions yield the highest success rates. He explained that the best time of day to trade really depends on the strategy the trader is using. Since his conservative strategy is very technical, it fares better in Asian sessions when trading European pairs. Since it’s nighttime in Europe while the Asian markets are most active, no European news releases are making their way out and influencing trades.

To see how these two Trade Leaders’ trading strategies have been working for them, check out the Leaderboard.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Author Bio

Last week it was noted that the Eurodollar currency was trapped, but it was required to stay above 1.4515 to confirm that a new higher trend could develop. It managed to do this for almost the entire week, (although without any much needed acceleration), before the overnight session on Friday saw the original break out point at 1.4440 give way. On waking up Friday morning it was clear that only this currency had shown any real weakness, so it was necessary to look for clues as to what it was. After scouring the wires the conclusion was that a rumour that Angela Merkel would resign was the reason. However, a government spokesman said: ‘Rumours about Angela Merkel’s resignation are just pulled out of thin air.’ The origin of the rumours was unclear. The break actually occurred at 1 a.m. U.K. time when the market is at one of its thinnest moments, when a critical support point was breached.

By the time the main market woke up, the lack of any real reason for the break (for those who don’t believe in Technical’s), led to a somewhat spurious excuse that feeds on itself to explain the move. This type of justification after the price move is a classic example. Another common one is that one major block of players such as funds are coming into a market. Again, in a world far removed from past decades when FX was traded on the phone and by human market makers, and therefore there was a degree of visibility, in the current trading environment, large players go to great lengths to hide there activity via sophisticated automatic trade engines. This has led to such terms as “Dark Pools”, which is a term for hidden liquidity. The question for traders, who are not in the professional market, is whether they are at a disadvantage. This is where Currensee’s social indicators and views of the communities positioning can provide some visibility that is relevant and up to date. It is easy, if discipline is not strict, to feel that the market is conspiring against you and can cause great damage to the ability to trade. Your position is wrong; the reason why seems nonsensical, and hope can easily enter your trading plan. This is nearly always ruinous.

So what is the solution? It may seem obvious, but there are two basic rules. The first is simply to day trade in your time zone, so there is no overnight event risk. Tomorrow is always a new day and opportunity. The second is the placement of stops. Whilst it is true that volume is thin in Asia compared to the other time zones, the FX market remains the area of deepest liquidity among all the asset classes. It is far better to have been taken out of a trade, in order to be able to reassess your analysis when not actively involved. One of my key mental tasks, if a current position is causing me uncertainty, is to go back to my days as a market maker, when often you were forced to have positions you didn’t want.

My question is. If I didn’t have a position, would I get long or short? Again, it seems somewhat simplistic, but in cold analysis, it is often easy to eliminate one side of the market, as it is obvious that it does not coincide with your trading plan and template. If it doesn’t do this, then the answer is that you shouldn’t have a position at all.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.