Just how big has FX become?
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If one looks around and wonders where the speculators have gone (the carbon-based variety, not the feedback-loop creating, binary terrorists) look no further than the FX market, which according to the latest BIS data, has hit $4 trillion in daily notional volume (20% higher than the $3.3 trillion in 2007), nearly quadruple the combined U.S. stock and Treasury trading, which in April averaged about $134 billion a day (down from a daily average of $148 billion in 2007) and $456 billion (down from an average of $570 billion for all of 2007), respectively. This amounts to nearly one quadrillion in total dollar transaction volume per year. There are two main reasons for the exodus from other products, and for ongoing cloning of the "Japanese housewife" phenomenon: the ongoing migration away from the bizarre daily moves in stocks, which are now traded almost exclusively by robots, or other frontrunning machines (see Schwab daily 52 week low), and the ridiculous leverage allowed in FX margin accounts. Just today, the CFTC announced that after the proposed 10-to-1 retail FX transaction leverage was shot down by "dealers, lawmakers in Congress and others who feared it could push investors into overseas markets with less protection", instead Gary Gensler's goons decided to keep all the habitual gamblers in house, and give them virtually unlimited leverage, or, as the case may be: 50 times. Recall that Bear and Lehman just needed 30x leverage to blow themselves up, and that happened with the FRBNY and the SEC both supervising. So let's see: $4 trillion...50x retail leverage...no regulation...this will surely end well.
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The survey showed how investors are seeking out faster growing economies and big commodity producers. Trading volume between the US dollar and the Australian dollar rose 35 per cent from 2007, and volume with the Canadian dollar was up 44 per cent. Trading also jumped in the Indian rupee, Chinese yuan and Brazilian real. In contrast, trading in the US dollar against the British pound, a mainstay of the currency markets, fell 6 per cent Trading in the euro against the greenback rose 23 per cent.
"There's been a change in the overall investor dynamic," says Jeff Feig, a managing director in Citigroup's forex department. "There are more and more investors, especially in the US, investing internationally."
Overall, the US dollar remained the dominant global currency. It accounted for 84.9 per cent of transactions, down from 85.6 per cent in 2007. The euro's share rose to 39.1 per cent from 37 per cent. The share count data adds up to 200 per cent, to reflect the fact that there are two currencies in each transaction.
The forex market is actually a network of bank dealers and electronic-trading systems. At its core are investors or corporations needing to convert one currency into another, either as they buy or sell a stock or bond from another country, or bring home profits earned abroad. For example, any time a US investor buys a Japanese stock or a German company buys parts from a Korean supplier, a foreign-exchange trade occurs.
Banks are also heavy users of the currency markets to convert cash they borrow from foreign investors. Mutual fund managers overseeing portfolios of foreign stocks may use currency derivatives to offset the impact of exchange-rate swings on those investments. And finally, there are speculators, such as hedge funds and mutual funds, who place bets on whether individual currencies will rise or fall.
The currency market is by far the world's largest financial market. It dwarfs US stock trading, which in April averaged about $US134 billion a day, down from a daily average of $US148bn in 2007, according to data compiled by the Securities Industry and
Financial Markets Association. Even trading in US Treasuries, among the biggest markets in the world, averaged $US456bn a day in April, down from an average of $US570bn for all of 2007.
Now small investors are increasing their exposure to foreign currencies. They are piling into mutual funds that make bets on currencies as a core part of their strategy. More broadly, US stock mutual funds that invest overseas have taken in $US42bn over the past year, according to Morningstar Inc.
In addition, exchange-traded mutual funds (ETFs), whose shares trade like stocks, are making the currency markets more accessible to small investors. There are now 44 currency ETFs, up from 16 in April 2007, according to Morningstar. In 2004 there was one.
Currency trading usually involves placing bets with borrowed money. That has regulators concerned about individual investors' ability to handle large amounts of leverage, though action has been limited so far.
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