8/3/2019 Vol 2 No. 29 October 3, 2011

1/1

ublished by

inancial Technologies Knowledge Management Company Limited

xchange Square, 1st Floor, Suren Road,

hakala, Andheri (East), Mumbai - 400093. India.

el: +91 22 6731 8842 Fax: +91 22 6726 9541

mail: marketsinmotion@ftkmc.com Website : www.ftkmc.com

sclaimer: 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 w ill not be responsible.

orthcoming Programme

MARKETS

EquitiesCommoditiesCurrenciesDebtBankingInsuranceFinancial Services

PRACTICE

Executive EducationCertificationConsultancyResearchAdvisory Services

ORUMS

The Strategy DialogueFinancial Markets ForumfiNETCommodities Camp

REPORTS

Financial Markets ReviewMarket Briefings

PL PROGRAMMES

Markets in MotionGlobal Financial MarketsPracticeWinter School

NATIONAL

IMULATION LAB

w w w . f t k m c . c o m

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

IntroductionThe tensions in the financial markets, which became apparent in earlyAugust 2011, have intensified sharply in September 2011 on account ofconcerns over the downgrade of the US by Standard and Poors, euro zonefinancial 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 globalfinancial system with trading volumes surging to fresh highs worldwide.

Record Trading VolumesICAP, the worlds premier interdealer broker by trading volumes, reportedthat the total average daily spot FX volumes on the EBS platform were $186.9billion in September 2011, an increase of 46 percent year on year. Similarly,NYSE: FXCM, a global online provider of foreign exchange trading, saw theretail customer trading volume touching $363 billion in August 2011, 17percent higher than July 2011 and 36 percent higher than August 2010, andinstitutional 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 exchangecontracts changed hands during August 2011, up 11 percent from July and21 percent higher than the same period last year.

Drivers of VolatilityThe strains in the debt markets of the US and Europe have emerged asimportant drivers of volatility. With sluggish growth and very low interestrates in the core major economies, currencies such as the dollar, euro,pound-sterling and yen remain unattractive. Moreover, low interest ratesin the US have compressed the yield differential between the dollar andlow- yielding currencies such as the Japanese yen. Debt deleveraging inthe major economies suggests many emerging currencies will continue to

enjoy a growth and yield advantage, which should translate into gains forcurrencies in emerging economies.

Declining Carry TradeCarry trades (i.e., borrowing funds in a currency with low interest rates andinvesting the proceeds in currencies that offer higher returns to collect thecarry between the two rates) have been dealt a blow by the sharp volatility inthe currency rates. Popular funding currenciesthe borrowing and sellingleg of the trade have usually been the Japanese yen, Swiss franc, and theUS dollar. Though the exact size of the market is unknown, the estimatesput its size in outstanding deals at more than US$ 1,000 billion. Carry tradeis popular with hedge funds and other large institutional investors. Carrytrade has now become unattractive in view of sharp volatility in the currencymarket. However, carry trades are bound to return when the market calmsdown.

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

Rank Name Market Share (in %)

1 Deutsche Bank 15.64

2 Barclays Capital10.75

3 UBS AG 10.59

4 Citi 8.88

5 JPMorgan 6.43

6 HSBC 6.26

7 Royal Bank of Scotland 6.20

8 Credit Suisse 4.80

9 Goldman Sachs 4.13

10 Morgan Stanley 3.64Source: Euromoney FX survey 2011

High-Frequency TradingHigh-frequency trading (HFT) has increased its presence in the foreign

exchange (FX) market in recent months. This development is one aspect ofa broader trend facilitated by the wider use of electronic trading in foreignexchange, both in the broker-dealer market and at the customer level.HFT in FX operates on high volume but small order size, low margin, lowlatency (with trade execution times measured in milliseconds), and shortrisk-holding period (typically well under five seconds). As such, it occursmainly in the most liquid currencies. HFT participants in FX tend to beconcentrated in three cities: Chicago, New York, and London. Outside thesethree centres, there are currently very few HFT firms. HFT firms conduct theirFX activities mainly on inter-dealer electronic broking platforms such as EBSand Thomson Reuters (London-based companies) and multi-bank electroniccommunication networks such as Currenex, Hotspot FX, and FXall (US-basedcompanies). They are also active on the Chicago Mercantile Exchange (CME)

for trades involving FX futures.Contributed by M Ravindran & Pinky Jain

When economic integration progresses, interdependence among countries becomes stronger, which, in turn,implies more potential for spillovers.

Viviane Reding, Vice President, European Commission

Global Currency Trading Soars Amidst Crisisd e v e l o p m e n t s t h a t m a t t e r i n f i n a n c i a l m a r k e t s

or details, contact:Ms MaggieMobile: +91 9930268329

mail: maggie.rodrigues@ftkmc.comMs Meena

Mobile: +91 9930267956

mail: meena.kulkarni@ftkmc.com

NTERNATIONALPROGRAMMEON COMMODITYMARKETS

ctober 11-15, 2011Mumbai, India

October 17-21, 2011

Mumbai, IndiaINTERNATIONAL PROGRAMMEON EXCHANGE OPERATIONS &ADMINISTRATION

ol 2 No. 29 October 3, 2011

Market Volatility5852

17

2165

Major currency

volatility, left s cale

VIX equity volatility,

right scale

13

25

45

5

9

5

25

2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1

Source: www.wellsfargo.com