electronic currency trading

What are your views on electronic currency trading? I see ads for 24/7 forex brokers. Are they as regulated as the futures markets? Is there adequate liguidity there 24 hours a day?


I have experience short-term and intraday trading stocks using technical analysis, but I won't be able to continue intraday trading at work.


If it's possible I would like to be trade in the evening and night time (eastern time).

If you use completely pre-defined strategies, you can set them up on TradeStation. The program will email you or page you at work when it does something.


I can't imagine a guy with a day job, and trading currencies at night, being very good at either.


Those things aren't constantly going - making big moves in a central, level playing field - like Cisco, and I have trouble visualizing what non-mechanical, arbitrage, or scalping strategy you hope to use that the big banks won't have an edge all over you.


Sure, you can fight over fractions of pennies non-stop, 24/7. But so far as the big, anomalous moves which I think you will have to be correct on just to break even, I can't imagine how you hope to predict them.


I don't mean to sound mean, or doubt your skills, but don't get too excited about it. Or, if some other poster tells us otherwise - that it is good stuff - then maybe you'll have me out there somewhere to compete with too:)


Are you an economist, or something? No, just a chart-watcher, right? Currencies are pretty trendy, so I say use TradeStation.


It's like, if one bank is buying currency from another bank, and some little punk fires in an order saying "Me too, I want to buy some pounds too," it's like, who cares?


It might all come down to what book your electronic order gets executed against. Who takes the other side? And I do not have the answer.


leroy

[electronic currency trading]


There are 2 markets for this, one is the GLOBEX, the other is the FOREX.


I donot trade via either, however, I can offer some links that may help you.


First, you should read this on the FOREX.


http://www.cftc.gov/opa/enf98/opaforexa15.htm


This is the BIG one (FOREX), where the major players are. For the most part it is an unregulated market. You see banner ads all over, offering little or no commission trading with an account as small as several thousand $$$. Trades world wide 24/7, check that, it might be 24/6.5.


Advice is worth what you pay for it, and the price here is free, so do your own homework.

Make SURE you completely understand the risks involved in trading here.


Here is a link to a free real time price chart on the FOREX. Another word of caution. Some prices are in US $$$, but when you trade you buy(sell) the underlying in that currency, so you need the correct quote for say, the Japan Yen. Example: US$130 = .007692 JY (appx) [check my math, I make no promises]


http://www.forexdirectory.net/quotesfx.html


Here is one more link that I've found useful. Good charts, good advice, but NEVER use only this to reach a decision. (my opinion)


http://www.forex-ats.com/default.htm


The GLOBEX is best explained here. Trades thru Chicago (CME)


http://www.cme.com/


Best wishes, (there's no luck involved)


SteveB

One more suggestion. Make absolutely, 101% sure, no questions about it, that you have back up plans in place should your IP go down!

That might be true Leroy, but it isn't as liquid a market. Further I will tell anyone trying to trade currencies that if you try to purely base it on charts you are running huge risks so if that is your plan have very tight ranges to work with. Currency moves are based on economics, not really trends. Most trends, IMO, are just a reflection of people coming to conclusions that an economist would have come to earlier. My advice is to stick to lesser markets and out of the EUR and JPY and learn those markets cold. You can't trade the VEN Bolivar effectively 24/7, but these are the types of currencies where you can see behind the hype and actually make money out of it.


One last thing. I highly agree with others in that you aren't likely to do very well off-hours. Even though the markets are open all night, the liquidity drops greatly. The 24/7 market is a true statement, but as in everything else, the whole world takes its cues from NY. When the NY and CHI markets are trading, you see at least 70% of the volume running through the system, much of it because that is when the arbitrageurs are making their hay. The first hour Japan is up usually is just trades to even out its market to the US market unless significant news has come up. And in something like currencies, the last thing you want to be doing is playing all your eggs when the market lacks serious liquidity.

While i agree that in the long run currencies to converge to economic fundamentals, in the short to medium run, they are often driven by other factors. For example, recent JPY movement is almost entirely based on political events and to a lesser extent flows. I think in general currency trading is quite difficult without information on flows which most investors simply do not have.

Javelin,


If you work on a high-visibility or friction desk - meaning one where you talk to customers or handle their orders all day - in fixed income or whatever, some of us (me:) would be really curious to know what it's like - what kind of trades you do, whom they come from, etc.


More specifically, if you are a sales-trader, I would be curious to know what the trend in revenues per station has been like in your product, and how it has been affected by new technologies and shopping/matching facilities!


Have the flows become less visible?


Do customers shop you and then match elsewhere?


Do you steer your own smaller clients into in-house electronic routing alternatives?


Do you make your book available electronically to anyone, or advertise your spread actively?


Thanks either way,


eLROY

Leroy, you forgot to ask him if he loves his wife and if he has a lover on the side, haha. I would be surprised if anyone gave you this kind of information, so many trading desks consider this as "proprietary" as it gets. After all, everyone has Bloomberg, not everyone has customers calling in giving flow and depth information.


As for the comment about short-term trading, that is the problem. Too many people trying to chase pennies in a world where everyone has the same info. I can't imagine how anyone earns much money out of currencies without playing for longer-term horizons and/or doing a lot of arbitrage with the help of plenty of people on a team and some very good software backing them up.

Yes, not everybody has visibility up the customer supply chain. But I was not asking Javelin to post which of his clients were doing what today, to spread his visibility around the Internet!


There is nothing proprietary, it is a well-known fact, that with smaller margins, many trading desks are attempting to funnel smaller tickets into the low-touch/automated channel, at the same time as preserving their analog relationships with these same clients for other quid-pro-quos and carpool exchanges.


But most trading information is price-implicit, and compressed into a single front-point along the time axis. And increased automation decreases time-axis visibility, and increases reliance on time-series deductions from the ticker, at the same time as making that information more symmetric across participants, as you pointed out.


So margins have been collapsing. Some in these forums have suggested that the way to stay out front is to push into more esoteric, higher-margin products, and away from Nasdaq dealering, cookie-cutter CP, et cetera. If you manufacture the product, if you build the deck, you own the information, and it creates a self-perpetuating liquidity magnet. In other words, if you synthesize the original deck out of other instruments, or you have unique pricing expertise... I won't go into that:)


So basically my question is what are they doing at Javelin's shop to maintain margins? And this is not "proprietary" information, rather it is promoted at financial-services conferences and sold to clients every day! How are they creating a positive flow-path for information, how are they maintaining the polarity of natural collection and dissemination barriers within the institution/client relationship, at the same time as taking advantage of automation efficiencies made possible with new technologies?


Put differently, how do you reduce friction for transactions, but maintain friction in information, to keep your competitors from leaning on your data then undercutting you, or pennying you? How do you stop your clients from spreading price-implicit spores of your "proprietary" data all over the Internet?


Or is this even a problem? I'd like some help trying to picture it:)


eLROY

There is a trend to electronic trading and there is certainly pressure on margins on many products. The response from the industry has really taken two tracks.


The first is to get big or get out. In many areas such as FX, bonds and other commoditized areas, only the largest players can really thrive. Lower margins naturally mean that higher volume is needed.


The second is to cross-sell. Of course, just because you're not making much money trading FX, doesn't mean you can simply pack up and go home. The real money is in the more structured, exotic products but you're never going to get that business unless you first do the plain vanilla stuff so its really a loss leader in some ways. THe whole focus of the sales force is much more focused on derivatives. Its one thing to recommend a simple spot EUR/$, quite another to sell a binary range forward with double knockout or something like that.


Regarding the flows... the reason i mention it is because often in the fixed income market large players can and will move the market. So you can look at all the charts you want and analyze economic fundamentals but on any given day, 10 year volatility might go up just because XYZ came in and bought in size. Then all the analysts go and conjure up some explanation trying to justify this.


About the e-trading platforms... i work in research so i don't really deal too closely with that aspect but from what i gather, the traders aren't really concerned about "giving away information" through their e-trades. The size on the those trades is quite small comparatively so you definitely won't get the same price on the larger volume trades. And i don't think we're very concerned about competitors pennying us. Don't know about equities but in fixed income 90% of the revenues are generated by about 10% of the clients so if we lose a little business here and there on the e-trades its not a big deal.


So, thats my impression of the state of affairs in fixed income. Its still an area which is dominated by larger players with little to none in the way of retail volume. Not sure about the story in equities, but even there i'm sure our main clients are mutuals funds, pension funds, etc... the usual suspects, so i have a feeling the story won't be all that different.

Here is the link:


http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=espd&sid=0&o_symb=espd


Thank you, Javelin, for telling us a little about the bond market:)


When I can get my thoughts together, I have a comment or two.


eLROY

When you say commoditized, you essentially mean one of two, interchangeable things:


1) symmetric information, across all shops, about ambient demand, meaning how high you can bid and make a profit, and


2) uniform, low-friction access to decks of orders, customers whom you can unload an inventory into, and counter-parties you can synthesize a product out of.


Of course, if everyone else knows where the Yen is going just as well as you, and everyone else can dump it just as fast as you - if you're all assembling the same product out of the same inputs - the only way you can win a bid is by bidding higher, and making a smaller markup.


So, you go esoteric, to where


0) you mine new value, by structuring and custom-tailoring innovative products to more exactly reflect client needs,

1) other people lack the expertise to build the same products, even with access to the same inputs, and the same global reach,

2) smaller players lack the balance-sheet flexibility to assemble the products on short notice and provide immediacy,

3) there are few enough natural counter-parties - meaning people with exactly opposite needs who might lean on your price data to meet one another at a fair price in some electronic free-for-all - that people need someone who can perform synthesis and arbitrage to take the other side,

4) by offering 0 through 3, you subsidize the analog realtionship, actually talk to customers, and thereby gain visibility up the supply chain, which you could not purchase or bother people with simply in exchange for EUR/$ spot tickets, and

5) it becomes self-perpetuating, to the extent you are the first-stop shop for pricing and transactions, and there still is some residual friction - or something.


Meaning, any unique value you can create, and force the customer to talk to you, is good. But every time you force a customer to talk to you, you have to acquire something additional which you can use to force another customer to talk to you, and another and another, building a proprietary stockpile. You can't let the customer acquire enough to become independent, and then help others to become independent, in a chain.


But I say, you are bleeding out your asymmetry, you are commoditizing your products in the very process of selling them. You are perpetually pioneering new products and markets, only to create an environment where second-tier players can come in, once the water is warm, and undercut you by a few pennies. You build the foundation which everyone else leans on and, thanks to low friction, your product becomes commoditized.


The way to counteract this, in my opinion, is to gain and keep your original asymmetric visibility into the flows in the simplest building-block products, by automating the paid collection of proprietary customer supply-and-demand data. And you purchase asymmetric leaning opportunities in the transaction. You


1) pay the customers for visibility, in a low-cost, automated way,

2) you price and sell the customers information about your spreads, in an automated way,

3) you gain asymmetric leaning opportunities in the process.


That way, every time you and the customer make contact - or every time your automated system and the customer make contact - there is a fairly-priced exchange. It creates a loop, which forces the customer to come back to you over and over and over. You never give the customer enough surplus value that he would go anywhere else, and give someone else value to sell to someone else, in a circle of invisible losses to where it all becomes valueless.


This alternative value-accumulation paradigm doesn't work, initially, when you have symmetric information. But once you start to build up a proprietary pool of asymmetric information, it becomes self-perpetuating, and you squeeze everybody else out of businees. You restore a monopoly in the commoditized product.


You sell unique information and opportunities to clients, in exchange for a unique claim to lean on them, and on their individual decks or needs. They sell you a unique glimpse into their positions, in exchange for payment which only you have the expertise to price, and the automation to collect.


It's simple economics, every time you talk to a customer, the incoming has to be greater than the outgoing. But you people don't undertsand this, you're giving away the store without even realizing it, you're creating an endless series of loss leaders, by not mining value that is right under your nose.


You're giving away free value for lack of the expertise to fully price the utility of your services to clients! You have to break down the total utility, to each party, of every client contact, in whatever form that utility may come. Only when it is allocated and rationed by a precise price system, can your advantage be protected and grown.


I know you don't know what I'm talking about. And this is a pretty haphazard explanation, I will admit. But it breaks my heart to see big trading desks throwing away profits - and having to resort to loss leaders for crying out loud - when they don't have to!


You have to reintroduce friction, make everything that happens squeeze itself through a parking meter! Make a penny flow in the opposite direction! Maybe I'll try to explain the exact mechanics more clearly another day...


I swear, if I had a big enough client book to start with, and the right proprietary groupware tools I would customize for the job , I could put every other shop out of business, in every product, in about a year:)


eLROY