Trading News

I have access to forex volume data!

And you don’t! 🙂

We’re working on something in the office whereby we get access to volume data from the folks who run the Reuters forex dealing platforms so we can use it in our market analysis. Right now I can only see the current day’s data to a given point in time (we’re working on expanding that). The chart below shows Tuesday’s distribution actual traded volume by price level for GBP/USD.

Click for full-sized image

By way of comparison, here’s the price time distribution for GBP/USD on the day. You’ll notice the similarity of the two distributions, but also the differences in the upper part of the day’s range.

Trading Book Reviews

Book Review: Investing with Volume Analysis

[easyazon-link asin=”0137085508″][/easyazon-link]If you want to learn just about everything there is to know about incorporating volume in your trading or investing you’re going to want to pick up a copy of [easyazon-link asin=”0137085508″]Investing with Volume Analysis[/easyazon-link] by Buff Dormeier. The author is a Chartered Market Technician (CMT) and an experienced money manager and he’s pulled together for this book a very comprehensive collection of volume studies and indicators, including some of his own devising.

This isn’t just some encyclopedia of volume analysis tools, though. There is considerable discussion of how to implement them, including studies demonstrating their performance. The author also discusses recent developments (high frequency trading, etc.) in the markets and their impact on volume and the analysis thereof.

My one issue with the book is that it has the feel of a manifesto, especially early on, and there are some religious undertones which may bother some readers. Most of that stuff is in the first few chapters which provide some background and historical perspective of volume and technical analysis. At times I found the reading slow going through that section, though it gets easier later.

All in all, I found this a very useful book. If you are looking to use volume in your trading/investing and market analysis, this is definitely the book for you.

Make sure to check out all my trading book reviews.

Trading News

Competition, Regulation Hitting Forex Brokers?

Apparently, the analysts at Citi have their concerns about the earnings prospects of the major forex retail brokers. They’ve knocked their price forecast for FXCM (which went public not to long ago) down to $18 from $14. Ouch! They’ve done this on the basis of the trading metrics FXCM has just reported for January. They didn’t quite meet expectations.

It’s interesting to note how aggressive things have gotten in the retail forex broker space where advertising in concerned. FXCM and Gain are co-sponsors for CNBC’s new forex program. FxPro is a lead sponsor for two teams in the top division of English soccer. Oanda has just started advertising after having taken a word-of-mouth approach to attracting customers for years. That means the account acquisition cost for these brokers has risen at the same time as new regulations like the CTFC’s 50:1 leverage limit are putting upside limits on how much volume those accounts can trade. It’s going to be interesting to see how the industry evolves from here.

One of the more interesting side benefits of having FXCM and Gain as listed stocks is that we get to see all kinds of data we would not have seen otherwise. One of those is volume data. FXCM reported $258bln in trading for the month of January. Gain reported $470bln for Q4 of 2010, $1.6trln for the full year. I’m thinking at some point it would be worth comparing that volume to comparable retail volume in other markets.

Trading News

Forex Trading Volume Still Rising

Reports on trading volume in the North American and London markets were released on Monday. They show continued growth in the markets, which likely won’t surprise anyone at this point.

North America
Average daily forex volume hit $772bln/day in October 2010. That’s up 2.3% from April 2010 and a new record. EUR/USD volume accounted for $258bln of that flow, just a bit under 1/3rd of the total. Interestingly, USD/MXN saw the biggest increase in volume. It jumped 26% from April.

New York sees about 20% of the global forex trading volume each day.

Daily forex trading volume reached $1.82trln in October. That’s up 8% from April. Spot trading was up 11%. About a third of daily volume in the foreign exchange market goes through London.

The only Asian figures I’ve seen were for Sydney, which posted a 2% rise in volume from April to October.

Reader Questions Answered The Basics

Is the Forex Market Too Big to Manipulate?

One of the readers at Forex Live asked the question:

“What would you say about the FX market being too big for manipulation? I’ve heard this so many times, but the recent price action of EURUSD just screams the opposite. The big banks RULE the markets and they do whatever they want. How can we small players survive in this market?”

Jamie, the head man over there with whom I’ve worked in the past (I’ve also worked with Gerry, one of the other primary posters), had this to say in response:

I’ll put it this way. The forex market can be influenced by a big player or two in the near-term but not manipulated for very long.

I totally agree with what Jamie says in terms of any one single player being able to control the forex market (except possibly in the case of the less liquid more regional currencies). If some big player comes in with a large order it’s going to have an impact on prices, just as it would in any other market, but that impact will only last so long as the supply/demand dynamic in the market supports it. Say a big hedge fund comes through with a $50bln buy order for USD/JPY. There’s no doubt that prices will be influenced by that order. If, however, there isn’t any additional buy interest in USD/JPY once that $50bln goes through, prices will invariably adjust back down.

Keep in mind the size of the forex market – about $4trl in daily volume according to the estimates. That’s makes it hard for any one player, or even a set of players, to move for a sustained period. Compare that to something like gold. On a good day about 250,000 futures contracts trade there. At a prices of $1300/oz and a contract size of 100 oz, that’s a notional value of about $32.5bln. That’s less than 1% the volume of forex market trading (and about 1/5th the notional volume of the 10yr Note futures), which is why I’ve been saying for a while now that if money really started moving into gold it would go parabolic.

I’ll also agree, however, with the questioner’s point about the big banks ruling the market. They do. The big banks are the primary price makers in forex. That doesn’t mean, however, that they can move the bid/ask strictly of their own accord. They have to react to the demands of the market. The big banks are in direct competition with each other for transactional flow business, and there’s so much pricing information available to customers these days, that banks cannot get far out of line with each other or risk losing business.

Trading News

The Dominant Players in Forex

I see the question all the time about where prices come from in the forex market and who drives them. The answer is that it comes from the market makers in the inter-bank market. Want to know who the big players are there? Here’s the current ranking as per Euromoney (hat tip to Clint at BabyPips).

Source: Euromoney FX survey FX Poll 2009
Source: Euromoney FX survey FX Poll 2009

According to that same survey, the daily volume of forex trading breaks down like this:

  • Western Europe 50.19%
  • North America 26.98%
  • Asia 14.54%
  • All others 8.39%

Here’s something most folks probably don’t realize, however. According to a Financial Times article posted today, about two thirds of the $3.2 trillion in daily forex market transaction volume done each day is derivatives (see Most Active Forex Currency Pairs). That’s heavily in swaps. The focal point of that FT article is on the potential impact of new legislation requiring derivatives to be cleared through central clearinghouses.

It’s worth noting that the only bank in the ranking list above that does retail forex trading business is Deutsche Bank, which has the dbFX platform. The way I understand it, DB is a major liquidity provider to retail forex brokers. So the answer to the question of who is making prices in the forex market is Deutsche Bank.

The Basics

Forex Crosses Do Actually Trade

A question that comes up sometimes from new forex traders is whether the cross rate currency pairs such as EUR/JPY and AUD/NZD actually trade or whether they are just calculated figures. Unfortunately, I’ve seen some more experienced traders respond incorrectly (or at least unhelpfully), not clarifying the situation at all. Getting the answer to that question requires answering a very simple secondary one:

Do countries trade directly with each other?

The foreign exchange market is first and foremost a market for the conversion of currencies from one to the other to facilitate international trade and capital movement. If a company in the US is buying something from a company in Japan it will probably have to convert USD into JPY for the transaction (or the Japanese firm will do it on their side when they receive the funds).  So what happens when a company in Europe wants to buy something from Japan? The firm isn’t going to first convert EUR into USD and then USD into JPY. That would be foolish and add to the expense of the transaction (corporates are subject to bid/ask spreads too). Any corporate Treasurer who did that would find himself unemployed very quickly. They are going to do the direct converions of EUR to JPY.

So basically, the more trade and capital flow there is between two countries the more volume of forex action there is going to be in that currency pair. Obviously, that means some pairs are going to be more active than others.

Now, having said that, cross rates are definitely calculated. But so too are the majors. It’s a simple fact of the market makers’ computers keeping prices in line. Remember your triangluar arbitrage. The EUR/JPY rate, for example, must equal EUR/USD x USD/JPY (before accounting for spreads). As such, if there’s something which moves one part of the triangle, the other parts must be adjusted to keep the relationships in place.

The bottom line is that crosses do trade, though for the most part the volumes are lower than those of the majors.