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About GAIN: News & Events |
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Retail Forex Flows Grow Despite Tough Market Conditions
February 26, 2008
The currency markets may be tough hunting ground for profits among professional traders right now, but amateur dabblers don't seem to be scared away.
Deutsche Bank AG (DB) this week reported that flows on its retail currency trading system hit a record high during January, a tumultuous month for trading.
It doesn't reveal the size of the flows, but it does say that the monthly total was higher than ever before in the system's relatively short two-year history.
The record flows came during a month when the U.S. Federal Reserve cut U.S. key interest rate 125 basis points, including an a 75-point cut in one fell and unscheduled swoop that took the basic Fed rate below that of the European Central Bank's 4.0% policy rate.
During January, major currencies jerked higher and lower with no clear pattern, driven by different factors on different days. Trading volumes were heavy but direction was tough to call, and long-standing economists are still puzzled by the market's behavior.
Such volatility seriously crimped professional currency hedge funds' returns, leaving many nursing losses. Big-hitting traders have had their nerves frayed, and anecdotal evidence suggests they are now holding their positions for much shorter periods.
"There was a lot of damage done in January and few people had a strong month," said Keith Presbury, who runs the Rhicon Forex Investment Management currency fund in London. That has filtered through to shorter-term positions now "because managers don't want to show a terrible first quarter," he added.
But it could be that despite wobbly exchange rates, which have been particularly difficult to predict over recent weeks, retail investors are finding greater comfort in currencies than in other, more established asset classes.
"As the world observed tumbling equity prices during January 2008, investors sought to optimize alternative asset classes where they could make money, and foreign exchange presented such an opportunity," said Catherine Hardimann, head of Deutsche Bank's retail foreign exchange service in Europe.
Retail trading in the $3.2 trillion-a-day currency markets is clearly taking off. Research firm Aite Group estimated last summer that retail flows at the end of 2006 had hit $60 billion a day. That's a tiny slice of the market as a whole, but it's up fivefold from 2001.
Aite also predicted that flows by the end of 2007 would have hit $77 billion a day. Tighter regulation of retail currency trading systems, driven by the National Futures Association in the U.S., has helped to bolster confidence in the sector.
For trading systems, several of which have struck deals with big foreign-exchange banks to work together on reaching retail clients, this new boom time is what they have been working for over several years.
"In the past couple of years, the industry has reached critical mass," said Glenn Stevens, chief executive of retail trading outfit Gain Capital Group in Bedminster, N.J.
"The big banks were almost forced to entertain retail currency trading, and now it's embarrassing not to offer it," he said.
Stevens reckons that retail flows will keep growing even if big currency managers keep suffering patchy performance.
"You're more likely to hear about it if funds are getting beat up than if they're being successful," he said. "Many professionals have gone flat, but for the individual traders, this volatility means opportunities."
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