Global FX markets continue to suffer from inconsistent liquidity while volatility boosts trading volumes for retail FX firms.
The FX markets have suffered intermittent droughts in liquidity and subpar pricing ever since Lehman’s collapse four weeks ago. Trade volumes have faltered over the past few weeks due to several structural issues brought on by the current financial collapse. Dealers have reduced lines to faltering banks thus affecting their trading abilities and the trading of their Prime Brokerage clients. Dealers’ concern over AIG’s financial security cut volumes on Currenex and other multi-bank trading platform where AIG was the central clearer. The collapse of Lehman also took a major FX market maker out of the pool thus decreasing available liquidity. The collapse of Icelandic Banks last week has furthered fueled counter party risk concerns and has made many reluctant to trade with major banks. Though banks such as Citi and JP Morgan have stepped up to the plate to provide needed lines and liquidity to the market, pricing has remained significantly wider than usual and depth remained scarce. Two pip wide EUR/USD has come to replace the customary fraction of a pip spread during the Dow’s 500 point drops, now a daily event. Many banks have also decreased their bid and offer sizes shrinking top-of-the book tranches on many platforms to as little as $2M or $3M. All this in turn has led to less buy-side trading as funds and corporates grapple with counter party risk fears while trying to retool their models to function in a high spread, low depth environment.
Retail FX firms have remained largely unaffected by this liquidity drought due to the relatively small size of most retail transactions and the dealers’ ability to net trades internally. Furthermore the industry’s largely margin based collateral system coupled with automatic margin call executions and a more diversified client pool have made customer side counter party risk a non-issue. In fact many Retail Forex Dealers have experienced record volumes due to increased volatility and the acquisition of new clients as customers flee the equity markets in droves. In fact FXCM posted record volumes in August with many expecting similar numbers for the month of September. Japan’s FXOnline reported that market volatility boosted client transactions to 200,000 a day, four times higher than average. Forex Dealers FX Solutions, CMS Forex and Saxo Bank have also noted significant increases in trading volume. Investment and trading capital is likely to become more scarce as consumers have less discretionary income to allocate to their market activities. Nevertheless Retail Forex Dealers are set to experience a boom in new account openings as investors and active traders alike shift funds out of stocks and bonds due to the global equity markets’ collapse.