A Brave New World

Opportunities abound as spreads narrow

Every time I look at a trading platform I am amazed at the spreads quoted as “standard”. The advances made in liquidity and technology that allows all players a fair opportunity to “trade like a pro”.

Obviously, the advent of the Euro nearly twenty years ago was always going to bring liquidity to the market as it brought together (at the time) twelve, fourteen if you include the Monegasque Franc and Vatican Lira, currencies that were traded individually with others joining over the ensuing years.  

Just comparing the advances made in technology that started over twenty-five years ago mean that the interbank market has become more and less sophisticated at the same time. The growth in sophistication has been led by the growth in the knowledge and experience of the average FD or Treasurer that has brought a whole new dimension to one of the primary drivers of interbank players, corporate activity. The flip side of that is that the interbank market has lost its soul and is therefore prone to scams, scandals and the types of activity that have led to investigation and prosecution over the past few years.

In the golden years of FX trading, say between 1985 and 1995, the market was totally self-regulating, banks and customers understood their places and their responsibilities.

Why Complicate things?

Bank trading rooms were predominantly staffed by educated people, but they didn’t necessarily have degrees. In his book Dinosaur, Haydon Murray delves into this world and demonstrates what was needed back then to be successful yet maintain integrity.

Trading FX, as any successful individual trader will agree, relies on a degree of education but it is a nimble mind and a basic understanding of positioning and price action that are the basics. As banks have tried to hone their employment practices and only use graduates in the dealing rooms, so FX has become either the starting point for “bigger things” or a market ripe for manipulation or sharp practice. It is a shame indeed that the banks and regulator don’t see what is staring them in the face.

I do not believe that the FX market can be “fixed” but, and this is something that will draw a knowing nod from several readers, it is the customer who falls rapidly down the food chain.

The sharks at the top are the six banks who now, in some form or another, see around 85% of all FX traffic pass through their hands.  

Pray to the tech gods!

So, where is it all heading? What does the rise of the cryptocurrency mean and is that the coming major event? Well, in my opinion, yes probably but as with any new paradigm shift, it will require far wider acceptance and understanding bit we are clearly moving in the right direction.

Cryptocurrencies in general and Bitcoin in particular are becoming a big deal on “ordinary” news bulletins which will grow interest and acceptance. Inadvertently Donald Trump is driving the process of “alternative money” by debasing Government and its teach into our lives. The growth of cryptocurrency will be as a means of exchange of value and which won’t necessarily have anything to do with trading long term.

Trading is going to be a slave to technology and who can build the best algo. It is already becoming a feature of the FX market that one of the other “spread narrowing” features are the placement of orders at almost every tenth of a pip. That brings the birth of the super scalper but also means that slippage will become the no.1 denominator of a broker’s capability.

Obviously, that means that the only way the market will cope is to have automate everything and the market will become totally automated and the opportunity to make money will vanish as spread disappears entirely taking away brokers raison d’etre.