forex strategies used by banks

It would be good to know which strategies are used to trade forex by the banks. Judging by the Bloomberg currency section, the economic analysis of currencies by banks is generally "more of what happened today" , or "will probably go 100 pips higher within the next 6 months" ie useless , same goes for the free ubs analysis on oanda. So how are they making their money? Baskets of currencies? Scalping? Insider dealing on news events? Can they actually do better than an amateur on an ma crossover?

Comeon, give us the insider information!

I think you'll find the big firms are all trading off flow to a large extent.

Search through GammaJammer's posts, he trades for a firm that is big in forex and has posted about what he does here on t2w in the past.

You cannot underestimate the value of a flow environment. It can allow traders who would lose their proverbials if isolated to make large PnL's. One thing I noticed seeing people coming from flow environments to a fund is that they really struggle initially while they come to terms with the fact that they were not the great trader they thought they were. Some adapt, some die.

Flow?

shadowninja said:

Flow?

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Client trading activity. Sometimes market type orders, sometimes stoploss stopentry or limit orders.

Flow traders / market makers at banks leverage this information in a few main ways in FX

1) Front running. Entirely legal in FX to front run client limit orders. There is also no centralised exchange so the criteria for large orders and when one should fill them are non standard.

2) Leaning on their trading books. I.e. knowing where their risks etc are positioned (three customers buying eurusd off them in quick succession - probably means something). Bunch of stoplosses sitting just below current levels - be careful etc etc etc

3) Information - if a certain customer is always directional (i.e. when they buy, the price tends to go up soon after) or always 'away' (i.e. they buy 200m eur from you, and the same probably from your mate down the road) or smart (i.e. you know and respect the people making their trading decisions) then follow their lead.

4) Pricing power - the more flow you see, the more times you will have a chance to match buyers and sellers, sitting in the middle making a few sponds for minimal (or sometimes even zero risk).

5) As a proxy - if your client is a good representative of a large cross section of the market, then you can make some more robust assumptions about what people are doing in the market. Certain types of client play to this scenario better than others.

Of course, not all traders at banks are flow traders. They have pure prop traders as well (often multi product), but flow trading is a big part of the large banks' activity. It is also how they are able to be market makers in sizeable amounts in FX - you can't do that kind of activity unless you have the information and business base to back it up - you just end up getting killed.

GJ

Thieving gits! BUT, if they are making a market, then I suppose, would a market exist without them?


I can see how flow traders might become polluted or "flow dependant" Is that in the flow traders long term best interest? Guess it would come doen to what they want for themselves.

Thieving gits. lol

difference

xtf said:

It would be good to know which strategies are used to trade forex by the banks. Judging by the Bloomberg currency section, the economic analysis of currencies by banks is generally "more of what happened today" , or "will probably go 100 pips higher within the next 6 months" ie useless , same goes for the free ubs analysis on oanda. So how are they making their money? Baskets of currencies? Scalping? Insider dealing on news events? Can they actually do better than an amateur on an ma crossover?

Comeon, give us the insider information!

Click to expand...

To my mind we have to make difference between 2 kind of traders on FX, the prop trader and the traders doing market maker because the roles are not the same. Because in a bank, when you are spot dealer, you have a book but you manage your book in function of the clients :
ex: the client calls a salesman on fx , the client wants to do 50 mio eurusd, the sales call the trader and the trader gives his price 1.5485/1.5487
at 87 it s done so the trader will be short a 1.5487 so then he has to find a counterparty to unwind quickly his positions if he thinks that the market is a little bit bullish he will not want to be short. So we can see there is a difference between a prop trader (who can be the client for instance (hedge fund...).) and spot dealer in a bank

That is correct in very very basic terms. In practice the modern market makers job is a fair bit more complex than that, in these days of increasingly aggressive customer business combined with fragmented (and at times very patchy) liquidity.

GJ

Thanks for the explanation. Very interesting!

Crap Buddist said:

Thieving gits! BUT, if they are making a market, then I suppose, would a market exist without them?

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In a nutshell that's it. Because you can carp all you like about 'hidden' costs etc as a customer, but the bottom line is that in return for that, the banks will make you a price in a billion euros in one hit if that's what you need, so if risk transfer is your priority, the banks' approach will work in your favour.

And ultimately there are far more tools available to the clients these days as regards both execution and information, so they are less beholden to the banks now than ever.

It's not a perfect system, but all in all, taking the contributions of all sectors, it kinda works pretty well imho (and I have been on all sides of the fence including sitting on it).

GJ

is there anything equivalent to flow a retail trader can use? I can think of the Commitment of Traders report or maybe put/ call ratios- worth looking at?

In a word - no. Not for FX anyway. COT is only useful as a very general tool. Flow information is usually useful in inverse proportion to how old it is (i.e. it's value decays over time) and retail traders just don't see it first or even second hand.

I know it's not ideal, that's just the way it is. That's a big reason why I try to warn people off trading very short timeframes - because too much of what mmoves prices in those timeframes is really just flow related noise. And if you don't see that flow info, there's little or no chance you can really understand what's driving prices in the very short terms, which, imho, reduces the odds greatly and makes your trading far more akin to gambling (and we know who has the edge in the casinos don't we boys and girls - ain't the punters that's for sure).

GJ

xtf said:

is there anything equivalent to flow a retail trader can use? I can think of the Commitment of Traders report or maybe put/ call ratios- worth looking at?

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Ditto GJ's comments on COT. Plus there is an increased and inceasing blurring of the lines or definitions of commercial and non-commerical at the same time as the 'traditional' use of spot and futures trading expectations and intents by these groups tends toward a far more variable and dynamic utilisation than has hitherto been the case.

That bloke at Morgan Stanley who just lost 60 million should have looked at his flow a bit more often. Hopefully some of you guys soaked it up.