Professional Vs. Home Forex Traders

[c6ackp]

City Vs. Home Forex Traders

Could someone please answer the following queries, which have been rattling around in my head for a few months now...

How much do city fx traders rely on the infrastructure of the bank, in which they work, to be profitable?

What opportunites (apart from matching client orders for no risk & cheaper execution) exist for the professional trader which are not available to the home trader?

What proportion of city traders are "allowed" to trade their own account directly against the market?

What would the maximum pip stake be for a very consistent professional fx trader who has no involvement with clients but trades only against the market? Up to £500/£1000+ per pip?

I have a friend who is head of a front office equities department in a city bank. I mentioned to him a while ago that I was interested in forex. His game is equities, but he made the following comment:

"...fx traders are animals - we stick them in the basement. When they see one of our major competitors, ABC bank, buying heavily, say Yen, we sell like mad to try to squeeze ABC bank out of their position..."​

I understand that all the legendary plays on the stock market have involved price manipulation and competitors squeezing each other to force them to sell for a loss, but I would be slightly surprised if this technique is used routinely in forex. Is this for real? Also, given that the large banks have unlimited access to Ivy league/Oxbridge rocket scientists + IT infrastructure, why resort to such a crude strategy, when, presumably, they have the best models and the most experience to beat the market?

Is this "squeezing" part of the reason for the incessant & aggresive retracement in forex?

Now the markets are wide open with easy and efficient access why are city traders staying in the banks, getting up @ 5am, putting up with all the corporate nonsense, etc?

Is it because:

a) they like the kudos of working for ABC,
b) they couldn't be profitable at home,
c) they can't make as much money at home,
d) there's too much totty on the trading floor,
e) other?​

Given access to 100k and an IB account trading GBP futures for 1 week, who would win, the top city or top home trader?


Thanks,
Steve

 

[c6ackp]

By "own account" I didn't mean a personal account. I meant holding positions on their own book for speculation rather than supporting the treasury function of the bank (if that makes sense)?

All I would say is that your friend in the equities department has obviously given you a slightly over-simplified view of what goes on on an interbank FX desk.

I realise that - just thought it was comical. The question still stands though, is this "squeezing" between banks real/common practice?


Thanks,
Steve

 

[c6ackp]

OK GJ - many thanks for the insight, I didn't realise that the spread on client business is so tight, I assumed that this was the bread 'n' butter business. Perhaps it used to be before the market became so transparent and accessible. Ta.

 

[Perrington]

My personal philosophy is quite elementary, the more information you have access to, the more informed you are. I feel that home fx traders can and do make a decent living, however the overall risk must be slightly higher, due to slightly reduced exposure in relation to the complete market spectrum that the city trader is naturally exposed to. The home trader can succeed as fundamental announcements are generally good plays to take on, and TA is useful because so many are using it to predict movement. However, the increased risk I referred to earlier can IMO be summed up via "charting anomolies" these charting anomolies can generally be attributed to those with large buying/selling power. The city trader is therefore slightly better off, during specific markets conditions.

 

[c6ackp]

...the overall risk must be slightly higher, due to slightly reduced exposure in relation to the complete market spectrum that the city trader is naturally exposed to.

Thanks Perrington - could you explain this quote, please? Is this knowledge of order flow, large client orders, rumours, option protection, etc. or something else?

 

[Perrington]

Iam not a city trader, so my comments are speculative. My thoughts are along the same lines as the examples you give in your previous post.

 

[c6ackp]

Thanks guys.

Nice to know that city forex traders routinely trade for £1000++ per pip.

Sounds like fun!!

That would make the dealer handling RFQs on deal4free cough ' n' splutter a bit

 

[jmreeve]

My understanding was that $1bn FX transactions were not that uncommon which is $100,000
per pip.

Also heard of someone lucking out on a surpise rate change announcement and making $150 million on a trade.

 

[c6ackp]

nice one John - that's a whole different ball park - anyone here trade more than $100,000 per pip?

 

[ERA]

Also heard of someone lucking out on a surpise rate change announcement and making $150 million on a trade.

OK, I own up! That was me.

 

[jmreeve]

As to the rate change story, no idea. Sounds a tad far fetched to me. Most banks don't let their traders have positions large enough to 'luck out' into a profit quite that large (as they would be mortified if it went the other way). A million maybe, but probably not 150 Million.

I was surprised when I heard this but the source was very reliable so I believe it to be true.
However, I am not sure of the circumstances so it may have been a position that was taken by a trader on behalf of a fund. If it was an options position then going the other way may not have resulted in an equivalent loss so the risk to the bank may have been acceptable.

 

[jonnyy40]

How many pips does the average bank trader make a month?

 

[jmreeve]

It might not have been correct but the bank in question manages hundreds of billions of $ so it is possible.
If it is true is was almost certainly executed on behalf of a customer or managed funds.

In any case, I don't think it matters. The point I was making is that professional participants in the FX market routinely make very sizable transactions and hedge funds do take on very substantial positions.

I am quite surprised that with the success of spot FX that options have not really be offered to the retail market. This is another very sizable and liquid market so would seem like a logical thing to do.

 

[jmreeve]

On the other hand, allowing the retail punters to start SELLING options en-masse seems like a recipe for disaster to me. People blow themselves up plenty quickly enough just trading spot ;-)

Not that the brokers would care too much.
It's all more order flow and more comissions so will probably happen sooner rather than later.

Who is cheapest for FX options at the moment?

 

[JP1966]

But aren't bank option traders only ever trading volatility and not direction so does that really suit the non-bank trader. Also would a non-bank trader have to sign an ISDA agreement - this is a very lengthy document and again mans that en-masse selling of options to the retail market is not practical.

 

[jonnyy40]

GammaJammer,could you clear up a couple of questions for me,please?Which interbank platform is the most popular?and what is the minimum sum required to get access to an interbank platform?I've read in places that it's $10million and in others $250,000?Could you give any web links for interbank trading proper?

 

[jmreeve]

Also would a non-bank trader have to sign an ISDA agreement - this is a very lengthy document and again mans that en-masse selling of options to the retail market is not practical.

Retail OTC deriv transactions take place all the time without an ISDA. CFDs are a good example.
It just means that the individual would have to enter into an agreement with the broker who would then
be the counter party.

 

[JP1966]

A fair point. thanks.

I still wonder how it could work in reality as a bank has a duty of care to allow best execution in most option strategiesto non professional traders. How could they therefore take a margin?

The reason I suggest this in a previous role we wanted to sell caps to clients to help them hedge their mortgage against rising rates , whilst enabling them to keep their exisitng mortgage deals. As the cap was regarded as an option we were advised by lawyers and the fsa that this was impossible.

 

[jmreeve]

I am sure the lawyers they were probably correct given the particular circumstances.

I would have thought the fact it had option like qualities was irrelvant as you could always offer a derivative of the derivative. e.g CFD on an option or cap. Spreadbets on options are available to retail traders. You can usually convert one type of derivative into another by writing a new contract that has a similar payoff.

 

[c6ackp]

Thanks again GJ : the EBS screenshot shows a cable spread of 5 pips, is that normal!?!

Also, I've asked FXCM a couple of times, when they are likely to reduce their spread on cable from 5 to 3. They always say something like: "...when the traders here see sufficient liquidity...".

Is this a reasonable explanation? Liquidity of the pound, in London? It doesn't sound correct to the layman - what do you think?

Steve