Over the last several years, Forex Dealers have been springing up everywhere. Attending the New York City Trader's Expo this year, I was surprised at the number of FX dealers that were all exhibiting very similar offerings. Some competitors even used the same trading platform just white labeled to appear customized.
My thoughts were there must be tremendous profits in the FX Dealer business to support the preponderance of dealers offering truly non-differentiated offerings.
My next obvious thought was, where does this profit come from? These guys generally do not charge commissions, so how do they get paid?
Dealer profiting - your Loss is their gain
They make their money in several ways, first is from the bid/ask spread which normally is at least 2 pips and sometimes as high as 5 or 7 depending on the dealer.
The second way and some say the sneaky of dealer profiting is to actually take the other side of your trade. Your losses go directly into the dealer's pocket.
How is this possible? A little known fact about trading with FX dealers is that your trade isn't actually placed in the true interbank market, but merely held on the dealer's own books. They are the counterparty, therefore your losses enrich the dealer and your gains come directly from the dealer. Conflict of interest? I'll let you decide.
Dealers are improving; however, some are moving to a non-dealing desk model and having several banks compete for your trades with the best price on the pair. You are trading with the dealer as your counterparty in an unregulated marketplace - seems pretty risky for the serious trader.
Is there an alternative for the active currency trader?
Yes. There is an excellent alternative in the form of currency futures offered by the CME. I am particularly partial to the E-mini version of the currency contracts from the CME.
The E-Mini Euro symbol E7 is the one I am most familiar with. It moves in $6.25 ticks and the advantages of trading this future over the EUR/USD pair offered by dealers are several. First and foremost is the very tight spread and low commissions offered by most brokers.
Secondly is a regulated marketplace with price transparency.
Thirdly, your broker can't play games with your trades as dealers sometimes do, as the trade is made in the actual marketplace and not held on dealers' books.
The bottom line
FX dealers offer more flexibility for the FX trader, particularly small traders. They provide access to the market for those very little capital. In fact, several even allow you to trade micro lots with just one dollar in the account! The spreads and other negatives have less of an impact if you're a longer term or swing trader.
Currency futures definitely have the advantage for short term/day trading/scalping. In the end, it really comes down to personal choice and style.
Good Luck!
Dave Goodboy is Vice President of Marketing for a New York City based multi-strategy fund.
NewsReel
Forex Spot Trades Vs. Currency Futures
Posted by forex-experts at 11:45 AM
Labels: the market
Why Hedge Foreign Currency Risk
International commerce has rapidly increased as the internet has provided a new and more transparent marketplace for individuals and entities alike to conduct international business and trading activities. Significant changes in the international economic and political landscape have led to uncertainty regarding the direction of foreign exchange rates. This uncertainty leads to volatility and the need for an effective vehicle to hedge foreign exchange rate risk and/or interest rate changes while, at the same time, effectively ensuring a future financial position.
Each entity and/or individual that has exposure to foreign exchange rate risk will have specific foreign exchange hedging needs and this website can not possibly cover every existing foreign exchange hedging situation. Therefore, we will cover the more common reasons that a foreign exchange hedge is placed and show you how to properly hedge foreign exchange rate risk.
Foreign Exchange Rate Risk Exposure - Foreign exchange rate risk exposure is common to virtually all who conduct international business and/or trading. Buying and/or selling of goods or services denominated in foreign currencies can immediately expose you to foreign exchange rate risk. If a firm price is quoted ahead of time for a contract using a foreign exchange rate that is deemed appropriate at the time the quote is given, the foreign exchange rate quote may not necessarily be appropriate at the time of the actual agreement or performance of the contract. Placing a foreign exchange hedge can help to manage this foreign exchange rate risk.
Interest Rate Risk Exposure - Interest rate exposure refers to the interest rate differential between the two countries' currencies in a foreign exchange contract. The interest rate differential is also roughly equal to the "carry" cost paid to hedge a forward or futures contract. As a side note, arbitragers are investors that take advantage when interest rate differentials between the foreign exchange spot rate and either the forward or futures contract are either to high or too low. In simplest terms, an arbitrager may sell when the carry cost he or she can collect is at a premium to the actual carry cost of the contract sold. Conversely, an arbitrager may buy when the carry cost he or she may pay is less than the actual carry cost of the contract bought. Either way, the arbitrager is looking to profit from a small price discrepancy due to interest rate differentials.
Foreign Investment / Stock Exposure - Foreign investing is considered by many investors as a way to either diversify an investment portfolio or seek a larger return on investment(s) in an economy believed to be growing at a faster pace than investment(s) in the respective domestic economy. Investing in foreign stocks automatically exposes the investor to foreign exchange rate risk and speculative risk.
For example, an investor buys a particular amount of foreign currency (in exchange for domestic currency) in order to purchase shares of a foreign stock. The investor is now automatically exposed to two separate risks. First, the stock price may go either up or down and the investor is exposed to the speculative stock price risk.
Second, the investor is exposed to foreign exchange rate risk because the foreign exchange rate may either appreciate or depreciate from the time the investor first purchased the foreign stock and the time the investor decides to exit the position and repatriates the currency (exchanges the foreign currency back to domestic currency). Therefore, even if a speculative profit is achieved because the foreign stock price rose, the investor could actually net lose money if devaluation of the foreign currency occurred while the investor was holding the foreign stock (and the devaluation amount was greater than the speculative profit). Placing a foreign exchange hedge can help to manage this foreign exchange rate risk.
Hedging Speculative Positions - Foreign currency traders utilize foreign exchange hedging to protect open positions against adverse moves in foreign exchange rates, and placing a foreign exchange hedge can help to manage foreign exchange rate risk. Speculative positions can be hedged via a number of foreign exchange hedging vehicles that can be used either alone or in combination to create entirely new foreign exchange hedging strategies.
Arbitrage
There is no free lunch.
Old Stock Exchange adage
Arbitrage strategies are very popular in the hedge fund world, but before turning to their description, it is necessary to clarify the specific meaning of the term “arbitrage” in this context.
From an academic point of view, an arbitrage stands for a risk-free transaction that
generates an instant profit: a theoretical example of arbitrage is the concurrent purchase and sale of the same security on different markets at different prices. By buying the same security at a lower price and selling it right away at a higher price, an arbitrageur earns an immediate profit at no risk, saving the settlement and delivery risks.
But in the hedge fund business the term arbitrage has developed a different sense, in that it does not refer to risk-free positions, but rather to positions involving risks other than the market risk. Hedge fund arbitrages in practice are directional positions on spreads: if the spread widens or narrows as anticipated, the manager makes a profit; otherwise he suffers a loss. Therefore we must not be misled by the word arbitrage: a hedge fund may well suffer a loss even when it has constructed an arbitrage position – what it takes, is for the spread to widen or narrow contrary to predictions.
An arbitrage opportunity may appear when given technical, geographical, legal or administrative barriers interfere with the correct interaction between two markets trading the same security, thus preventing the security from having the same price on both markets.
In a perfect world, there would be no arbitrage opportunities, and in the real world most arbitrage opportunities tend to disappear quickly, unless there are high transaction costs that hamper frequent arbitrages. Over time, inevitably, other arbitrageurs will get organized to take advantage of arbitrage opportunities, narrowing down the price difference until it disappears. Arbitrage opportunities draw various arbitrageurs to the market, and they will erode each other’s profits by competing against one another. Once again, to make a return it is necessary to take on risks!
It is important to note that arbitrageurs are not asked to forecast the absolute movement of two securities, but rather the relative movement of one over the other, irrespective of market direction.
Any arbitrage opportunity faces so-called steamroller risks. Through a colorful analogy, an arbitrageur is seen as somebody who picks up a few coins from the ground in front of a moving steamroller: the man runs no risk provided he never forgets that the steamroller is forging ahead towards him. In order to earn a few coins the man runs the risk of being steamrolled.
Risks can also come from regulatory or tax changes, which may force the arbitrageur to close a position while losing money. Or, as illustrated below in the ADR arbitrage example, sometimes conditions regulating the short sale of a security may change suddenly, and the security may be called in by the owner; or sometimes the borrowed security may pay out a dividend, which is going to represent an unexpected cost for the arbitrageur.
The greater the number of arbitrageurs operating on a given market, the higher the
competition, which means that the returns realized by the arbitrageurs will be lower. The current trend in the hedge fund business is that the massive money flow towards arbitrage strategies makes it more and more difficult for managers to generate interesting returns.
Most of the low-hanging fruits have already been picked!
This article is a part of “Investment Strategies of Hedge Funds” ebooks by Filippo Stefanini for closed private educations only. You should nuy his books for the best completely informations.
WHAT IS A HEDGE FUND?
In the United States, the country where they first appeared and enjoyed the greatest development, there is no exact legal definition of the term “hedge fund” that outlines its operational footprint and gives a direct understanding of its meaning.
Yet, to rely on the literal meaning of hedge fund, i.e. “investment funds that employ
hedging techniques”, could be misleading, because it relates merely to just one of the many traits of hedge funds and makes reference to only one of the many investment techniques they deploy.
A more fitting definition in our opinion is the following: “A hedge fund is an investment instrument that provides different risk/return profiles compared to traditional stock and bond investments”.
To appreciate the meaning fully, however, it is necessary to remark that hedge funds make use of investment strategies, or management styles, that are by definition alternative, and that they do not have to fulfill special regulatory limitations to pursue their mission: capital protection and generation of a positive return with low volatility and low market correlation.
Hedge funds are set up by managers who have decided to take the plunge into selfemployment, and whose backgrounds can be traced to the world of mutual funds or proprietary trading for investment banks.
The differences between hedge funds and mutual funds are manifold.
The performance of mutual funds is measured against a benchmark, and as such it
is a relative performance. A mutual fund manager considers any tracking error, i.e. any deviation from the benchmark, as a risk, and therefore risk is measured in correlation with the benchmark and not in absolute terms. In contrast, hedge funds seek to guarantee an absolute return under any circumstance, even when market indices are plummeting. This means that hedge funds have no benchmark, but rather different investment strategies.
Mutual funds cannot protect portfolios from descending markets, unless they sell or remain liquid. Hedge funds, however, in the case of declining markets, can find protection by implementing different hedging strategies and can generate positive returns. Short selling gives hedge fund managers a whole new universe of investment opportunities. It is not the general market performance that counts, but rather the relative performance of stocks.
The future return of mutual funds depends upon the direction of the markets in which they are invested, whereas the future return of hedge funds tends to have a very low correlation with the direction of financial markets.
Another major difference between hedge funds and mutual funds is that the latter are
regulated and supervised by Regulatory Authorities, and are bound by limitations restricting their portfolio makeup and permitted instruments. Moreover, investors are further protected by obligations burdening the management company in terms of capital adequacy, proven robust organization and business processes. On the contrary, the absence of a stringent
2 Investment Strategies of Hedge Funds regulatory framework for hedge funds leaves the manager with greater latitude to set up a fund characterized by unique traits in terms of the financial instruments to be employed, the management style, the organizational structure and the legal form.
Therefore, the hedge fund industry is marked by a great heterogeneity, in that it is
characterized by different investment strategies and by funds of a wide variety of sizes.
Although hedge funds immediately bring to mind the image of innovative investment
strategies within the financial landscape, the first hedge fund came into existence more than half a century ago.
This article is a part of “Investment Strategies of Hedge Funds” ebooks by Filippo Stefanini for closed private educations only. You should nuy his books for the best completely informations.
100% Hedging Strategies
Hedging is defined as holding two or more positions at the same time, where the purpose is to offset the losses in the first position by the gains received from the other position.
Usual hedging is to open a position for a currency A, then opening a reverse for this position on the same currency A. This type of hedging protects the trader from getting a margin call, as the second position will gain if the first loses, and vice versa.
However, traders developed more hedging techniques in order to try to benefit form hedging and make profits instead of just to offset losses.
In this page, we will discuss, some of the hedging techniques. >> 100% Hedging.
This technique is the safest ever, and the most profitable of all hedging techniques while keeping minimal risks. This technique uses the arbitrage of interest rates (roll over rates) between brokers. In this type of hedging you will need to use two brokers. One broker which pays or charges interest at end of day, and the other should not charge or pay interest. However, in such cases the trader should try to maximize your profits, or in other words to benefit the utmost of this type of hedging.
The main idea about this type of hedging is to open a position of currency X at a broker which will pay you a high interest for every night the position is carried, and to open a reverse of that position for the same currency X with the broker that does not charge interest for carrying the trade. This way you will gain the interest or rollover that is credited to your account.
However there are many factors that you should take into consideration.
a. The currency to use. The best pair to use is the GBPJPY, because at the time of writing this article, the interest credited to your account will be 24 usd for every 1 regular long lot you have. However you should check with your broker because each broker credits a different amount. The range can be from $10 to $26.
b. The interest free broker. This is the hardest part. Before you open your account with such a broker, you should check the following: i. Does the broker allow opening the position for an unlimited time? ii. Does the broker charge commissions?
Some brokers charge $5 flat every night for each lot held, this is a good thing, although it seems not. Because, when the broker charges you money for keeping your position, the your broker will likely let you hold your position indefinitely.
c. Equity of your account. Hedging requires lots of money. For example, if you want to use the GBPJPY, you will need 20,000USD in each account. This is very necessary because the max monthly range for GBPJPY in the last few years was 2000 pips. You do not want one of your accounts to get a margin call. Do not forget that when you open your 2 positions at the 2 brokers, you will pay the spread, which is around 16 pips together. If you are using 1 regular lot, then this is around 145 usd. So you will enter the trades, losing 145 usd. So you will need the first 6 days just to cover the spread cost. Thus if you get a margin call again, you will need to close your other position, and then transfer money to your other account, and then re-open the positions. Every time this happens, you will lose 145 usd!
It is very important not to get a margin call. This can be maintained by a large equity, or a fast efficient way to transfer money between brokers.
d. Money management. One of the best ways to manage such an account is to monthly withdraw profits and balancing your positions. This can be done by withdrawing the excess from one account, take out the profits, and depositing the excess into the losing account to balance them. However, this can be costly. You should also check with your broker if he allows withdrawals while your position is still open. One efficient way of doing this is using the brokerage service withdrawals which is provided by third party companies.
by Yannis Karamanakis
http://www.myfxreport.com
Posted by forex-experts at 12:16 PM
Labels: correlations pairs, hedge
No money down!
Of the numerous pitfalls confronting traders, the easiest one to sidestep
is trading without enough capital or experience.
Questions:
I’am a beginner interested in day trading. Being only a beginner — and a student — I don’t have much money to spare, aside from a couple of hundred dollars.
Are there any brokerages out there that will allow me to open an account with as little as $300? I am not sure if you’re familiar with [brokerage], but I have used their software. I’m not saying it’s the best out there, since that’s the only one I
have used, but I would like something similar to that. In other words, I require something that uses the Level II (demand and supply) and shows the S&P futures. —A. Z.
There might be brokerages out there that would let you open an account for $300, but we can unequivocally state you shouldn’t attempt to trade with that little money. Save your $300 and research trading ideas, test them, and paper trade. By the time you think you have an idea worth using, you might have enough money saved to trade it. With a $300 trading account, you would likely burn through it on a few losing trades, or be forced to trade positions so small that — even if were you profitable — commissions would offset much of your gains.
You should simply scour the Internet for trading platforms that fit your needs. Do a keyword search on the features you’re looking for and start comparing them. In most cases, you’ll be able to download trial versions of programs and play around with them a bit.
Also, we must ask why, if you have no experience, are you drawn to day trading? If you have a reason, fine, but our experience is that many people have gone into day trading in recent years because it’s a hot topic in the media. One bit of advice: Research the markets and let your analysis help dictate the style and timeframe you trade. Maybe you will be a day trader. Maybe you’ll find out you’re a longer-term trader or investor. But have a reason for going in a certain direction. This might not sound like exciting advice, but it’s better to be safe than sorry when risking money.
Source : activetradermag.com
Posted by forex-experts at 12:18 PM
Labels: About trade, finance worlds