Comment by Peter jcp on October 17, 2012 at 1:02pm

Hi Alan - Interesting article and I am sure you guess my view on your comments. I can only really offer my thoughts as a retailer trader - who as never actually worked in the financial sector - but at senior levels in other industries.

For a start and it is a shame to say it - but the investment/ trading side of the industry is as bad as you can have. Greed and power does corrupt and from years 2000-2009 it proved the industry was out of control and was up to every possible trick in the book and probably a lot more.

The fact that you have an industry full of very clever people able to earn millions was a recipe for it to eventually end in a massive crisis. However instead of only a few banks getting hurt the whole world economy as been damaged by the financial sectors and we are having to pick up the tab;-(

If any would be trader wanted to be a Doctor or any other profession - electrician / lawyer/ Optician etc - they would spend 3 -7 yrs+ learning their craft - and even then many might not make it.

The Financial industry have allowed myths and untruths to be spread that you can be an experienced trader after a few courses and with 6 months to 1 year you should be advanced enough to be on the way to make your first million.

There is some truth in it because maybe 0.002% of all traders do that within a few years (lol)

Meanwhile the other 60 / 70 /80% lose money ( designed ideally to happen slowly after many wins) and just give up or move on.Nobody bothered about the "churn" rates for a start - as long as they had 3-5 yrs - they would have made their monies.

Probably 10-30% stay trading after a few years and then finally find a way through experience to be fairly consistent. The 5-20% of those who go full time get the 10k hrs of live chart watching - and then start to make consistent money.

Yes volumes have helped to reduce spreads - but so as "baiting" - ie the lower the spread the more possibility of getting 2 million+ retail and small commercials to trade more and of course the majority will lose. Five decimals is a joke - but it brings home the importance of just making 1 pip and not to think anything under 50 pips is "noise" and untradeable and that small pips does not count. Yes 10 cents on a pip and 5 decimals is nothing but 500 dollars on a pip and that 0.34 of a pip is nice bucks.

Agree that HFT trading needs more controls as yet again they have managed to hood wink the regulators selling the good points and not mentioning it makes them far more money - but more difficult for all others ;-)

Talking about money, power and greed - we then have the politicians - but that's another story...

Have a good day

Regards

Peter 

Comment by Alan Hill From Sarrafx Trading on October 17, 2012 at 1:13pm

Peter, I will prepare a considered response. 

I never saw myself as a guardian of the industry but there are some important distinctions to be made.

Comment by Alan Hill From Sarrafx Trading on October 18, 2012 at 5:57am

Hi Peter,

Tarring the whole “financial industry” with the same brush I have to disagree with.

It is clear that the huge upsurge in activity in the leveraged FX community from 2000 onwards attracted some unscrupulous practices and practitioners and regulation was unable to keep up.

 With this upsurge in activity there will always be those who try to exploit loopholes in the system. It is incredible just how easily these Ponzi Schemes come into being and also how long they can survive undetected.

It never ceases to amaze me some of the comments I see on other sites where traders complain about the time it takes to withdraw funds from some brokers. If it were me there would be hell to pay. Some clients feel intimidated by their brokers and that is a relationship that can never work.

The FSA has not always covered itself in glory in protecting “the little guy” but it is what we have as a regulator and I believe that setting up an independent body globally to which both sides of the market could belong could help immensely. I would even support your candidacy as the first chairman ;).

Seriously though it’s never going to be easy to regulate this market and although it appears glib to say it the best policy is buyer beware. I would give you an overview of our policies and procedures here but I am afraid I would be censored for self-advertising.

Looking now at The Big Bad Wolf; the interbank market. I was a member of this community for more than twenty years so believe I have the experience to make a fairly rational judgement. I don’t want to give a history lesson on how the market has evolved over that time but it is the advances in technology that have led us to where we are today.

I think it is also important to distinguish between the various parts of a banks treasury to understand where the problems lie.

FX as a product remains essentially unchanged since the late seventies it is simply the delivery method that has changed. For banks it is the common denominator and the simplest product traded. Risk management is very simple. Give a trader an open position limit, mark his positions to market at the end of the day and that is it. Add in the spreads he agrees as a market maker to his counterparty banks and throw in a corporate sales desk and that is about it.

It is with the onset of technological advances that the issues started to arise. Banks started to employ graduates with computer skills that were way beyond the capabilities of the banks employing them to understand. This was the advent of the “Financial Engineer”. A title which, in my opinion, has done more harm than good.

Two things then occurred. Banks needed to employ specific Risk Managers and a whole suite of products were born that were little more than a maths thesis to those creating them. Markets became far too theoretical and products became mis-sold to those who either didn’t understand or were not fully explained the downsides. These were usually sold as hedges but never fulfilled the propose.

All this time, FX continued to be the ugly duckling of the banks treasury. Not especially profitable compared to the more “sexy” products producing far greater revenues. Even as FX options began to become more prevalent, spot FX moved with the times only in its delivery method.

Where we are today with banks quoting each other spreads in Eur/Usd of 0.00001 is testament to how liquid that pair is. The fact that banks have allowed HF trades to also deal off that spread is plain crazy but part of the liquidity and flow that is all banks see the benefit of this market right or wrong.

Brokers, especially the big guys, can negotiate spreads that are close to interbank depending on the volume they deliver and that is where the problems start for the leveraged community. Of course day traders get sucked in by ever narrower spreads and as volumes increase brokers can afford it due to the sheer volume of business. It is at times of stress that spreads blow out and that causes the problem.

Of course, yet again, it is down to the individual to negotiate the best deal he can get for himself and not become one of the crowd.

My tenets are integrity, differentiation and consistency. And that is all the self-publicity I think I can get away with.

 

 

Comment by Peter jcp on October 18, 2012 at 10:32am

Hi Alan - I agree I should not "tar" all in the industry with the same brush - as that would be unfair.In all organisations and businesses you will have a few "bad apples" and as long as it only a very small percentage - they will never be able to take over.

For example in the UK Police force - just a few bad cops can alter the public's perception whilst 95% of all others may be totally above the law and doing a great job etcetc.

What I think did not help was the culture of bonus's - and of course very big bonus's encouraging short cuts - innovations on the "edge" of legality and regulators thinking the traditional sector was "whiter then white"

The FSA and other bodies have a lot to answer for - as they have not done the job they should have done - but saying that the advanced technologies of today have allowed the industry to cover up so many "indiscretions" and then if found out - blame the computers:-)

As we know you cannot send a computer to jail - and the guys who wrote the programmes or come up with the ideas are really "untouchable".

I also think with whats happened this year - with the Libor fix and also other manipulations yet to come out - as meant the rules will change and the industry will start getting itself back in "order" - kicking out the rogue traders and making the very top now realise they face criminal prosecutions if they fall out of line

Your tenets are to be encouraged and in the end that should always enable you and your group to succeed and prosper.

Back to the trading and there as been some lovely "baiting and hunting" so far - but all in the nicest possible way  - Have a good one ;-)

Regards 

Peter

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