Forex Magnates Q1 2014 Quarterly Industry Report

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A preview of the Q1 Forex Magnates Quarterly Report including analysis on the retail and institutional foreign exchange market

Transcript

  • Q u a r t e r l y Industry Report

    2 0 1 4

  • 5Editor's Note

    Section 1 | Q1 2014 Forex Market Overview

    Forex Market Quarterly Overview

    Institutional FX Volumes' Review

    Retail Forex Volumes

    Retail Forex Volumes By Accounts

    Retail Forex Volumes By MT4 Usage

    Exchanges Update

    Section 2 | Articles

    Turkey FX Conference: Where is Local Industry Heading?

    Trading Under Crisis: The Turkish Case

    Platform Wars: What Should I Offer and Why?

    Iran: Middle East's Shining Star in Need of a Polish

    EMIR: Centralized Reporting Hits Europe

    Going Public: The Costs of the FX IPO Trend

    Fixed Income: Are FX Prices Affected as Desks Struggle?

    The Digital Currency Age: Is Cryptocurrency Trading the Future?

    FXPB Credit: Expensive on the High Street, Cheaper on the Side Street

    Trading Down Under: Australia Country Report

    What Really Matters? Executives Talk

    From Milli to Micro: Latency Still a Driving Force in e-Trading

    Germany, France & Canada: Underdeveloped FX Markets in Highly

    Developed Economies

    IOSCO: Can Forex Regulation Go Global?

    Regulation Vs. Prosperity? The Challenges of U.S. Forex Industry

    Section 3 | Detailed broker information

    Forex Industry Biggest M&As and Investments

    Section 4 | Major News of the Quarter

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    CONTENTINDEX

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    M A R K E TO V E R V I E W

    Section

    01

    Forex Market Quarterly Overview Institutional FX Volumes' Review Retail Forex Volumes Retail Forex Volumes By Accounts Retail Forex Volumes By

    MT4 Usage Exchanges Update

  • 10

    OVERVIEW01

    Three months can fly by quickly, especially when there is a lot going on around

    the globe. And while many indus-try insiders remember the mighty volumes from the first two quarters of last year, most of what has been going on in the markets during the first three months of 2014 has been somewhat different.

    Catalysts of growth were quite ap-parent during this time: The Feder-al Reserves long-awaited exit from its Quantitative Easing Program, the Russia-Ukraine geopolitical spat throughout the quarter and more. Based on these, one could have expected things to be quite different by the end of March 2014.

    But reality is that substantial FX volatility ensued for only the first month of 2014 - a great start no doubt, but a poor follow-up in Feb-ruary. It seems that tensions that have been building up in Europe have had an impact on traders' ap-petite for trading.

    January appeared to be a break-through month for all major ECNs and a record month for Thomson Reuters' FXall division.

    However, the main beneficiary in the institutional space has been the Moscow Exchange which has reported record volumes in the

    month of February, attributed to the escalating geopolitical spat be-tween the West and Russia.

    February and March looked more like the fourth quarter of 2013, with single events managing to give a boost to volatility, but not sustain-ing the momentum to establish major trends in the most traded currency pairs.

    The market seemed to be geared to a wait and see mode, which could only mean that what wasnt traded today, will certainly be traded to-morrow.

    The dollar appeared to have stabi-lized just as the end of the quarter approached, and a gentle nudge from fundamentals might actu-ally trigger what striving FX traders have been awaiting for a while now - a new batch of US dollar strength.

    The Japanese yen pairs have been relatively quiet with expectations focusing on the incoming sales tax rate hike at the beginning of April.

    While government representa-tives argue that it might actually just pass without disrupting eco-nomic growth, some prudent mar-ket participants voice worries that the event could shake-up the three pillars of Abenomics and leave the only lever in the hands of the Bank

    FOREX MARKET QUARTERLY OVERVIEW

    of Japan. Will it pull it off again?

    European Growth

    Mired in a financial crisis for much of 2011 to 2013, Western Europe and the UK both appear to be turning the page in recent months. Wheth-er its the result of monetary stimu-lus, improved corporate balance sheets, or rallying stock and real estate prices that have created new wealth, the European region has become one of the hotter markets for online retail brokers over the last six months. The surprisingly positive results from Europe con-trast to reports from brokers in the region over the previous two years.

    Benefiting from the European and UK performance have been pub-lic UK online brokers. In its past two trading updates, IG Group has cited double digit percent-age growth in its revenues per average clients from Europe, as well as overall higher earnings expectations. As a result, shares of IG Group have set all-time highs this year, with the com-pany now sporting a $2.33 billion market cap, tops in the industry.Elsewhere, arguably the poster

  • 11

    child for a vibrant forex and CFD market in the UK and Europe is Plus500. Since going public in July of 2013, shares have rallied over 450% to a recent 675p.

    The increase in price has occurred as the broker recently reported record revenues of over $60 mil-lion for Q1 2014. Among unique features of Plus500 has been their focus on the UK and other slow growing but wealthier countries. This strategy differs from many other newer entrants of the last five years which have put their efforts into attracting clients from emerg-ing market regions.

    EMIR Reporting

    Starting February 12th, the Eu-ropean Market Infrastructure Regulation (EMIR) mandatory re-porting has kicked-in. The report-ing obligations under the new regulatory framework, dubbed as the European version of Dodd-Frank, has challenged companies across the industry. Firms now need to implement their own so-lutions, or to find a third party to assist them to file their reports with an authorized Trade Re-pository, as guided by the Euro-pean Securities Markets Authority.

    All open trades in forex and cer-tain derivatives contracts (such as CFDs) held at the brokerages are to be reported on a daily basis under the freshly implemented regula-tions. Certain companies from the industry have claimed that they

    don't fall in the category of enti-ties that are obliged to conduct mandatory reporting, however all prominent industry players have implemented the procedure.

    Copy Trading Regulation

    The FCA is on the move to regulate copy trading, as announced in a letter to brokerages regulated under the FCAs authority, to outline its position on the growing popularity of social or mirror trading services. According to the document, such services do constitute managed investments and companies will be required to address the issue by obtaining permission to operate as licensed investment managers.

    Another possible path for compa-nies trying to overcome the regu-latory challenge could be to elect trade leaders only from a pool of already licensed investment man-agers. MiFID is also presenting an alternative, as companies regulated in any other European jurisdiction will have the benefits of cross-bor-der regulation enabled.

    Could this be a renaissance for CySEC, as top rate agencies have changed their outlook about the is-land-economy and its ailing banks to a more positive one?

    This is highly unlikely, however some companies have already gained a license for managed in-vestments on the island and are promptly prepared for whatever other European regulators decide.

    Meanwhile in Japan, Tradency has become the first mirror trad-ing provider to get regulated under the Japanese Financial Services Authority, unlocking a huge legally recognized market for copy trading services.

    Chinese Yuan Gains Traction

    The Chinese yuan has started gain-ing more prominence amongst re-tail traders (especially in Asia) as the People's Bank of China has decided to end the easy one-way carry trade bet that has been tracking the yuan for almost a decade. According to sources close to the local FX market it is precisely the central bank that has been heavily encouraging the switch to two-way trading of the USD/CNY.

    Several brokerages have decided to implement the pair within their offerings and more are hopping onboard every passing month. The volatility that the pair has pro-vided since the start of the year as well as liberalization efforts which are gathering support amongst Chinese political elite, mark the possible beginning of the era of a new major FX pair that no broker-age will afford to miss from its of-ferings soon.

    This era may come sooner than expected: With the Shanghai Free Trade Zone implementing full Chinese yuan convertibil-ity by the end of June, coun-try-wide implementation of the

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    ARTICLESTurkey FX Confreence Trading Under Crisis: The Turkish Case Platform Wars Iran Country Report EMIR Going Public: FX IPOs Fixed Income & FX Prices The Digital Currency Age FXPB Credit Trading Down Under: Australia Country Report What Really Matters? Executives Talk From Milli to Micro: Latency a Driving Force in E-Trading Underdeveloped FX Markets in Highly Developed Countries IOSCO: Can Forex Regulation Go Global?

    Regulation Vs. Prosperity?

    Section

    02

  • ARTICLES02

    42

    In recent years, every analysis of global economic trends in-cluded the acronym BRICS, a

    group of five developing countries that were expected to contribute most of the growth to the whole worlds gross domestic product. At the start of 2014, the term Fragile Five, coined by Morgan Stanley, seems to be establishing itself as the hottest buzzword on the minds of economists and market com-mentators. Based on the fear of se-vere financial troubles in emerging markets following the American Federal Reserves stated commit-ment to tapering its quantitative easing, the "Fragile Five" consists of the countries most likely to suf-fer economic hardships that might lead to a global contagion.

    Broadly speaking, many emerg-ing markets currencies have been volatile recently as the age of cheap money - fuelled by the Fed is perceived to be nearing its end. This is forcing central banks in those countries to react, mainly by sharply raising interest rates. Tur-key, Brazil, South Africa, India and Indonesia are these five countries particularly vulnerable to a loss of investors confidence, as they are heavily reliant on foreign capi-

    TRADING UNDER CRISIS: THE TURKISH CASE

    tal which makes their economies especially fragile and most likely to be the first markets to develop structural problems.

    Moreover, February's events in the Eastern European country of Ukraine show that beyond the Fragile Five, more countries may face financial crisis amid geopo-litical instability. This article will focus on Turkey as a case study to examine the effects of economic volatility on online retail Forex bro-kers. Being one of the Fragile Five, Turkey is experiencing an ongoing political crisis, thus allowing us to examine its effects on the countrys FX trading trends.

    During December 2013, the current Turkish governments public im-age declined after a major scandal was unfolded, which resulted in several notable ministers resign-ing. The liras gradual decline dur-ing December-January was further ignited after the government tried to intervene in a bid to save the currency. On January 28, the Cen-tral Bank took measures whereby it doubled its borrowing rate from 3.5 percent to 8 percent, and raised the lending rate from 7.75 percent to 12 percent.

    As the US Federal Reserve's tapering policy brings the age of easy money to an end, developing countries are more vulnerable to economic and political crisis.

    This article will explore the case of Turkey as one of the Fragile Five, examining whether and how FX trading is affect-ed by such geopolitical turmoil.

    By Avi Mizrahi

  • ARTICLES02

    46

    FX Conference in April by Forex Magnates will definitely increase the awareness of the leveraged FX market in Turkey as well as help to increase the knowledge of clients about the risks involved in OTC FX trading, opined Mr. Akdemir.

    Not Only Turkey

    As the Feds bond buying program could wrap up by the middle of the year, 2014 will prove to be a chal-

    lenging year for the world econ-omy and for emerging markets especially. The example of Turkey shows that the Forex industry has much to gain from such a trading environment.

    Brokers should consider adding trading pairs based on the Brazil-ian real, Indian rupee, Indonesian rupiah, Turkish lira and South Af-rican rand as those will attract investors as well as the medias at-tention. These currencies are also expected to have the most volatile swings. Emerging market curren-

    cies pairs volumes were reported to Forex Magnates to be up across the board, with the rupee, lira and rand faltering the most as of the writing of this article.

    Ukraine, with its recent political and military crisis, could set an-other case study in this respect. It will be interesting to review fig-ures of retail FX spot markets in the country, as reports are expected to be published at the start of Q2. The data available now shows a

    very dramatic shift with regards to the Ukrainian currency (UAH), published by the Derivatives mar-ket of Moscow Exchange, where a USD/UAH futures contract was launched in June 13.

    Aleksandr Ezhov, Head of FX Busi-ness Development at the Moscow Exchange, told Forex Magnates that, Before the beginning of the Ukrainian political turmoil in No-vember 2013 the total monthly turnover of this contract was about 319,000 USD. In comparison with November, in February 2014 total

    turnover raised to 3.86 million USD, 11 times higher than in Novem-ber 2013. By the end of February in USD/UAH futures, it reached 2.63 million USD. It is 214% higher than in November 2013. ADTV in Febru-ary was about 200,000 USD. Num-ber of trades in February 952.

    During the unfolding dramatic events in Ukraine, the Russian ruble also experienced untypically high levels of trading volumes, only as a result of the currency weakening due to the proximity to a troubled country. This demonstrates that there is a risk of regional contagion when problems arise and can also lead to increased trading volumes in neighboring markets.

    Can Political Crisis Continue Driving Forex Trading?

    As volatility has always been a source for rising activity across most asset classes, emerging mar-kets topped with political crisis cre-ate even greater opportunities for investors. Judging by the case of Turkey, and what is already known about the Ukraine, trade of pairs containing local currencies soar in times of crises.

    But is this a calculated risk for in-vestors or just a plain risk? As of writing this article, the political sit-uation has yet to settle in both Tur-key and the Ukraine. If it doesnt, can trading volumes maintain such record highs? Forex Magnates will continue to monitor the situation and report accordingly, to assist in-dustry professionals to make edu-cated decisions when focusing on emerging markets currency pairs.

    Ukrain Contracts Volumes Spike During February

    Source: Moscow Exchange

    Total Volume, Con...