Making a tough game tougher

Posted by Scriptaty | 7:55 PM

We have to ask whether the professional traders have made life unnecessarily difficult for themselves. A currency trader can get lost in all of the interlocking factors affecting the markets, such as macroeconomic fundamentals, geopolitics, and each country’s yield curve.

This 24/6 market, famously dubbed “the currency bazaar,” by Andrew Krieger, cycles almost $2 trillion per day throughout its global network. Yes, it is deep and liquid, but that in itself has some drawbacks, such as the presence of orders in the $100 million and higher range.

Anyone swinging such orders about is likely a very sophisticated investor. There are an estimated 8,000 hedge funds and 1,800 CTAs loose upon the land; only 124, or approximately 1.3 percent of this total, can be described as “currency-only” funds. These traders approach the markets through the usual variety of trading styles across more than 30 different commonly traded currency pairs, with targeted trade durations from minutes to months.

Some are discretionary traders, while some hew to rigid quantitative systems. The majority of these traders are trend-followers; but countertrend or mean-reverting strategies are employed by many short-term quantitative traders. Many longer-term traders rely on interest rate “carry” strategies to earn more in the currency lent than in the currency borrowed. And the most sophisticated traders construct both plain-vanilla and exotic option strategies to achieve narrow return targets.

But through it all, one reality remains: The low percentage of currency-only traders is either a tribute to the virtues of intermarket diversification or evidence of just how difficult it is to reside exclusively in the currency markets.