$1.9 Trillion A Day
That's how much is traded, apparently, in foreign exchange markets. Of that, the spot market (ie foreign currencies) account for about $620 billion while the other $1.3 trillion is, presumably, in "derivatives" -- meaning options, futures contracts and whatever other "derived" products there are out there.
Compare that number with the volume of world trade. According to the OECD (www.oecd.org), total world trade amounts to about $2.3 trillion per quarter (close to $10 trillion per year). Or, let's say, $25 billion per day. To put it another way, of the $1.9 trillion in foreign exchange trading that goes on every day, only around 1.3% is necessitated by trade between countries in goods and services.
What the hell is the other 98.7%????
Well, here's a clue: the FT (yes, my main source of news) reports that hedge funds are moving in as market makers. Hedge funds have traded FX for years, of course. (One of the most notorious trades in hedge fund history was in FX, when George Soros made $1.1 billion betting on a fall in sterling back in the early 1990s). But the actual market making has been left mostly to large international banks, which make money on a "spread" (ie they buy at a lower price than they sell, just like a stockbroker) rather than by taking large positions. In recent years, a lot more trading has gone on line, to places like FXAll (you can see them at fxall.com), which sees about $35bn a day in trading (a tiny percentage of the total market, but it's growing pretty fast). I guess the hedge funds have become so comfortable in this market that they're going to have a go at market making (through EBS, a centralized currency trading platform catering directly to banks). So why are they in the market, again? Oh, yeah, not because they need to buy Polish vodka or anything, but because they have a feeling zlotys are headed up.
Maybe I'm missing something here, but... doesn't the other 98.7% sound pretty much like, well, a casino?
Compare that number with the volume of world trade. According to the OECD (www.oecd.org), total world trade amounts to about $2.3 trillion per quarter (close to $10 trillion per year). Or, let's say, $25 billion per day. To put it another way, of the $1.9 trillion in foreign exchange trading that goes on every day, only around 1.3% is necessitated by trade between countries in goods and services.
What the hell is the other 98.7%????
Well, here's a clue: the FT (yes, my main source of news) reports that hedge funds are moving in as market makers. Hedge funds have traded FX for years, of course. (One of the most notorious trades in hedge fund history was in FX, when George Soros made $1.1 billion betting on a fall in sterling back in the early 1990s). But the actual market making has been left mostly to large international banks, which make money on a "spread" (ie they buy at a lower price than they sell, just like a stockbroker) rather than by taking large positions. In recent years, a lot more trading has gone on line, to places like FXAll (you can see them at fxall.com), which sees about $35bn a day in trading (a tiny percentage of the total market, but it's growing pretty fast). I guess the hedge funds have become so comfortable in this market that they're going to have a go at market making (through EBS, a centralized currency trading platform catering directly to banks). So why are they in the market, again? Oh, yeah, not because they need to buy Polish vodka or anything, but because they have a feeling zlotys are headed up.
Maybe I'm missing something here, but... doesn't the other 98.7% sound pretty much like, well, a casino?
posted by econoclast at 2:57 PM
2 Comments:
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