Prominent Market Players Talk About THIS Market Enviroment

October 24, 2012 - 8 Comments

Stepping away from the usual market commentary, I asked several esteemed, prominent, market people from the banking, broking and hedge fund world, if they would share their thoughts on the current state of THIS market. Thanks very much to all of them for taking the time to write their pieces. Here they are, presented verbatim, hopefully providing valuable insight into the current enviroment that we are trading in and dealing with:

Proprietary Trader At New York Based Bank: For me it is: (1) More difficult than usual as there are fewer catalysts to trade. In the past you had 15 or 20 central bank meetings/year that moved markets, for example. Now you have maybe 5. (2) Correlation trading is too crowded. Hundreds of traders and thousands of algos all trading S&P correlation and things like that. Not as much edge when a strategy is crowded. (3) Logical macro trades get crowded very quickly and unwind unpredictably. (4)Policymaker pronouncements (which are inherently difficult or impossible to predict) are the most important catalysts and are nearly impossible to position for.

Money Market/Rates Trader At UK Clearer: Hating it – too much headline and political noise – impossible to price . Rates play are JPY style: boring – stay long carry, add on any sell offs . Fighting it may seem attractive as everyone looks for the home run, but it’s a slow death.. Race to the bottom in global rates for now, extension plays etc. FX is headline driven and politics – fundamentals out of the window. Technicals working ok but hostage to headlines still – ie random.

Chief FX Trader At London Based Bank: I think most will agree that it’s the most difficult “trading” market yet experienced, blighted by the contrasting “risk-on/off” ethos and the classic +\- Macroeconomic backdrop. The two mantras often contrast and conflict and produce counter-intuitive moves, sometimes anticipated, but never leveraged, owing to low conviction. The result is an average -5% ytd across the HF industry. It’s worth noting that asset managers, by nature longer term, have averaged +10%…simply because they select their asset-classes wisely, but also sit, rather than trade. Something needs to destroy risk on/off……..but what? A zero rate environment, stricken with worry and self-doubt, tenuous political will, and austerity, isn’t a rosy outlook

Chief FX Trader At London Based Bank: I think most people hate the markets currently. I certainly do. Everything is just harder. Whether it is the Central banks being forced to ‘ruin’ the market due to the various crises, or the fact that the market has no ‘human’ face anymore, it’s very tough to make any cash, especially with ever diminishing risk profiles. As a result, banks are chopping traders that don’t get replaced. Why would they? The paranoia with regulation after all the bad press banking has got means the trend of business going all electronic isn’t going to get reversed. Less human involvement means less chance of fraud in the banks’ eyes. Voice traders at the clearers aren’t allowed to speak to other banks – again more post LIBOR paranoia about what could get typed on those most evil of communication, e-mail and Bloomberg chats. Other communication is getting more and more closely monitored. I don’t chat half as much as I used to… and you can see it’s similar elsewhere.. there can be no conversation in chat rooms for hours at a time. Is that because there’s no business to talk about ? So many times now we have moves that no-one seems to know what is behind them, apart from electronic business driving other Algorithmic electronic business. Sorry about the lack of succinctness, I’m just not optimistic. At all.

Chief FX Trader At London Based Bank: Relating to FX markets specifically: (1)Screen based markets, as opposed to Voice based: This means (Supposed) Price Transparency for Customers – but they forget this is an OTC market and not an Exchange. What liquidity they think is available at any given point, is generally not. Algo’s are having an over-weighted impact on price action. High frequency trading is the devil and should be banned. It serves no purpose other than to artificially create distortion and volatility. Too much flow concentrated into too few banks – The emergence of the Fx eTool has changed the market dynamic forever.  (2) Sovereign Wealth Funds and Central Banks are the Big Players: In the early 90′s a $5b Hedge Fund was a massive player. Now they are a minnow, an irrelevance. (3) Salespeople – a dyeing art. Old School people who know how to bring the right areas of their firm to the right customers are highly valued. ‘New’ Salespeople who have no 1990′s experience do not understand the value of relationships. They do not understand the value (or otherwise) of any flow that comes to the bank. Independent thought is such a rarity. They need to be spoon-fed. The ‘Copy and Paste’ Generation. (4) Bulge bracket Banks - their FX / Rates business plans look all wrong to me. The days of 40 salespeople in one branch selling FX to an over-broked and electronically covered customer base are about to be over.  (5) Compensation – the model of how people are paid has changed but needs to change more. There needs to be greater transparency and the gap between the lowest and highest paid needs to be much smaller, and there needs to be more accountability for the rubbish decisions that the top tiers of management regularly make. I sound bitter, but it isn’t really bitterness I and so many other people feel. It is disdain for the stupidity that has caused Bank Shareholders to lose so much money. (6) FX markets – they will be an exchange in 10-15 years. CLS was the thin end of the wedge. Counterparty credit increases in importance by the
day. The regulators will see an end to the OTC model, certainly in our lifetime.
The market is generally overworked and tired: People in their 40′s who have worked a lifetime of working hours already, generally been upstanding corporate citizens, paid their taxes, put in the hours, who are trying to see it out for ”another 5 years” so that they can maintain the silly lifestyle they have created for themselves.
Add in regulation, bureaucracy, e-Transparency, longer hours, higher taxes, less pay …… no wonder it is less fun that it used to be !

Rates/FX Trader, Now Trader Performance Coach: My own view is that a lot of people want to see the back of this year. It seems ironic that in a year when people’s worst expectations for markets were not realised, that so many people seem disappointed. After all, if at the start of the year we’d been told that Stocks have largely held up, that Europe did not collapse, that risk held up, a lot of people would have taken that. I have a number of theories why the mood seem’s so depressed amongst traders. I am not sure any one of them is more valid than others but i think collectively they all may be playing a part.
-Continued ZIRPS killing people in Stir markets.
-QE confusing matters, keeping bubbles going, and ruining ability to apply economic models to markets.
- Low volumes in many markets, and business not returning as banks had hoped.
- Lack of trends, many people stopped out of risk-off trades, cannot go other way.
- Risk off/on uncertainty and confusion i.e. JPY strength and Equity strength together.
- Uncertainty over new legislation, Dodds-Franks.
- More and continued planning of large-scale redundancies.- Definitely damaging mood.
- Poor HF returns.
On the other hand I do know of some who still had a good year, but they do not seem happy in their success. It seems the mood has gotten the better of many people

Senior Fx Sales/Trader At Zurich Based Bank: Bottom line: market sucks big time (like I have said a long time) and most people we speak to agree and are starting to feel the pain. It’s doom and gloom in 95 % of the cases. I heard of banks quietly letting people go 1 by 1 . As is the case with many banks, we have trimmed down our prop activities as it simply is not rewarding enough to have someone do this 100% of the time and ”sit around” most of the time. I have moved into bank sales and e-sales, that should give you a clue already. Some traders I talk to started speaking openly of leaving the industry and doing something else. The other point to make: FX markets barely move 0.5% during the day in 95 % of the time so risk parameters are adjusted to this situation, which has obviously consequences when you finally see a good move. And decent moves… perhaps you see 1 or 2 per year?? By default, stop-loss limits are already small since the crisis, so IF a reasonable move comes, most of the time people haven’t got enough delta on to make a decent amount…. and / or they missed the move since they got out of their position too early, adapted to a market that barely moves or trades ranges.

Senior FX/Money Market Sales at London Based Bank: HFs out there are struggling to get a grip on how to trade a low interest rate, low vol environment. Only flows come from the fast money boys who are able to micro manage positions trying to play technicals, or headlines, but are not married to any firm view.. The macro boys struggling as they find trading politics impossible, with the economic story simply seems to be ignored by the politicians as they fudge their way to an as yet unknown target. Consensus view and the bigger position is now long USDJPY on back of expectations that BOJ will do something very soon, although we may get nothing until early new year, but market positioned for a move well back above 90.00. Macro has only a couple of bullets left to play with in 2012 and hence sitting on hands because before using them, they need a very clear signal. They really can’t afford another poor quarter.

Far East Based CTA Manager: The market is very tricky to trade in 2012. Few people are making good, consistent, returns. In the CTA space, the market is having an exceptionally poor year because of VOLATILITY, or should I say lack of volatility. Look at the VIX, this year it has traded below 13.7 on 7 occasions in March, August, September and October. Last time it traded at or below 13.7 was 2007!! Add to that investors have not been in the equity rally because the outlook has been so bleak, so they missed the central banks QE program, sugar injection. So the market ground higher on exceptionally low volatility with bleak economic conditions (Europe, housing, jobless, China slowing etc etc), but on the back of a QE program pumping it higher.

London Bank Emerging Markets Trader: As a market maker, the biggest way to describe these markets is ‘frustrating’. Liquidity has been eroded by the e-world but customers still expect banks to offer the same false liquidity that is perceived to exist. Margins have also been eroded and, as we are seeing, banks are starting to make cutbacks as we are pinned in range bound markets with the Central Banks keeping rates pegged artificially low. With this is mind there have been untold false breaks which the market has looked to trade, only to get caught out again. It seems the other main driver we have seen recently is that of positioning. Everyone is one way….then they are cut. I don’t expect this to change in the immediate future and I think there will be a sustained period of low vol trading until the markets can normalise with central banks taking a step back. Ask many a trader how they are doing….’Small up’ is the best thing you will hear.

London Bank Emerging Markets Trader: Looking at markets with an EM bias as a starting point, all subsequent comments are related to that asset class. Markets to my mind are best characterised by the imaginary Dolittle character of a Pushmepullyou. The pushme is the QE/OMT liquidity sugar rush driving markets higher up the wall of worry. The pullyou is the poor cyclical backdrop. Whilst current growth momentum is picking up, the longevity and the magnitude of this positive momentum will be key for markets. Looking at financial conditions for a lot of EM markets the QE3 sugar rush has not led to domestic monetary easing as currency gains have offset equity gains and there is minimal spread compression given we are already in at very tight levels. So for me China activity data is key as this will determine in the short term whether EM can take the next leg stronger. Whilst the correlation between EM and US equity market performance in the form of the S/P has receded recently, I am not sure this recent relationship will hold with a break of the S/P below 1420. I am trading very much on a shorter maturity time frame with risk/reward parameters still operating on a 3:1 ratio but with parameters of 30-50 BP S/L against 90-150 bp T/P.

London Based Derivatives Broker : Take on the job is that it feels like spinning in ever decreasing circles with a massive amount of groundhog day thrown in. Sitting observing a mis-managed idea in Europe largely with the old guard still in charge/in the wings, and incredulous that the Davos crowd couldn’t see what was coming. Brokers still try to report flow and to instigate ideas largely to de-incentivized client bases that are themselves fearful of that tap on the shoulder. Lager helps though.

London Based Money Broker: The Forward Foreign Exchange markets continue to become more and more difficult from a broking perspective. Banks seem to be continually moaning of a lack of customer flow, due to flat interest rates. They often have to quote a ‘choice’ price to get a deal from their customers, then ‘warehouse trade it’.They, in turn, are all squeezing the brokers for more aggressive brokerage deals. These factors have led to a reduced workforce , both sides of the telephone. The bonus culture has disappeared for the time being within the state owned banks and the bonus now appears to be simply continued employment.

So, plenty to moot here. Once again, thank you to all the above for taking the time to write their thoughts. Testing markets and tedious trading enviroments permeate the financial world at the moment. When will something give?

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  • MacroPug

    Very interesting post. From where I sit we have trouble running positions that are fully sized to our fund as the unpredictability of policy interventions means we need to be able to exit relatively quickly. Unfortunately as risk tolerance drops across the street – in all products – liquidity is also seeping out of markets making it impossible for a fund like ours to exit gracefully when policymakers change the facts. We could deal with unpredictable but very liquid markets but unpredictable and illiquid markets mean weak returns as even if we are right we are under risked.

  • MacroPug

    oh one more thing.  There is a ray of light here. The collective gloom reminds me of the previous death of volatility througn 2006/07 (1yr EURUSD vol. sub 6% mid 2007!). From a macro perspective my sense is that policymakers are coiling the spring…

  • Justin P

    I hate to be cynical but if you had run this article at various points over the past 20/30 years how many times would you have heard the same message from this level of seniority. ie The markets aren’t as good as they were (eg. when we were on the way up) and have changed for the worse.

  • Howard G Wright

    London Based CEO of a Technical Analysis Service and related Proprietary Multi-Trading-Medium Portfolio. The Foreign Exchange, Precious Metal, Commodity and Equity markets are all currently more difficult to trade successfully than in previous years. Having said that, there are still good profit opportunities for those traders who are prepared to engage in the onerous and demanding task of tracking and capturing short-term (intra-day) market movements and who are not afraid of booking successive small losses as the result of failed short-term technical signals, As the renowned stock investor Sir John Templeton once said ‘if you want to have a better performance than the crowd, you must do things differently from the crowd.’ In the current environment I believe that ‘doing things differently’ translates into a mixture of keeping things simple, being highly disciplined, and being prepared to work harder. It’s not whether you’re right or wrong that is important, but how much money you make when you are right and how much you lose when you’re wrong – a concept and truism that a proficient player Backgammon will fully appreciate. If it was easy, the world would be full of traders instead of lawyers.

  • Freebird

    25 years in and part of the financial mechanism and recently set free, and I have never seen things so unpredictable….. Thanks for the comments, insights from the front line are invaluable, I feel your pain. My advice is throw the towel in and go live life.

    This rates manipulation (Bernank et al) will end in tears, reflation at all costs isn’t the solution…the malinvestment bubbles just keep growing….

  • jimmy big hands

    buy low sell high

  • F.X.

    Brilliant post, corroborates largely with what we experience(d) in the FX hedge fund , FX prop trading space. And bear in mind: it is important to see that most of these pieces were written by ”insiders”, market makers, pricers, order executors,  i.e. those who still DO have some form of institutionalized advantage (the spread, flow,  information, etc).

    When you analyse the PURE ALPHA  space, i.e. those market participants, CTA’s, hedge funds that do not have any advantage, the picture is even darker. Let me tell you this: at present, consistent alpha is only and exclusively produced by short term algo / high frequency-trading. And most of the time, latency and speed (= equipment) are the ONLY keys / edge for consistent trading returns, followed closely by advanced statistical modelling. In other words: ”trader’s skills” don’t even rank anymore. Even the odd exception  ”good trader” who has a good run, is considered a very unstable source of returns. 

    Sharpe ratio’s show and confirm it all: Algo funds have a Sharpe Ratio of 5 or higher, I have seen some Algo CTA’s who reach 9 + and one that reached  an unreal 15.  Now put that against a top discretionary trader who has a Sharpe ratio of 2 !!  And they are very very rare.

    So, for the time being, if market conditions don’t change, and unless you have a institutionalized edge,  forget discretionary trading and forget systematic trading (except for longer term positioning, IF you have the time and pockets to sit out long periods of no returns or drawdowns).

    The above is confirmed by (1) performance analysis reports of all top level performance analysis service providers   and  (2) most e-FX brokers who rather don’t want their discretionary client base to know the above for obvious reasons: the liquidity of the retail guys /  discretionary guys is needed to allow the algo guys make their winning stream of trades.

    Last but not least: comments made such as the one by ”jabu” who made an ”absolute pulpus” are entirely meaningless in this discussion. I’d love to see his Audited Sharpe Ratio – just to begin with. Until then, ”lucky fool” out of  Nassim Taleb’s splendid books applies ;-)  

    Don’t be fooled. Statistics don’t lie in trading!

    F. X.  (full name known to the blog owner)


    • f n

      ICAP’s decline in FX turnover (released last week): -47% in Oct YoY, … add insult to injury and speak volumes as well…