Randomly Noted

J.P. Morgan reported some strong earnings today. But what this bloggers eye were some of the sub-numbers in the earnings report. The bank booked $1.8 billion in investment banking fees. But don’t be fooled – that wasn’t from big M&A advising. But $429 million was in advisory fees. Instead, that $1.3 billion + remaining fees number came from equity and debt underwriting, with the big piece coming from debt – a quarterly record of $971 million for the bank.

Grouped under the investment bank is also trading – and fixed income once again ruled the day. Of the $6.6 billion of revenues from “fixed income/equities,” $5.23 billion came from fixed-income. The bank didn’t offer a break down i.e. how much was from FX trading, for example.

Finally, the investment bank (trading and traditional IB) contributed about 43% of the firms net income ($2.37 billion of a total $5.5 billion).

A quarter where the investment bank didn’t carry the whole day, er quarter, but carried a lot of it.

In my travels around Asia the past couple of weeks, I’ve been meeting with various banks and investors to learn more about the FX market in connection with our big initiative there. Stopped in to see a decent sized U.S. hedge fund and was fascinated by the investment strategy.

Among other tings, these folks invest in convertible bonds issued in local currencies in home countries. They end up with three factors that can affect returns: credit exposure, changes in interest rates and changes in currency values. The manager relayed an interesting anecdote that explained the benefit of such a strategy: the bond and underlying stock hadn’t moved much in price but the currency had to the point it allowed him to convert the bonds into stock and then sell the stock, convert the currency to dollars and make a handsome return. In other words, currency fluctuations in transactions like this can help take an out-of-the-money convertible and all of a sudden bring it in the money.

Continue reading…

Earlier this year, when the Banks for International Settlements came out with its triennial FX survey, we learned that 85% of the growth in the FX market over the past three years came in a category called “other institutions,” a group that includes funds of all stripes, including hedge funds, as well as small banks and insurance companies. In fact, for the first time, there was more trading in this category than among reporting dealers.

Now, we learn from the BIS Quarterly review what the BIS believes drove those increases. Number one on the list: High-frequency trading strategies grew. Followed by more trading among smaller banks. And finaly the emergence of retail (individuals as well as small institutions.)

Continue reading…

The FX market is hot. About $4 trillion of currencies are traded every day – a number seen hitting $10 trillion in 10 years. Banks around the world are bulking up their trading desks. And Mrs. Watanabe (the proverbial Japanese housewife who day trades while her husband is at work) continues to do more business than ever all over the world.

So, it is with that backdrop that two of the platforms that cater to the retail investor are looking to go public. Gain Capital, which runs the Forex.com website, is hoping to sell 11 million shares for a maximum $190 million, while FXCM is hoping to sell 15 million shares from $13 to $15.

And while there is no question that FX is hot, investors may approach these IPOs with a little caution.

Continue reading…

If you think the $4 trillion a day of trading in the FX market is huge, how about this: UBS strategists believe the market will grow to $10 trillion traded daily in 10 years. What UBS sees behind that growth is a bigger role by asset managers in the market – and in many cases, it’s more about diversifying portfolios. As more hedge funds, pension funds, mutual funds and insurance companies make investments around the world, the more need there is for them to have an FX hedging strategy.

It is a market that one would think could be vulnerable to disruptions. But the strategists at UBS don’t see much threat of that – they look back at the financial market “shocks” a couple of years ago and how well the currency markets rebounded. And they don’t see disruptions in international trade having much of an impact.

One interesting side effect – the bigger the market becomes, the more difficult it is for central banks to influence interest rates through intervention – because it would take more activity to have an effect on the markets.

The recent Bank for International Settlements FX market survey unvelied a number of trends. One that didn’t get much coverage was some of the reordering of the top ten trading centers around the world. Not huge shifts but interesting nonetheless. For example, Switzerland – home of two of the largest FX trading banks in UBS and Credit Suisse dropped from the third largest trading center in 2007 to the 5th largest in 2010. Moving ahead and up a spot each was Japan (now 3rd) and Singapore (now 4th). The answer for the shift could be connected to the credit crisis of 2008 – Asia was touched but in a way much less then Europe and the U.S. Asian economies suffered through the recession but not as much as elsewhere.  And big banks were particularly hit hard through the crisis.

Another interesting tidbit – when you look at the top four trading centers in each of the three regions, you know that Europe will certainly be the largest, which it is with around 47% of the marketshare. But second place is Asia (20%) and the Americas are third (19.7%). The gap between numbers one and four in Asia is 4.4 percentage points. But it is 17.6 percentage points in the Americas. The U.S. is the second biggest player but it drops significantly after that – Canada comes in number two in the region with a 1.2% market share. Mexico and Brazil each have an 0.3% share.

The Bank for International Settlements released its triennial survey on the foreign exchange markets last night  and among the mounds of all of the interesting numbers (interesting to those of us who care about forex) were some trends worth noting. For starters, spot trading was up nearly 50% – and that was driven by the traditional trading between banks but even more so by trading by hedge funds, pension funds and mutual funds, among those characterized as “other financial institutions.”

So, proprietary trading was in full force at the banks – which we know has been a profit center in recent quarters for some firms. And we continue to see the larger role played by institutions like hedge funds.

Continue reading…