Told Ya So: The Currency Volume Bubble in Full Bloom

Only a month ago I warned about what I sensed was a “volume bubble” in currency trading (My Condolences to the Currency Professional).  According to a recent piece in The Banker, I am backed up by some eye-popping statistics…

Already the biggest traded market in the world, currency trading has leaped to record levels this year. According to data published by the Bank for International Settlements (BIS) in early September, an average of $4000bn is being traded every day, up from $3200bn in 2007, when the BIS last carried out a survey of the global market.

The huge rise has been driven by an almost 50% jump in spot foreign exchange (FX) volumes to $1500bn per day, and reflects increasing trading activity by ‘other financial institutions’, a segment that includes hedge funds and other non-bank counterparties such as pension funds and mutual funds.

The Banker characterizes this as “the maturation of FX as an asset class”.  I am, shall we say, a bit more aggressive in my stance.  You can chalk up some of the growth in currency trading volumes to the globalization of trade in general, but much of it is pure speculative mania fueled by dumb money that has no business levering up and playing this game.

As I’ve already explained, with currencies, you’re not going to have a “price bubble”.  Instead, what I’m seeing is an activity or volume bubble, still growing.  Regulation for retail Forex is still in a relative period of infancy from what I hear.  Outside of the major banks, there is an underworld.  There are online brokerages who are seducing small-timers into the wolves’ lair, trading against their own “clients” within inside markets, hitting customers’ stops at their own pleasure.  There are also currency cold-calling brokers, many of whom were kicked out of the stock brokerage industry only to find a haven with even less scrutiny and more margin – “send me $5000 and we’ll have 50k to work with, Mr. Fredrickson”.

There is legitimate currency trading and then there is the ever-metastasizing frenzy that I believe will be the next hotbed of failures, blowups and recriminations.


FX Emerges as the Winner of the Crisis (The Banker)

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My Condolences to the Currency Professional (TRB)

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