An interesting news item

Royal Bank of Scotland shuts London FX prop desk           

LONDON (Reuters) – Royal Bank of Scotland has closed its foreign exchange proprietary trading desk in London, the banking group said on Tuesday. “As a result of this decision, we will seek to find alternative suitable employment within the organisation for those affected,” the bank said in a statement. The closure affects at least six staff. Proprietary trading desks use their bank’s own money to trade in a whole range of different assets. A number of mid-tier investment banks have shut down proprietary trading desks recently, including Dresdner Kleinwort and also Commerzbank due to losses.
In foreign exchange for most of this year, currencies have been stuck in tight ranges, with volatility collapsing to record lows in some major currencies. But these ranges were broken in late November as the dollar faced a broad selloff, which pushed the U.S. currency to a 20-month low against the euro and a 14-year trough versus the pound this month.

RBS is ranked 5th by a 2006 survey of biggest FX banks by Euromoney magazine, with a share of 6.61 percent.

(Published on 5th Dec)

I find this article interesting because research on the microstructure of the foreign exchange market suggests that banks may be able to attain a forecasting advantage by using the information contained in their customer order flow books. However, and it’s just a thought, an implication of this article could be be that the informational advantage from knowing the house’s order book isn’t that significant. While this probably isn’t true for large financial institutions such as Citigroup, it could be correct for the smaller and medium sized players with lower market shares, whose orderbooks are less likely to be representative of the state of global orders in their entirety. Trading is tough.

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4 responses to “An interesting news item

  1. 3500,

    I’m thinking of opening an forex trading account but so far I’ve only used the demo from gaincapital.com and http://www.gftforex.com. Looks like there are hundreds of these trading firms out there. do you have any recommendation for which firm to go with. I also want to be able to trade wirelessly too. My main concern is the speed of the software and the ease of use. thanks.

  2. Hi Andrew, I tend to use various spreadbetting platforms in the UK because they are tax free and because deposits up to a certain amount are guaranteed by the government in the event of bankruptcy. Other than that these I do use Oanda quite often. I Their system is pretty quick but it does goes down on rare occasion (most do). I’m not sure if they offer wireless trading though.

    Each broker has its strengths and weaknesses and I would recommend taking a look at some FX forums such as ‘Forex Factory’ or perhaps a board like ‘EliteTrader’, to get an idea of what people think, and to see which broker will best suit your trading style. If you do this, bear in mind that the more popular retail platforms such as FXCM may get a lot of poor ratings but that is partly due to the fact that they have more users and people generally seem to like to complain more than they like to compliment. The other key point to consider is whether you want a fixed spread platform (EUR/USD spreads usually around 2-3 pips) or variable spreads (EUR/USD spread will often be as low as 1.5 with Oanda, but then will spike up significantly during volatile periods).

    Once you know all your criterion you should be able to narrow down your search. When you sign up I’d recommend starting trading with small size so you can get used to the real platform (in some cases the performance of live platforms can differ from the demo sites).

  3. Just a quick comment about Banks shutting down Prop desks. I have worked at large international banks for many years and have found that “flow” information to be highly overrated. I always felt that no matter who was buying or selling they were only another dealer with an opinion… no better or worse then my own. Having a large investment name or fund behind them may give the impression that they know more then me, but I have seen many a trader from these firms lose jobs over poor performance. I feel that I am paid to provide trade ideas and position’s for the bank not follow the trades of someone else. If anything I have tended over the years to lose money quoting flow as it either gives me a position that I agree with but in to much size or takes me out of my position and I cannot get back in quick enough. Just my thoughts. Interesting site…I will keep reading. Good Luck.

  4. Hi Banker, during my time working for a bank that is but a small fish in the FX world, they never even got around to putting the order flow information in to a usable format, although traders would always shout out when big order were going through the market, highlight big order positions in the morning meetings, or flag trades on the internal chat system.

    But, I think the idea about using order flow data is not so much about tail-gating the funds on the back of individual tickets – thinking they know more than you do – so much as it is about using the order flow data collectively to gain a predictive edge. I know banks like Citi do collate this information, but for the lesser players in the market I don’t think it provides an exploitable edge. That said, it still may be of value as it provides proprietary information, which a sales force can then use to impress clients.

    PS – Good luck on your new fx blog. I also take a global macro view on my medium-term trades, and while I don’t have any positions on at the moment, I will be sure to check in on your thinking every now and then.

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