Institutional Investor's Alpha Magazine - April 2008 - (Page 28)

efx Electronic Platforms Reshaping Foreign Exchange Trading Markets Today, almost half of FX transactions are initiated as hedging tactics, according to a CME study. Cross-product management of risk is key in this environment. survey indicated that asset classes most likely to be additionally traded with FX, highly active traders looked to ﬁxed income (53 percent), equities (41 percent) and interest rates (28 percent). But to exploit the FX relationship fully, providers need to have depth in other product classes, the study says. In preparing an eFX trading strategy, fund managers also need to consider their risk tolerance. Will they have a fairly ﬂat book at the end of the day, using a shorter-term, higherfrequency trading strategy? Or will they take a bit more risk, using different analytics for their strategy? Dave Olsen, co-head of the global prime brokerage business at JPMorgan in New York, notes that the FX market offers a number of ways to bundle risk, such as futures versus the OTC market, forwards versus spot strategies or a myriad of option strategies. “There are many conﬁgurations that managers have used successfully,” he says. While some fund managers are using eFX for basic hedging strategies, others are using traditional platforms. “Managers using FX for hedging purposes might only do a few transactions a day,” Olsen says. “Because these Cash Business Traded Electronically ● 2006 ● 2007 ● Expected by 2010 89% 96% Factors Driving FX Markets CME GROUP’S RECENT GLOBAL FX MARKET STUDY indicates that electronic trading, risk management and cost control are key factors driving the global FX markets. 80% 77% 76% 77% 70% 83% Although latency is a hot topic among electronic 71% 70% traders, 72 percent of bank-survey participants cited counterparty risk as their biggest concern, followed by settlement risk (64 percent). Latency was of concern to only 19 percent. Traders of all categories also continue to focus on ef- 60% 40% ﬁcient execution. The Global FX Market Study showed that 79 percent of active traders were concerned primarily with bid/offer spreads as the key component of 20% their transaction costs. Market impact (price movement during trade execution that negatively affects the market price) concerned 59 percent of active and 64 percent of less 0% Banks Real Money Institutions Leveraged/ Highly Active active traders. Settlement costs (including exchange fees) concerned 49 percent of active and 48 percent of less active traders. Source: Global FX Market Survey sponsored by CME Group, research undertaken by ClientKnowledge 6 • Alpha Sponsored Report • April 2008

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - April 2008

Institutional Investor's Alpha Magazine - April 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Here to Eternity The Good Guys: Voice of Hope Cover Story: The Kings of Cash Where the Money Is Into the Light Interview: Proceeding with Caution Strategies: A Convenient Truth Alpha Bytes: Village Voice Unhedged: Commentary: No Time for Complacency

Institutional Investor's Alpha Magazine - April 2008

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