We’ve written about the shifting dynamics in the world of retail forex trading before. In particular, the phasing out of ‘Mrs. Watanabe‘ in favour of ‘Mrs. Robo Jones’ — the western-based punter seeking returns in a zero-rate environment, but doing so with the help of algorithmic tools and so-called FX bots.
These FX bots, peddled on the internet or by the FX platforms themselves, make hugely tempting profitability claims. More often than not though — by guaranteeing relatively predictable trading volumes — they’re only a sure income stream for their creators or the FX platforms they are used on.
And there’s nothing wrong with that.
But, and there is a but, the spot FX market is among the most unregulated markets in the world. Accordingly, there’s little preventing parties privy to those flows from using the information for their own proprietary gain.
It’s the same effect as giving a retail consumer a supermarket loyalty card. Mrs. Robo Jones is happy because she receives X-amount of free money with every successful trade the FX bot executes on her behalf. Her costs appear minimal versus her profits. She thinks she has done well, and is happy to suffer the occasional loss.
But, like with all loyalty cards, it’s her purchasing trends that are actually more valuable to the service providers. As many consumer groups warn, supermarkets adapt their pricing to make the most of the purchasing patterns detected. The information garnered is nearly always worth more than the free spending points given out. In Mrs. Robo Jones’ case, though, her trends are already known to the developers of the programmes she uses.
Meanwhile, the pace of growth in the FX retail sector continues to astound. As the FT reported on Tuesday:
Indeed, dbFX, Deutsche Bank’s online forex trading platform for individuals and small institutions, has seen volumes rise 37 per cent in the year to August 2009.
But can these sorts of developments actually have an effect on wider currency trends? According to the FT article, they’re definitely starting to (our emphasis):
Betsy Waters, global head of dbFX, says retail investing is receiving an additional lift as individuals adopt the high-frequency automated trading systems pioneered by hedge funds. These computer programs, which use complex algorithms to produce automated trading signals, can be bought and uploaded over the internet by retail investors and plugged into a trading platform.
Indeed, dbFX reports that this trend has exploded in popularity since the start of the year. It says currency trades generated by automated systems have risen from negligible at the start of the year to represent about 20 per cent of its customer flow in August.
Ms Waters says that some of the buy and sell signals generated by these programs now have more influence on FX trading patterns, especially at less liquid times of day, and are dictating moves in the wider market.
And that’s a trend that we expect will only grow in force. Note, after all, that even personal-finance pages in papers like the Telegraph are now encouraging holidaymakers to opt for FX broker platforms over traditional commission-charging exchange points.
Related links:
Free money! Honest - FT Alphaville
The new carry currency? – FT Alphaville