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Bloomberg’s Richard Breslow Full Note:

 

 Investors Not Rewarded by High Difficulty Level

A lot has been made of the falling volumes in global foreign exchange turnover. The BIS has put numbers to all of the anecdotal evidence and the decline is real and significant.

Especially as it has come largely at the expense of spot- related flows. Causing liquidity, during crunch times, to really take a hit. Institutional end-users have felt the pain. A sign also that speculative activity is clearly down.

There are a lot of reasonable explanations for this phenomenon. They mostly focus on regulatory changes. Which have led to both intentional and unintended diminution of market-making ability and risk appetite by banks.

Others focus on the disruptive rather than liquidity enhancing activities of high frequency trading. Electronic dealing, both single and multi-dealer platforms, may have improved price discovery at the expense of liquidity on transactions in large amounts. And may have caused divergence from best practices, on both sides of the trade.

But I think the overlooked reality in today’s global trading environment is that, put simply, foreign exchange has just been harder to trade than other asset classes.

Institutional investors, let alone those with the luxury of a family office, go where the environment is most welcoming. Why beat your head against the wall trying to make sense of some stretched argument about how the Russian ruble will fare against the South African rand when simply buying gold has been the alternative?

The former has multiple, opaque and rapidly changing parts galore. The latter only requires evaluating if the world will stay as messed up as it’s become.

Unconventional monetary policy has completely altered the portfolio selection calculus. Front-running central bank feeding frenzies is the trading ticket.

Not to mention the unintuitive consequences of policies like negative rates causing currencies to appreciate. That was hard to trade in prospect. Buying corporate credit wasn’t.

There are tons of opportunity in currency trading. But trends, such as there have been, have been hard to capture. Traders have, logically, chosen the opportunities with the lowest difficulty levels. Unlike in the Olympics there’s no penalty for doing so.