Banks jump into currency as their other sectors battle

A SURGE in currency trading and the favourable regulatory treatment of the foreign exchange business have unleashed an intense fight on Wall Street as banks battle one another for a larger share of an increasingly fractured market.

The volatility in major currencies has created opportunities for Wall Street banks to make money facilitating client trades.

In recent months, Bank of America, Goldman Sachs, Morgan Stanley and other banks that historically had smaller foreign exchange businesses than major rivals have stepped up efforts to gain market share. They are taking on Deutsche Bank, Citigroup, Barclays and JPMorgan Chase, which have long dominated currency trading.

The competition is particularly intense among banks, because the foreign exchange sector is under fewer new regulations than other areas of trading, such as derivatives or corporate bonds. That means banks can fund currency trading with less capital than they need for other businesses.

Trading volumes in major currencies rose in the first half of the year, supported by a massive monetary easing programme in Japan and expectations that the US Federal Reserve would start pulling back from its bond-buying programme.

These moves by central banks spurred companies to hedge their currency risks.

A slowdown in fast-growing markets such as China and Brazil also affected currencies and had particular ripple effects on resourcerich Australia. With the prospect of less demand for raw materials from emerging economies, the Australian dollar has dropped to lows against the US dollar not seen since 2010.

The average daily trading volume in major currencies jumped to $5.6trillion (about R55.2-trillion) in June, a record, up 15% from $4.9-trillion in May, according to CLS Bank, which operates the largest foreign exchange settlement system.

Although currency trading has turned into a bright spot for banks, the business is far from lucrative. A broker typically earns just fractions of a cent for every dollar’s worth of a trade and banks have been cutting prices to gain market share.

Foreign exchange contributed just 8% of fixed-income revenue at the top global investment banks last year, down from 36% in 2008, according to consulting firm Coalition.

The first half of 2013 was a good one for Wall Street, but foreignexchange volumes were down 24% so far in the third quarter, said Barclays analysts.

Yet, for many banks, foreign exchange trading is an alluring business if only because new regulations are making other businesses unviable. Under international capital rules designed to ensure that banks have enough capital to cushion against losses, foreign exchange is treated as less risky than other fixed-income businesses. That is because assets involved in foreign exchange trading are essentially cash. Even Swiss bank UBS, which pulled back from most fixed-income trading businesses to conserve capital, opted for currency trading.

Michael Karp, CEO of the Options Group, an executive search and consulting firm, said although banks were cutting staff in many fixedincome trading areas, foreign exchange “is the one place where banks are expanding and looking to get back in action”.

Since last year, big banks have been snapping up executives from competitors to bolster their foreign exchange trading businesses.

Matthew Miller, co-founder of consulting firm Shift Forex, said he had been getting a lot of calls from recruiters and clients asking whether he could suggest candidates for foreign-exchange positions at big banks. “They all seem to have a need for people, whether on the retail side or the institutional side,” he said.

The industry had also spent millions developing and marketing new foreign exchange trading technology software in recent years, Miller said.

“People have made significant investments in technology,” said Troy Rohrbaugh, JPMorgan’s global head of interest rates, foreign exchange and public finance.—