Yesterday's TechCruch post points out that Bitcoin is trading around the $300 mark down from its peak of $1,150 last year, with Paul Krugman, Dealbook and others questioning whether this is the crash. If this is indeed the crash then it's come awfully fast. In today's world where news headlines finish their cycle in 24 hours, perhaps it's only fitting that speculation and crashes run through ever shorter lives as well.
Promotion of Ethics, Simplicity and Transparency in Finance
Showing posts with label speculation. Show all posts
Showing posts with label speculation. Show all posts
Monday, October 6, 2014
Thursday, August 14, 2014
Who Likes the Financial Stability Board's Recommendation of a Fee for FX Benchmark Trades?
The Financial Stability Board released a consultative study on FX benchmark rates that includes several items for the industry to consider as well as a couple of recommendations. One recommendation was to widen the period of the window for calculating rates. Another was that the banks should charge for the service of filling fix orders.
As it currently stands, the WM Reuters rate, the London Close benchmark which is the fix with by far the largest daily volume, includes a bid, mid-rate and offer rate for each currency pair. Most large and many small users of the fix are filled at the mid-rate, and thus do not pay any fee or bid offer spread to their bank for filling their order.
Why does this occur? Banks allow it as the cost of doing business with large customers. If others are doing it, you need to do it as well - it became a market practice in effect.
Bank customers, of course, would like all trades executed for free, so how did fix trades become the only trade type executed routinely without spread or fee? This occurred as many funds use the WM Reuters FX rates to translate their local currency asset values into base currency values each day. The investment managers then wanted to execute any trades for that day at the same rate to avoid FX tracking error for their funds. Many managers also saw these rates as a means to achieve market rates without going through the work of negotiating rates with their banks. Others such as corporates began using the mid rate for execution purposes while hedge funds and others did so for speculative purposes.
While this seemed to be a win for the customers, it was not for the banks. When the fix began in the early 1990s FX spreads were quite wide compared to today and perhaps the banks could more easily tolerate these "free trades". Apparently as pressure increased on traders to perform in an environment of reducing spreads, some misconduct occurred, including collusion, as a means to generate profits on these trades.
The FSB's suggestion seems quite sensible to us. Expecting free services does not. In effect, the actions that traders took in recent years reinforces the adage regarding no free lunches. Using bid offer spreads or a small commission should reduce this tension between bank and customer.
While not the only change required to benchmark trading, this change is reasonable and should go along way in making this a more rational part of the FX business.
Asset managers and other fix users may not like the concept initially, but its inherent reasonableness and the need to increase market participants' faith in benchmark rates should see customers agreeing. The devil being in the details, however, the size of any commission or spread (tracking error to many) may be much more controversial.
As it currently stands, the WM Reuters rate, the London Close benchmark which is the fix with by far the largest daily volume, includes a bid, mid-rate and offer rate for each currency pair. Most large and many small users of the fix are filled at the mid-rate, and thus do not pay any fee or bid offer spread to their bank for filling their order.
Why does this occur? Banks allow it as the cost of doing business with large customers. If others are doing it, you need to do it as well - it became a market practice in effect.
Bank customers, of course, would like all trades executed for free, so how did fix trades become the only trade type executed routinely without spread or fee? This occurred as many funds use the WM Reuters FX rates to translate their local currency asset values into base currency values each day. The investment managers then wanted to execute any trades for that day at the same rate to avoid FX tracking error for their funds. Many managers also saw these rates as a means to achieve market rates without going through the work of negotiating rates with their banks. Others such as corporates began using the mid rate for execution purposes while hedge funds and others did so for speculative purposes.
While this seemed to be a win for the customers, it was not for the banks. When the fix began in the early 1990s FX spreads were quite wide compared to today and perhaps the banks could more easily tolerate these "free trades". Apparently as pressure increased on traders to perform in an environment of reducing spreads, some misconduct occurred, including collusion, as a means to generate profits on these trades.
The FSB's suggestion seems quite sensible to us. Expecting free services does not. In effect, the actions that traders took in recent years reinforces the adage regarding no free lunches. Using bid offer spreads or a small commission should reduce this tension between bank and customer.
While not the only change required to benchmark trading, this change is reasonable and should go along way in making this a more rational part of the FX business.
Asset managers and other fix users may not like the concept initially, but its inherent reasonableness and the need to increase market participants' faith in benchmark rates should see customers agreeing. The devil being in the details, however, the size of any commission or spread (tracking error to many) may be much more controversial.
Sunday, February 9, 2014
Doubling Down: Bitcoin Evangelist Won't Back Down
Dealbook reports that Charls Shrem, one of the most visible advocates of Bitcoin, has not backed down from his support of the virtual currency, despite his arrest and accusations of money laundering. The post mentions Mr. Shrem's dreams of a Bitcoin debit card, different business such as a private charter jet company or a bar taking Bitcoin. In particular he noted that "Bitcoin really allows you to have such a global life — it allows you to be able to move anywhere within days if you want to." Let's see, I can travel internationally now at a moment notice, use debit cards, buy drinks and charter a jet (if I had the money). So what exactly does Bitcoin provide that real currencies cannot?
Tuesday, January 28, 2014
Bitcoins: Bonanza for the regulators?
Given all the noise about Bitcoins I can't resist another post today. Regulators are apparently jostling to be among the first to regulate Bitcoin businesses as money transmitters following the announcement by the U.S. Treasury Department’s Financial Crimes Enforcement Network. Assuming that no federal regulatory framework is proposed, I expect a handful of the states looking for "impact regulation" will be the first to propose specific regulations. But then I also expect that eventually, the federal government will preempt all state laws and regulations involving Bitcoin. Until then, Bitcoin will provide a rich source of laws and regulations (and potentially fees and taxes) for state governments.
You say marijuana, I say Bitcoin?
According to Bloomberg, the SEB AB Bank has refused to set up Bitcoin accounts due to concerns about money laundering. The news about Silk Road getting shut down and prominent Bitcoin speculators being arrested for money laundering comes at the same time that legal marijuana businesses appear to have no access to banks due to the same money laundering concerns. Except of course that legal marijuana business can transact in cash whereas Bitcoin only has value if it can be converted into another currency. Unless one were to shop at Overstock.com where apparently they still take Bitcoins, money laundering concerns be damned! Does anyone know if Overstock's Vice Chairman, Jonathan Johnson, is as worried about Bitcoin and money laundering as he is about gay marriage?
Thursday, January 23, 2014
Why is Bitcoin sucking all the oxygen out of the room?
One of our other bloggers, Joe Pimbley, is currently working on a book that we expect will touch upon the topic of Bitcoin. While he is Financial PEST's resident Bitcoin expert, I couldn't resist posting something about it. The New York Times Dealbook features a critical piece by Edward Hadas about the virtual currency while Bloomberg Business Week recently published a feature story about the virtual currency and the economy that has erupted in pursuit of this "fool's gold." I wonder, however, whether Bitcoin fits into the classic definition of a "currency" and whether, perhaps, there may be more similarities to the Great Tulip Mania of 1633-37 in the Netherlands.
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