After half his investment in emerging market hedge funds evaporated, Cenk Utkan made a financial U-turn toward the most liquid market he could find. He's been trading in foreign currencies ever since. "I got burned in Russia and China," said the 33-year-old managing director of London-based Connexion Capital, where he introduces hedge funds to institutional investors.
"In Russia, stocks got suspended. So I thought instead of locking my money up in a hedge fund, why don't I go to the most liquid end of the market, which is the currency market?" said Utkan, who trades currencies two or three times a day for his personal account.
Utkan has a lot of company. Small investors have fled stocks, real estate, emerging markets and other once-hot assets that have been battered by the worst financial crisis in decades and turned instead to currencies. The global crisis has taught them that liquidity is king.
With more than $3.2 trillion in daily volume, the foreign exchange market is the most liquid market in the world. And unlike stock traders who often face rules on short-selling -- or betting that share prices will fall -- forex investors are free to go long or short since currencies are traded in pairs. The investor is always buying one and selling another.
"Retail investors around the world, particularly in countries where you have more controls over the equity markets, are definitely turning to FX," said Betsy Waters, global director of dbFX.com, the retail currency trading platform of Germany's Deutsche Bank At dbFX.com, volume rose 37 percent in the first quarter from a year earlier and its customer numbers more than doubled in 2008.
Gain Capital, which owns Forex.com, said new accounts have increased about 30 percent a month in the last six months from pre-September levels, while the number of trades per day has risen almost 50 percent. GFT Forex said trading volume rose 187 percent from late 2007 to late 2008. The companies declined to provide further details.
After a slow start in the late 1990s, the retail FX market has taken off. By the end of 2006, average daily trade volume reached over $60 billion, a 500 percent increase from 2001, according to research firm Aite Group. According to Greenwich Associates, trading volume generated by "retail aggregators" -- electronic trading platforms that cater to individual retail traders -- rose almost 43 percent from 2007 to 2008.
That compares to a 15 percent rise in overall global forex volume, the research firm said. Wading into that mix are traders like Raymond Firetag, a former California mortgage broker who turned to online trading of currencies from his home a little more than a year ago. After 14 years in real estate, the 43-year-old now makes bets on the world's biggest currency pairs, such as the euro/dollar, dollar/Swiss francs and sterling/yen, on a laptop hooked up to four monitors in his house in Sacramento, California.
"Real estate was really slowing down," Firetag said. "I've always had an interest in macro-economics, financial markets and geopolitics. Discovering I could possibly make a living at it was very compelling. It was almost like a fish to water." Last year, he added, was an "extraordinary" market. "It was a trending market and much easier to trade in," referring to currencies that move in the same direction for long periods.
The credit turmoil has affected even the most fluid market in the world. Spreads widened in the crisis, meaning investors have to buy currencies at a higher price and sell at a lower one. This has led investors to concentrate on the most-traded currencies that tend to have tighter spreads. "There's a huge focus on the three major currencies and particularly on the euro," dbFX.com's Waters said.
In the first quarter, euro/dollar accounted for just over half of all trades on the platform, up from 41 percent in 2008 and just 20 percent in 2007, she said. But betting on currency pairs, which often see wild price swings, can be very risky, investor protection advocates warn. The use of leverage is a double-edged sword and can cause significant losses when things go wrong.
The boom in the retail FX market has also provided a breeding ground for fraud and scams, which range from misleading advertisements to fake account statements and outright Ponzi schemes designed to feed profits to existing clients by attracting cash from new investors.
"If (the firms) are not registered, I would be concerned. And also take it one step further and go to our background system and do an investigation of the firm to see if we've taken any actions," said Karen Wuertz, a senior vice president at the National Futures Association.
Investors can check the firms' registration and membership status at NFA's Web site. And they should recognise that risk controls should be an ongoing process. Said Firetag: "In the short term, you might come into a phenomenal market and risk management is not as important, like 2008. But if you want to have any chance of doing this long-term, the bottom line is risk management."
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