FOREX

The foreign exchange market is the largest and most liquid financial market in the world. Traders include large banks, central banks, currency speculators, corporations, governments, and other financial institutions. The average daily volume in the global foreign exchange and related markets is continuously growing. Daily turnover was reported to be over US$3.2 trillion in April 2007 by the Bank for International Settlements. Since then, the market has continued to grow. According to Euromoney's annual FX Poll, volumes grew a further 41% between 2007 and 2008.

Of the $3.98 trillion daily global turnover, trading in London accounted for around $1.36 trillion, or 34.1% of the total, making London by far the global center for foreign exchange. In second and third places respectively, trading in New York accounted for 16.6%, and Tokyo accounted for 6.0%. In addition to "traditional" turnover, $2.1 trillion was traded in derivatives.

Exchange-traded FX futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts.

Several other developed countries also permit the trading of FX derivative products (like currency futures and options on currency futures) on their exchanges. All these developed countries already have fully convertible capital accounts. Most emerging countries do not permit FX derivative products on their exchanges in view of prevalent controls on the capital accounts. However, a few select emerging countries (e.g., Korea, South Africa, India—) have already successfully experimented with the currency futures exchanges, despite having some controls on the capital account.

FX futures volume has grown rapidly in recent years, and accounts for about 7% of the total foreign exchange market volume, according to The Wall Street Journal Europe (5/5/06, p. 20).

Top 10 currency traders ^[5]
% of overall volume, May 2009

Rank	Name	Market Share
1	Deutsche Bank	20.96%
2	UBS AG	14.58%
3	Barclays Capital	10.45%
4	Royal Bank of Scotland	8.19%
5	Citi	7.32%
6	JPMorgan	5.43%
7	HSBC	4.09%
8	Goldman Sachs	3.35%
9	Credit Suisse	3.05%
10	BNP Paribas	2.26%

Foreign exchange trading increased by 38% between April 2005 and April 2006 and has more than doubled since 2001. This is largely due to the growing importance of foreign exchange as an asset class and an increase in fund management assets, particularly of hedge funds and pension funds. The diverse selection of execution venues have made it easier for retail traders to trade in the foreign exchange market. In 2006, retail traders constituted over 2% of the whole FX market volumes with an average daily trade volume of over US$50-60 billion (see retail trading platforms) Because foreign exchange is an OTC market where brokers/dealers negotiate directly with one another, there is no central exchange or clearing house. The biggest geographic trading centre is the UK, primarily London, which according to IFSL estimates has increased its share of global turnover in traditional transactions from 31.3% in April 2004 to 34.1% in April 2007. The ten most active traders account for almost 80% of trading volume, according to the 2008 Euromoney FX survey. These large international banks continually provide the market with both bid (buy) and ask (sell) prices. The bid/ask spread is the difference between the price at which a bank or market maker will sell ("ask", or "offer") and the price at which a market taker will buy ("bid") from a wholesale or retail customer. The customer will buy from the market-maker at the higher "ask" price, and will sell at the lower "bid" price, thus giving up the "spread" as the cost of completing the trade. This spread is minimal for actively traded pairs of currencies, usually 0–3 pips. For example, the bid/ask quote of EUR/USD might be 1.2200/1.2203 on a retail broker. Minimum trading size for most deals is usually 100,000 units of base currency, which is a standard "lot".

These spreads might not apply to retail customers at banks, which will routinely mark up the difference to say 1.2100/1.2300 for transfers, or say 1.2000/1.2400 for banknotes or travelers' checks. Spot prices at market makers vary, but on EUR/USD are usually no more than 3 pips wide (i.e., 0.0003). Competition is greatly increased with larger transactions, and pip spreads shrink on the major pairs to as little as 1 to 2 pips.

MUMBAI: Dalal Street is likely to witness volatile trade this week with a downward bias taking cues from global markets as concerns about debt

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repayment problems in Dubai loom large over markets worldwide, analysts said.

Brokers said market had treaded into the overbought zone and needed a trigger to undergo correction. Weakness in the street may continue for the next few days, they said.

"The market will remain volatile and trade in negative terrain this week. As investor sentiment is weak in the market there will be some more sell off," Geojit BNP Paribas Financial Services Head, Research Centre, Alex Mathews said.

The market would now look for some announcement from the Dubai government about how it is planning to deal with the debt crisis, which revived fears of financial meltdown.

Global stocks declined last week as investors turned towards dollar as preferred investment on concerns over potential debt problem fall out at Dubai World.
"Indian markets have already felt knee jerk reaction of the Dubai crisis. In the short term although the crisis might keep the market under pressure, going ahead markets here will take its own direction," Unicon Financial Chief Executive Gajendra Nagpal said.

The Monday market opening is expected to move from flat to negative and then take cues from the Asian and European markets.

Over the week the Bombay Stock Exchange benchmark Sensex lost 390 points or 2.29 per cent to reach 16632.01 points. While foreign institutional investors witnessed a net sell off of Rs 577 crore.

"FIIs have exposure in the Dubai markets. So they were selling their holdings in India. Domestic institutional investors gave some support to the market," Mathew said.

Taurus Mutual Fund Managing Director R K Gupta said, "Indian market movements will depend on how the global markets fare. As no more bad news is coming from Dubai, we can expect some recovery in the Indian markets although the bias will be negative."

Indian markets would find its support around 16,300 levels for Sensex, analysts said.

The US markets on Friday closed in the red with the Dow Jones ending down 154 points or 1.5 per cent at 10,309.92 points. The US markets were closed for a holiday on Thursday when other global markets suffered steep losses. On Friday the US markets opened in a shorter trading day.

Besides, Asian markets also closed down on Friday with the Japan's Nikkei index

closing down 3.2 per cent and the Hong Kong Sang Seng ended 4.8 per cent lower.

MUMBAI: If you want to know ‘the power of small’, the best person to ask is a small-cap mutual fund investor. Small- and mid-cap funds that

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invest in relatively small value, illiquid stocks have handily beaten large-cap funds by a wide margin. While one-year returns on small-cap funds have been in the range of 105-110%, gains on heavyweight blue-chip funds, which are often regarded as flagship schemes, are much lower, with average (category) returns falling between 75% and 78% for one year.

According to fund managers, though the market has run up over the past one year, hurtling stocks to the expensive zone, there are still factors that could sustain small- and mid-caps rally for some more time. While sector frontliners have run ahead in terms of valuations, there are several mid- and small-cap stocks that have relatively more upside to grow in value.

In terms of earnings growth, several mid- and small-cap companies have beaten their larger peers (though business turnover of smaller companies is anything but significant to compare with large-cap companies).
“The best thing about a small company is that minor improvements in corporate numbers or working style reflect on their stock price. Small improvement here and there contribute so much to their stock price,” said A Balasubramanian, CEO, Birla Sunlife Mutual Fund

.

According to fund managers, small companies with good management vision and ability to offer rare products or services make it to fund portfolios. Though large-cap stocks tend to balance the earnings capacity of a portfolio, it is lesser-known volatile stock groupings that give the portfolio an extra ‘gain-kicker’. If one were to see small- and mid-cap businesses that made it big over the past few years, companies such as Hero Honda (the larger peer being Bajaj Auto), Maruti (the larger peers — M&M and Tata Motors), Marico and Godrej Consumers (the larger peer being HUL) would top the list.

“Spotting a potential multi-bagger is the key to small- and mid-cap fund management. Small-cap fund managers do thorough research before allocating money to smaller companies. The general belief is that if a small-cap company is doing well, it will match up to large-cap companies in terms of returns,” Mr Balasubramanian added.