Big cats dine on the little traders in currencies

The Insider

Your Money

January 18, 2004|By BILL BARNHART

BENEATH the conventional chairs and tables of the world economy, a hectic cat-and-mouse game is under way in the financial markets.

Thousands of ordinary investors here and overseas, the mice, are playing with a few giant banks, the cats, in trading currencies.

The Internet is awash in sites offering direct trading in currencies. With no commissions, cash down payments as low as 1 percent and 24-hour action, the direct foreign exchange (forex) market has captivated many Nasdaq day traders of the late 1990s.

"It's like the dot-com craze, but it's currencies," said Edward Velazquez, chief executive officer of V-Tek Capital, a hedge fund adviser.

Known among law enforcement officials as a den of thieves, the retail foreign currency market gained some respectability in recent years.

A reform of the commodities trading laws in 2000 enabled the federal government to regulate over-the-counter currency-trading operations that aren't traditional financial institutions.

Last month, the National Futures Association, the self-regulatory organization of the futures industry, implemented rules seeking to toughen standards.

The regulatory initiatives have placed an implied stamp of approval on the game.

Andrew Busch, foreign exchange strategist for BMO Nesbitt Burns, said retail over-the-counter currency-trading volume is booming. It accounts for about 10 percent of the $1.3 trillion daily trading in currencies, he said.

Once the domain of big-buck hedge funds, over-the-counter forex has gone down market.

Currency-trading desks at major banks have been hollowed out by mergers, such as last week's J.P. Morgan Chase-Bank One deal, and by the consolidation of European national currencies into the euro, said Craig Russell, a forex dealer at AlaronFX.

As a result, traders are hanging out their shingles on the Internet, Russell said. In some cases, a few hundred dollars will open an account.

Moreover, the fad has a distinctively global scope. Asians and Europeans are far more conversant in the dynamics of currencies.

Xpresstrade, a Chicago dealer, says more than 30 percent of its volume is generated outside the United States via the Internet.

"If you grow up in Europe or Asia, you are accustomed to other currencies and other languages," said Dan O'Neil, a principal at Xpresstrade.

The standard bet is that the U.S. dollar is in trouble because of U.S. government and trade deficits. But last week the dollar rallied sharply, perhaps signaling a trend reversal.

Who knows? But what small-time currency traders, glued to their computer screens, don't realize is that of all the financial markets, trade in currencies is the most immune from logic and discernible economic forces.

Meanwhile, the world's biggest banks are more than happy to pocket the profit between the wholesale price of currencies, which they charge each other, and the higher retail price paid by everyone else.

Unless evolution has changed, cats still feed on mice.

Bill Barnhart is a financial columnist for the Chicago Tribune, a Tribune Publishing newspaper. Write to him in care of Your Money, Room 400, 435 N. Michigan Ave., Chicago, Ill. 60611 or via e-mail at

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