Sean Lee

Algogeddon: Coming soon to an FX market near you!

We've had some famous examples over the years, from Herstatt in 1974 through to LTCM in 1998, where one position in the market got so big that it's liquidation caused massive disruption and huge spikes in volatility.

We live in different times now but the risks are still the same. The present day market is dominated by huge 'Algos', systematic models which thrive in range-bound markets where the models can pick up the spread. Even if the spread is very tight, if you are picking it up thousands of times a day in significant volumes, you are certain to make a lot of money.

Old timers will remember the markets of the 1980's and 1990's when the bigger players could bully the market (most of the time); they could soak up whatever was being thrown at it and then simply move the market because they were big enough to do so. But these were only ever sort-term movements as no one player had the credit lines and depth of pockets to maintain dominance for any length of time.

Now we have a situation where the Algos are so huge that they can in essence do exactly what the bully boys did 30 years ago. They can tie the market into a tight range, warehousing the huge underlying positions which are being generated, and keep generating spread revenue session after session.

But, (there's always a but) there is a problem. All the Algos are programmed the same way and do the same thing. Banks and hedge funds simply turn on the Black Box and let the profits flow in. Remember how this ended for LTCM! The main impact in the case of LTCM was in USD/JPY which fell something like 15 big figures in an afternoon! Now extrapolate this scenario to where you have multiple LTCM-lookalikes all doing the same thing in bigger size and in less liquid currency pairs. How do you think this is going to end??

I don't know when it will happen but I do know that it will. Take it away Shirley, it's all just a little bit of history repeating.

by Sean Lee

The 3 C's for institutional investors; credibility, consistency and conservatism.

The really really good traders make so much money for themselves, they have no need to manage funds for others. Institutional investors understand this. Certainly some of the more aggressive hedge funds will employ 'risky' traders but even these roles are few and far between. There is of course massive demand nowadays for anyone who can consistently deliver double-digit returns but these are not mug investors, they know what they want and they won't make concessions to this.

If you want to have a career as an independent prop trader in the FX space then you need to focus on what the investor wants.

Let's start with credibility and trust. If the investor finds something in your past that you are hiding (eg a blown-up account or 3!) then they are unlikely to make even a small allocation. Be honest, declare everything. It's not expected that self-funded self-taught traders will have a blemish free track record! The investor wants to see that if you have made mistakes, they were made on your money!

Settle on a consistent trading strategy and risk management plan. NEVER deviate. The investor must know what to expect in all market conditions (notwithstanding the 5-year black swan events). Investors will pull your funding if you deviate from the plan, even if you are profitable.

Finally, I have yet to come across a serious institutional investor who is chasing 100% returns. They may allocate a small percentage as part of a portfolio to riskier traders, but if you really want to build some serious AUM then do so on the basis of a conservative approach; managed drawdowns and achievable monthly targets.

We know what the investors want, so what is the perfect profile? A 2-year track record, systematic approach to risk management, partially systematic approach to trading, moderately active strategy giving plenty of data to analyse, consistent monthly returns of 0.8-1.2%, and peak-to-trough drawdown of < 2.5%.

If you have this record you should be hanging out your shingle as a professional FX trader.

by Sean Lee

FXWW Select Australia

The FXWW Select program gives institutional and sophisticated investors access to the world’s premier FX trading talent in a professional environment.

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All members of the FXWW Select platform must pass the wholesale test.

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The trader application process happens in two stages; quantitative and qualitative.

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We are currently taking applications from Australian-based traders who fulfil the criteria and wish to join the FXWW Select platform. Traders from other jurisdictions will be contacted separately regarding their applications.
If you think you have what it takes to attract discerning investors, then please take the following steps:

- Firstly, fill out the Premier Trader Application form.
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- Once this has been done, you will receive instructions from us on how to sync with the FXWW EA which will allow us to analyse your trading data.
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- Qualifying traders will be invited to take part in the interview process.
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- Selected traders will join the FXWW Select platform where they will be eligible to earn both management and performance fees on investable funds.
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Monex Securities
Monex Securities has been chosen as the preferred destination for FXWW Select in Australia. Part of the Monex Securities Group, Japan's biggest online broker, the Group has 14 offices globally, $46 billion in assets and 3.7 million investors.

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Further information is available after registration or you can send queries and questions via the Contact Us section of the form provided.

The information in this email is prepared without considering your objectives, financial situation or needs. Monex Securities Australia Pty Ltd (ABN 84 142 210 179) is the financial product issuer who solicits business in Australia only, and regulated by the Australian Securities and Investments Commission AFSL (363972).
Trading margin FX and CFDs carries a high level of risk. You do not own, or have any rights to the underlying assets. Trading is not suitable for everyone and may result in you losing substantially more than your initial deposit. Prior to you make an investment decision, please ensure you carefully read the Product Disclosure Statement (PDS), Financial Services Guide (FSG) and Margin trading Terms and Conditions which can be obtained from Monex website https://fx.monexsecurities.com.au , and fully understand the risks involved before deciding acquired any of the financial products they provide.

by Sean Lee

FXWW Select explained

• A platform which brings together sophisticated, wholesale investors and emerging trading talent from the FX retail space
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• Traders must have a fully verifiable 2-year track record and at least 2 strong references from the alternative asset industries (ie FX, futures, commodities and cryptos).
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• Investors must be qualified wholesale clients and must have a track record of investment in the alternative asset classes.
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• The investment structure is based around Managed Accounts at a number of institutional-type brokerage firms.
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• FXWW Select is divided into a number of jurisdictions with preferred brokers for the investors and available regulatory cover for the traders if required.
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• It is not compulsory for traders/managers to have their own trading account with the preferred broker.
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• Each trader/manager will have direct individual agreements with the investor, with paperwork provided on the FXWW Select platform.

by Sean Lee

FXWW Australian trader network

by Sean Lee

ASIC still very intent on cleaning up the retail FX market

Interesting seminar in Sydney last night on the Global Code of Conduct for the FX market. Guy Debelle from the RBA has worked on this from the beginning and he outlined the progress to date and the plans for the future. The challenges remain the same; last-look, anonymous trading, pre-hedging etc.

Cathie Armour from ASIC was the keynote speaker and she spent a lot of time outlining what she sees as ASIC's role in the retail FX space. There are over 60 licensed providers of derivative products in Australia and over 80% of these clients come from overseas, mainly China. Some of the main points that I garnered from her interesting speech were:

• If an activity is illegal in an overseas jurisdiction, then a licensed Australian entity is obliged to obey and respect these overseas laws.
• Using leverage levels ranging from 100:1 to 400:1 is not a practical investment strategy.
• ASIC does not want its licenses to be seen as a guarantee or confirmation that a particular product line is safe and reasonable.
• The levels of complaints in the retail FX space are extraordinarily high and she stressed heavily that many of these complaints are 'heartbreaking' in nature.

Ms Armour was asked if ASIC planned to follow overseas leads by restricting leverage to lower levels such as the maximum 25:1 now legislated by the FCA in the UK. She did not directly answer this question but she said that all options are on the table.

Just last week we heard secondhand that a major legal firm here in Australia issued an opinion to some of the biggest derivatives brokers which at its core opined that ASIC licensees are not in breach of their license so long as they are not actively using that license to source and attract overseas clients. From what I heard last night, I don't think ASIC will be in agreement with this particular opinion.

by Sean Lee

Professional Trader Vs Profitable Trader

Not every profitable trader will make it as a professional trader in the institutional world.

An institutional investor will break his analysis of a trader or manager into two parts; qualitative and quantitative.

Everyone has different rules and preferences when it comes to the quant side but these are the main areas that are considered;

• activity
• methodology, systematic or discretionary
• overnight and weekend position policy
• daily, weekly, monthly drawdown limits (always based on equity NOT on realised)
• when and how much leverage is used (ie does leverage increase or decrease in drawdown periods)
• profit-to-loss ratios
• chosen indicators eg Sharpe, Sortino, Sterling etc etc

So even if you have been a reasonably consistently profitable trader over a lengthy period, a negative analysis on any of the above will probably mean that you won't get an institutional allocation.

The qualitative side is much more subjective;

• how long have you been trading
• have you any institutional experience
• can you provide at least 2 well-respected referees
• have you managed any institutional funds or been in a seed-funding program
• can you provide evidence that you are an upstanding citizen

Even if a trader can provide exceptional data, they may well be refused an institutional allocation if they cannot tick enough of these boxes.

Obviously the ex-institutional traders have a significant advantage in this department but there aren't many of them any more. The FXWW rating gives investors peace of mind that significant due-diligence has been done on the background of all registered traders.

by Sean Lee

ASIC: Local FX broker market surprised by 'intense' letters

As I flagged a few weeks ago, ASIC has been giving out signals that it's about to get tougher on implementing best behaviour for AFSL holders but even I was surprised that they seem to have morphed from a cuddly, friendly Koala to a claw-sharpened Drop-Bear overnight!

I believe that every derivatives, market-making license holder under ASIC's jurisdiction received some very intense letters from the local regulator yesterday, and the level of detail demanded has been described to me as being 'unprecedented'. The focus seems to be on the nature and location of individual trading accounts as well as the exact business nature of CARs (corporate authorised representatives) issued by the AFSL holder.

This action by ASIC would seem to have been in some part prompted by complaints from Chinese authorities that Australian-based brokers were the main destination of Chinese retail traders, carrying out activity which is unregulated in China. We should be in for plenty of speculation in the weeks ahead as ASIC collects all the required data.

May you live in interesting times.

Here is the full ASIC press release.

by Sean Lee