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Monday, September 20, 2010

Forex trading fast gaining currency

20 September 10 The Strait Times
by Goh Eng Yeow, Senior Correspondent

WHEN it comes to high-roller betting, the integrated resorts have generated all the buzz this year.

But there is another potentially far more lucrative realm of high stakes betting in which Singapore is well poised to grab a winning role in Asia: foreign exchange trading. And for the 'house', in this case the banks, the risks are low.

Business at the currency trading desks of global lenders has grown at a rapid pace of late, despite the financial crisis which threatened to cripple the international banking system two years ago.

A recent survey by the Bank of International Settlements (BIS), dubbed the central bankers' central bank, found that an average of US$4 trillion (S$5.4 trillion) worth of currencies is being traded worldwide daily, up from from US$3.3 trillion in 2007 - in the three-year period straddling the financial crisis.

Better still, bankers believe that even brighter days lie ahead for this part of their business, as they search for less risky sources of profits.

This follows fresh guidelines - known as the Basel III Accord - last week which may force banks to lend less, as they have to set aside more capital as a cushion against possible losses.

With eight of 10 global banks in forex trading having trading desks here, the future of this sector in Singapore - already the fourth largest forex centre in the world after London, New York and Tokyo - looks excellent too.

Still, before considering the prospects of forex trading here in greater detail, it is worth taking a look at the global picture.

The BIS estimates that the US$4 trillion worth of currencies traded a day works out to be 70 times the value of goods and services that change hands.

What is more attention-grabbing is the 48 per cent jump in 'spot forex trades' to US$1.5 trillion a day over the past three years.

For banks, there is the salivating prospect of earning a handsome trading commission booking these forex trades for their clients - at almost no risk to themselves - as the trades continue to grow.

Forex trading originally started when banks responded to their clients' need to convert any foreign currencies, earned from their overseas operations, back into their home currencies.

It then expanded, 40 years ago, as companies approached banks for help to 'hedge' against any wild swings in currencies in order to protect their businesses from suffering any forex losses.

But nowadays, most forex trading has little to do with trading or investments. Instead, it has become a great market for wealthy individuals and hedge funds to take huge bets in.

One popular trading strategy is 'pairing' of currencies - using your own wealth to borrow even more money in a currency like the United States dollar at almost zero interest costs to invest in a currency offering higher interest rates.
If the bet turns out to be well-advised, these big-time punters stand to reap huge gains from any nosedive in the greenback, as well as the higher interest offered by the currency they invest in.

The liquidity in the forex market created by these players has, in turn, attracted another powerful group of global traders - the 'algos', or high-frequency traders.
These are highly sophisticated investors who use lightning-quick computers to issue and then cancel orders almost simultaneously to make huge bets based on tiny movements in the currencies.

The end-result - among all these wealthy individuals, hedge funds, banks, and algos - is an exciting game for both winners and losers. The thrill of the chase lures them back into making more bets.

For any financial centre with the pulling power to draw all these players into its fold, the spin-offs can be enormous.

As a well-established financial centre, Singapore trades about US$266 billion worth of currencies a day, or 5 per cent of total global forex trades.

Some bankers tip that the Republic may unseat Tokyo to become the biggest forex trading centre in Asia in the years to come.

The Monetary Authority of Singapore is only too aware of how forex trading is shaping up here.

'There is a critical mass of forex players in Singapore with eight of the top 10 global banks (by forex trading volumes) having forex sales and trading desks in Singapore,' it said recently.

One chief executive notes that Singapore enjoys the advantage of world-class infrastructure with an international airport that is only minutes away by car from the main business district.

'Over time, Hong Kong will become more Chinese, as it serves the mainland Chinese market, while Tokyo's foreign exchange market will be largely domestic-driven. Singapore has the chance to be the truly Asian hub,' he said.

The enforcement of the Volcker rule to curtail proprietary trading by giant lenders in the United States may also be inadvertently adding to Singapore's attractions.
As these lenders' proprietary trading desks disband, they are increasingly looking to regroup in Asia, where they believe a more congenial financial climate beckons - and this makes cities like Singapore attractive.

And as they uproot and head east, they are likely to attract other players - the hedge funds and the algo traders - to join them here.

For the cities serving as their hubs, there is likely to be a quantum leap in the quality of their lives - as the cultural and entertainment scene also brightens up.
In the 1970s, Singapore's then budding financial centre got a big boost from petro-dollars, following a huge surge in oil prices.

This time, the remaking of the global financial landscape is likely to provide the backdrop for another transformational change.

Thursday, September 16, 2010

The 7 deadly investment myths

Believing in such false notions can cause investors to either lose money or miss out on opportunities.

Thu, Sep 16, 2010
The Business Times

By Vasu Menon
Vice-President, Wealth Management
Singapore, OCBC Bank

SUBSCRIBING to investment myths can cause investors to either lose money or miss out on opportunities. Understanding some of these myths and their pitfalls can result in better investment decisions.

Here are seven investment myths to be wary about.

Myth #1: Investing is exciting.

It is important to draw a distinction between investing and trading and speculating. Trading and speculating can give you the adrenaline rush and even make you fast money, but they can also cause you heartaches and leave you disillusioned if your bets go the wrong way.

Investing may be unexciting in the short term and may not yield you quick profits, but if you do your homework to identify good opportunities and invest prudently and set reasonable targets, it can provide you with decent returns over a three to five year period.

So investing requires patience but it carries less risk than trading or speculating, as it allows a greater time for your money to grow.

Myth #2: Good brand names make good investments.

Companies with established brands do not necessarily equate sound investments that assure good returns.

Take established US companies like Enron and WorldCom for example. They collapsed after being embroiled in accounting scandals and fraud. The former oil giant Enron filed for bankruptcy in December 2001 while WorldCom which was a telecom giant did the same in July 2002.

A more recent example is oil major, British Petroleum, which saw its share price plunge after its oil well in the Gulf of Mexico ruptured, resulting in the worst disaster in maritime history. No matter how established a company is, there are no guarantees it will not pull unpleasant surprises.

So, irrespective of how strong a company's brand name is, do not fall in love with it and over invest in its shares.

Myth #3 : The best way to make fast money is to invest in what's 'hot'.

Related story:
» Where best to park your money
» Making sense of financial jargon
Do not be a mere follower and purchase a popular stock or investment just because its 'hot' and everyone else is buying.

It's dangerous to adopt the herd mentality and take comfort in numbers.

Do your own research and analysis before taking the plunge.

Buy only if you fully understand what you are buying into and have the appetite to stomach the risk. If not, stay away.

Myth #4: Stay clear of investing when the outlook is uncertain.

In times of uncertainty, jittery investors tend to steer clear of markets or even sell off their investments, even if it means suffering losses.

While it makes sense to be cautious when the outlook is uncertain, there is also an opportunity cost to being too cautious, especially if markets suddenly turn around and surprise on the upside. For example, many nervous and panicky investors bailed out on their investments when markets were close to the bottom in the first quarter of last year.

As a result, they suffered losses and missed the subsequent strong market recovery which resulted in gains of more than 100 per cent in some instances.

Similarly, many overly cautious investors who were sitting on cash missed the boat, failing to buy when valuations were extremely low and attractive.

Looking ahead, uncertainty and volatility looks set to remain a fixture for several months. Instead of staying clear of markets completely and risk missing the boat, it makes more sense for investors to buy gradually and systematically over several months to mitigate the downside risk.

Myth #5: Always invest in the best performers.

Often, investors make decisions based on historical performance because of the mistaken believe that an investment which has done well in the past will continue to do well in the future.

However the strong historical performance may not recur if it was due to exceptional factors or because of undue risks taken by the fund manager.

So when buying into a unit trust for example, you should go beyond its past performance.

Other factors to look at include the risk adjusted returns of the unit trust, the kind of stocks or investments the fund manager buys into, the robustness of investment process and the experience of the investment team.

If you're not sure how to get this information, seek help from a financial adviser.

Myth #6: You have to be super smart to invest.

Related story:
» Where best to park your money
» Making sense of financial jargon
You don't need to be a financial wizard to invest.

Don't let the lack of knowledge or fear of financial jargon turn you off.

You can always start by attending basic courses on investments, reading books and online articles, consulting the right people and asking questions to address your discomforts or fears.

Also, check out investment seminars to pick up useful tips.

Myth #7: You need to be rich to start investing.

Wealth management and investments are not just for the wealthy. It's for everyone, no matter how much wealth you may have.

In case you are not aware, you can begin investing with just $100 each month through a regular investment plan. Such plans offer the additional benefit of dollar-cost-averaging.

Also, when you start investing early, you benefit from the power of compounding as well.

OCBC shall not be responsible for any loss or damage whatsoever arising directly or indirectly howsoever as a result of any person acting on any information provided herein.

This article was first published in The Business Times.

Thursday, September 2, 2010

Trading CFDs: some pointers

Published September 2, 2010


AS REPORTED in this column some weeks back ('How well do investors understand CFD risks?' BT, July 22), regulatory antennae in Australia were recently raised when the authorities found from a survey that a large number of retail players in the contracts for differences (CFD) market were ignorant of the risks associated with the instrument.

A study was then launched by the regulators and it remains to be seen what measures, if any, the authorities Down Under will impose on the CFD industry to address the concerns the survey raised.

It also remains to be seen if the situation is similar in Singapore, where CFDs are said to be one of the fastest-growing segments in the local financial market.

Leverage effect

Until any such survey is conducted, though, there are nevertheless several points of interest that prospective and current CFD investors might wish to consider when dealing with this instrument.

First and most obvious is to gain a thorough understanding of all the facets of CFDs and the leverage effect they can offer via the margin feature - both on the upside and downside.

In this regard, it's worth noting the commissions to be paid and the interest or funding charges for long positions. (Conversely, note that interest is earned for short positions).

Second is to compare the features of CFDs with other leveraged products such as structured warrants before deciding which instrument is best for individual needs.

For example, warrants have a short-term, finite lifespan and require knowledge of how volatility works but are traded on the Singapore Exchange (SGX), whereas CFDs theoretically have an unlimited lifespan and need not require volatility calculations but are not - at least not yet, in Singapore's case - traded on SGX.

Third and perhaps most importantly, once the investor has decided to take the CFD plunge, is to select an appropriate CFD provider. This is the counterparty in a CFD trade - the financial entity with whom the CFD account is opened - and so this means it is vital to ask certain questions before setting up an account and commencing trading.

First, it's best to scrutinise the account-opening forms to see if the provider highlights the risks associated with CFDs or relegates these to the fine print. This might offer clues as to how the provider conducts its business and whether it is a long-term player who wishes to forge a lasting relationship with clients or otherwise.

Second, education and training, without which it would be impossible to trade CFDs meaningfully. In Australia's experience mentioned earlier, the survey found that in some cases, even sales personnel themselves were not fully conversant with the intricacies of CFDs.

In this regard, it would be worthwhile checking if the provider invests meaningful resources training and educating all its customers - and staff. Again, this would provide some indication as to its long-term commitment to its business.

Third, it's worth finding out if the provider force-sells clients' losing positions if these positions become under-margined, to prevent such clients from losing too much money.

In CFD trading, the effect of leverage means that losses can be hugely magnified and thus not confined to the initial capital outlay (which typically is just a fraction of the price of the underlying assets). If positions are not monitored constantly or if markets 'gap' unexpectedly (that is, open with an unnaturally large gap between current and most recent prices), the consequent loss can be painfully large if not closed out quickly.

Financial strength

Providers are, of course, under no obligation to exercise discretion and close out losing positions, but some are known to take the initiative and try to limit a customer's loss by acting of their own accord.

Finally, the provider's financial strength. Just like trading in any instrument, there is a risk of loss connected to the financial standing of the broker/ bank/warrant issuer/CFD provider that is providing the service.

Prospective customers should therefore perform their own 'due diligence' on the provider's background before signing on the dotted line.

Finally, note that CFDs are not for everyone. They are inherently riskier than ordinary stocks and so require a greater degree of sophistication when trading.

They are, however, a useful addition to any financial market since their presence enhances the range of products available to investors. The key, as always, is education, understanding and knowing the right questions to ask.