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.
engyeow@sph.com.sg
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