Competing Exchanges

Moving to the interbank is one of the biggest hurdles a new CTA has to face, says the principal of Trendstat Capital Management in Scottsdale, Ariz., who manages more than $ 400 million in currency rate chart programs and trades almost entirely via the interbank. While Basso's disclosure document states a $ 3 million minimum, he says for the client to trade in any of the programs' markets, $ 5 million is more appropriate.

Pairing up While the Euro will bring about changes in cross-rate trading, one of the most popular currency pairs, the USD/JPY, will remain unchanged. For the small CTA, this type of client rarely exists. Instead of the interbank, an option might be the Chicago Mercantile Exchange's (CME) Global Foreign Exchange (GFX), where a team of market makers post bid/ask spreads in currency futures on Globex reflecting interbank forex conditions. GFX prides itself on its willingness to make markets for any request, even a one- or two-lot order.

It's clear exchanges are doing what they can to compete. This year CME will add the Russian ruble to its exotics. While liquidity might not be present, the CME's choice of contracts may be on the mark. “Right now I believe Russia is the best emerging market to trade,” says the chief investment officer of the Santa Barbara, Calif.-based Alpha Investment Group.

Finex, the financial division of the New York Cotton Exchange, added the Australian and New Zealand dollars, the South African rand, the Thai baht, the Malaysian ringit and the Indonesian rupiah in 2006. Volume on Finex last year surpassed 2005 figures by 56%, and some CTAs are taking notice. “We're looking at Finex,” says the vice president and director of research for HWB Capital Management in New York. “With the large size of the contracts, we could lower some commissions.”

If the interbank is the platform of choice, CTAs must weigh the pros and cons between an agency and a principal/dealer desk. With the agency desk, the CTA knows the agent shopped around at several banks looking for the best price and tightest spread, which may be the best route for individual clients who must cut costs. “Another advantage is we have no desire to trade off the information. We are not proprietary traders, so we don't have the conflict of interest the principal desk has,” says the senior vice president of forex at Carr Futures in New York, “Most of our CTAs are technically driven, so we have no advantage by telling the world what someone is doing.”

The principal views giving away flow information differently. Perry Parker, director of forex options at Deutsche Morgan Grenfell in London, says his firm is in the business of transactions.