Lack Of Volume In Forex Futures Pits Leads To Strategy Shifts And Staff Cuts

A lack of volume and participants has resulted in several major financial institutions scaling back their futures brokerage businesses in recent weeks, sources say. Although each has done so to different degrees, the moves evidence a general slowdown in the currency futures market.

As an example of lower volumes, at the Chicago Mercantile Exchange (CME), currency futures volume is down 15.4 per cent so far this year (January through April) and combined currency futures and options three weeks ago, Chemical Bank closed its year-old dedicated FX brokerage unit, although traders continue to deal on the IMM, but now do so through outside phone clerks and brokers. Chemical set-up the dedicated operation in Chicago, which operated independently of Chemical Futures & Options (CF&O), to save brokerage costs (FXW, May 9). CF&O remains intact.

But, as chief dealer Scott Gallopo explains, the operation was no longer a viable stand-alone business. He adds that Chemical continues to trade currency futures, as well as the CME's 'rolling spot' Deutsche mark contracts and 'currency forwards'.

In a different vein, yet still indicative of the slowdown of currency futures business, Chase last week announced that it is restructuring its futures brokerage unit, Chase Manhattan Futures Corp., following a year-long review of its wholesale business under Michel Kruse, who took over the position last summer.

Over the next three-to-six months, Chase will quit the business of futures clearing and execution, except in areas of relative strength, namely, the global custody business, according to Chase spokeswoman Shelly Wolfe-Colley.

Chase is not completely shutting down futures operations therefore, but Chase Futures (which operates separately from the FX group) will eventually be dissolved under that name, sources close to the bank say.

The current president, John Kelly, is expected to be absorbed into another area at the bank, say these sources. Kelly referred questions to Wolfe-Colley.

"As the futures industry has evolved, providing brokerage services has become increasingly commodicised," says Wolfe-Colley. "In such an environment, price and economies of scale have become the dominant basis of competition. We have chosen to focus our resources on those areas where our ability to integrate globally provides a distinct competitive advantage."

Chase is merging what's left of the futures brokerage unit into a single, centralised futures clearing agency for global custody, which will likely fall under a new name within the global securities services division, sources say.

Chase Futures has about 170 staff in the U.S., Europe and Asia, where it has operations on all the major exchanges. The majority of those employees will be affected by the restructuring, sources say, either moving within the bank or leaving. Wolfe-Colley says press reports that Chase will cut all the unit's 170 members are inaccurate.

But Chemical and Chase are not the only participants addressing the changing marketplace. Last month Lehman Brothers and before that, Oppenheimer, closed down their currency arbitrage units (FXW, April 3 and February 27, respectively).

Chemical's Gallopo says there are a number of reasons for the slowdown in the arbitrage business. "There is a lot less paper [customer business] going through the market," he says.

"Some of the larger hedge funds and CTAs (commodity trading advisors), who are still very active, go through the interbank market and don't do their pieces through the IMM as often as they used to."

He adds that a number of smaller CTAs have closed shop, further reducing volume. Therefore, the locals in the exchange pits who used to live off the "paper" flowing through the pits have been forced to move out of the currency futures market and into other areas, due to the lack of volume.

"With fewer locals, there's less of a market," says Gallopo." Now the business that goes through the pit is a bit more predatory since the volume is being dominated by interbank dealers."

David Goone, director of currency and interest-rate marketing at the CME, says there has been a slowdown of overall customer business, both on and off the floor (particularly in dollar-based products), but that banks are nevertheless still participating in the arbitrage business.