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August 27, 2008

My first two days on the Forex trading floor of a bank

Today was my first day on the trading floor of reputable  international bank [for privacy reasons, I will refer to  it as company X] and all I did the whole day when the market was open was observe what traders do, how they report, transact and record all transactions to manage their positions and bets of their money markets and forex positions. Having seen what traders do on the treasury trading floor I feel the work of a trader is more of what I may call as “corporate high-profile satta.” This form of satta, the one that I experienced at X was similar to what stock exchange brokers play with equity stakes in companies and selling short or long (in order words speculate) on the price of their constituent instruments.

The trading floor may be divided into separate divisions that of the money markets and the foreign exchange markets. However, X prefers to have both desks on the same trading floor with trading specialist working together. With a flat screen 49” TV displaying the current news updates from across the country, the traders (divided into the consumer desk and the corporate desks) are hooked up to their Reuters screens communicating to execute a deal with a party. I have yet to see exactly how and what the consumer desks works, but currently I am situated within the corporate desk, which deals with other banks (both domestic and international) and authorised foreign exchange dealers. X’s operations with international banks is limited to the X's broad international network of its subsidiaries in Singapore, UK, Japan etc. to settle Forex transactions with them.

The kinds of instruments that traded today included the following t-bill (of less than 6 month maturity) and spot ready US$ forex trades. Due to the volume of transaction occurring on the spot US$ forex trades and my recent internship within the Exchange Policy Department at State Bank of Pakistan, I was genuinely interested to see how such transactions took effect and hence the focus of this blog entry.

Foreign Exchange (Forex, for short) market is an arena where a nation’s currency is exchanged for that of another. The Pakistani currency, the Ruppee, like any other developing country’s currency follows the US Dollar and hence the domestic forex market revolves around the trades of the US Dollar. From spot, futures and swaps were the three kinds of transactions that I witnessed on my first day amongst the local authorised dealers, brokerage firms and banks. Internationally the Forex market is the largest financial market in the world, or so they say here at X – I have yet to find substantial supporting evidence for such a claim.

In terms of technology used, the transactions are mostly done through two means of communication: the Reuters system, where banks trade with other major banks and the conventional telephone calls, where bank authorised brokers from various brokerage houses from the market call in every minute with calls every second. It’s amazing at times to see only 4 traders handling the whole Forex and Money markets side of the trades at a major international bank such as X in Karachi. When inquired why Bloomberg did not work here in Pakistan, I found that its system were usually not up-to-date with the relevant data and Reuters had become the industry standard since the traders could remember.

Pakistani Forex market starts at 9:30am and goes all the way until 2:00pm, after which there are barely any trades taking place and only settlement being carried out. One would think why would there be 4 hours until the end of the day just for settlements? Well that’s another interesting feature specific to Pakistani capital markets, where spot or ready trades happen in real time and date of delivery is today, with the end of the day to settle or pending debts and obligations for all trades that were carried out on that day.

The complete linguistic code for a traders is another vast topic that I have encountered in the past 2 days and so I shall dedicate a future entry solely on this topic and hence not discussed here.

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