سود و گمانه زنی در تجارت ارز خارجی میان روز

This study examines profits and speculation in the USD/EUR trading of a bank in Germany over a four-month period. Dealing activity at the bank generates profits but speculation does not seem to contribute to this. We find that speculative positions fail to become profitable within a 30-min horizon. Also, the suggestion that exchange rate volatility would foster speculative profits cannot be confirmed. To explain daily revenues, neither the bank's speculative trading volume nor its inventory position, but only customer trading emerges as a significant determinant. Furthermore, a spread analysis reveals that there is hardly any room for revenues from speculation.

Nowadays, microstructure research in foreign exchange markets is seen by many as a promising avenue due to the “failure of the macro approach” (Flood and Taylor, 1996; Madhavan, 2000; Lyons, 2001). Our deeper understanding of the processes in foreign exchange is hampered, however, by the limited amount of data availability. In particular, profitability is a key source of information to understand the business, but useful profit figures are extremely rare. We contribute to the literature by analyzing a new data set which covers a much longer period than earlier studies. This allows us to apply new methods and to generate more reliable results. We find that our bank does make money in foreign exchange trading, but that speculation does not contribute much to this, if at all. Profits from speculation cannot be identified, either in an event study approach or by regressing potential determinants of profits. Moreover, analyzing spreads in non-speculative trading reveals revenues that fully explain overall profits. Thus, it is not speculation, but providing intermediation services to customers that seems to explain profits best. The issue of trading profitability is a core element of Friedman's (1953) proposition that profitable speculation would stabilize exchange rate movements. Although the conventional view now seems to be that profits are neither necessary nor sufficient for stabilizing speculation it is nevertheless very interesting to know whether banks’ foreign exchange speculation makes profits. Available evidence has not really been satisfying so far. There are several studies analyzing banks’ position taking, with lower frequency data, such as monthly data (Fieleke, 1981) or weekly data (Wei and Kim, 1997). We know, however, that banks square their large open positions at the end of the day, hence these kinds of studies miss the bulk of intra-day position taking (see Goodhart, 1988). Unfortunately, evidence from intra-day data is even rarer. According to our knowledge, only two studies analyzing profitability in foreign exchange exist, i.e., Lyons (1998) and Yao (1998). Their studies are limited since their data sets are based on one week and five weeks of trading respectively, a disadvantage in identifying a volatile phenomenon (Lyons, 1998). So at this stage, there is still an obvious need for better data which allow for the application of more reliable approaches, and thus, for drawing more general conclusions. Our data covers the complete tick-by-tick USD/EUR trading record of a bank in Germany over 87 days in 2001. This bank is a “regular” participant in foreign exchange markets as its activities show: first of all, the bank's trading volume in the market segment that we are analyzing is of about average size in comparison to the 33 foreign exchange trading banks in Deutsche Bundesbank's survey of the foreign exchange market in Germany (see details in the Appendix). Second, this bank offers the full range of products, i.e., spot as well as derivatives, it serves commercial as well as financial customers, it participates as a market maker and it conducts own-account trading. All this happens in several currencies. This bank is not as large as the banks covered by Lyons (1998) or Yao (1998) but it is not so tiny that it could be considered marginal, either. Moreover, the bank is not as specialized as Lyons’ dealer who trades in the interbank market only. In fact, this bank's customer share of trading volume is 38%, close to the average figure of 41% for the world-wide foreign exchange market (BIS, 2002, Table B.3). Finally, we identify considerable profits in our bank's foreign exchange trading, whereas Yao does not. Yao's results are somewhat surprising in light of the heavy trading and risk involved and may be due to non-representative circumstances. Beside the comparison above, there is further information suggesting that the evidence presented here is of potential interest beyond the single case. When analyzing the kind of trading behavior of this bank's USD/EUR dealer, we found that the characteristics are the same as those found in other studies (Osler et al. 2006, have examined this relation for other purposes). Moreover, foreign exchange markets seem to be so highly integrated that market-wide characteristics can be reproduced with our case data, such as the correlation between price changes and order flow in the sense of Evans and Lyons (2002). As a last check, we have compared the bank's profits at the four-month period covered here with a three-year period, finding that profits earned at the sample period are about 10% below average but not misleadingly low. We do find that our bank earns considerable revenues, i.e., gross profits. When we subtract transaction costs according to a standard approach, we find that this bank also makes (net) profits. We then turn to the core question of whether or not revenues are caused by speculation. Due to the data available we can extend and complement several methods of this literature: we follow Yao's (1998) definition of speculative trades and apply this also to incoming trades. The new application of an event study method shows that speculative positions fail to become systematically profitable over a period of 30 min. If we track these positions until they are closed we find profits, but these are partially caused by customer trades. Lyons’ (1998) suggestion that exchange rate volatility would foster speculative profits can be tested thanks to the comparatively long data period in a regression approach and his hypothesis is not confirmed by our case. Extending this approach by putting various suggested determinants of profitability into a multivariate regression, only customer business emerges as a significant profit source and not price volatility, nor position taking. Picking up ideas by Lyons (1998) and Yao (1998), we see that a spread analysis of interbank and customer business reveals that there is hardly any room left for residual revenues from speculation. Thus, the tentative finding in the literature that speculation may slightly contribute to foreign exchange trading profits (Lyons, 1998; Yao, 1998) is not confirmed by our examination of this case. Considering the competitive nature of this market, it seems reasonable to doubt that any participant could systematically make money by speculation. The paper proceeds as follows: Section 2 introduces the data used. Section 3 presents overall revenues and profits of the dealer's foreign exchange trading. Section 4 discusses approaches to help identify speculative trading activity. Section 5 focuses on identifying possible revenues from speculation. Section 6 concludes.

This analysis of a bank's trading record has revealed new findings about profits and speculation in foreign exchange trading. First of all, we find that our bank does indeed generate considerable revenues as well as profits from its foreign exchange trading operations. It is difficult to assess from the outside how satisfying the profitability for the overall bank is regarded, but considerable profits are real. The degree of profitability is between the two other cases of large banks documented before us (Lyons, 1998; Yao, 1998). Second, speculative position taking is practiced by the bank but cannot be identified as profitable. This is somewhat surprising, as earlier studies indicated some, although not large, revenues from speculative trading. In detecting revenues from intra-day foreign exchanges speculation we have applied new approaches, making use of the detailed and long sample at hand. An event study approach has been used to track prices when the bank had become engaged in accumulating trades: there is no indication that revenues are earned. In another approach, profits have been related to volatility in the foreign exchange market. We recognize that the bank does speculate more heavily in volatile markets, but it does not seem to be able to take advantage of volatile markets. Extending this regression, several potential profit sources have been put into a multivariate approach, which shows that neither speculation nor interbank trading contribute much to revenues, in fact it is only customer business that is significantly related to profits. Seen from the opposite side, i.e., from spreads identified in customer business, the latter can explain all revenues earned and leaves no room for speculative profits. The common ground for these findings is the competitive environment of one of the largest financial markets in the world, the USD/EUR-market. Fundamental information in this market is generally available to all professional market participants at the same time. It is well known that foreign exchange markets react in a systematic manner to this information (Andersen et al., 2003b) but it is difficult to imagine that a bank would have a systematic advantage in interpreting this information. So, speculation may be based on other kinds of information, such as anticipating central bank intervention (Peiers, 1997), exploiting technical analysis or incoming order flow (as in other financial markets) (see Schultz, 2003). Again, it will be difficult to gain a systematic advantage from these sources, as technical analysis tools are available to competitors, too, and as order flow basically is contemporaneous in relation to exchange rates.12 Obviously, our bank serves its customers competitively, and they do not care too much about a spread of 5 or 10 basis points. However, this small spread is enough for our bank to unload positions, to manage its overall inventory and to cover administrative costs. This successful service makes clear, moreover, that this bank—and possibly other banks as well—is not engaged in stabilizing speculation in Friedman's sense.