Quote of the Day: “Currencies Don’t Move Much. Without Leverage, No One Would Trade”

While researching material for an article on winners and loses in the record Swiss franc move, I came across this quote as reported by Bloomberg.

Currencies don’t move that much. So if you had no leverage, nobody would trade.”

Who said that?

Drew Niv, FXCM’s chief executive officer. The story progresses …

FXCM Risk Controls

Bloomberg reports FXCM had 230,579 retail customers on Dec. 31. They traded $439 billion of currency in December, with an average of 595,126 trades a day.

The company warned investors in a regulatory filing last March that its risk controls were imperfect.

“Some of our methods for managing risk are discretionary by nature and are based on internally developed controls and observed historical market behavior,” the company said in the regulatory filing. “These methods may not adequately prevent losses, particularly as they relate to extreme market movements.”

And what happened?

FXCM Gets Rescue

The Wall Street Journal reports Surge of Swiss Franc Triggers Hundreds of Millions in Losses with brokerage firm FXCM getting a rescue.

Brokers around the world are crumbling in the wake of the Swiss National Bank’s shock decision to remove the cap on its currency.

Banks, brokers and individual investors were left with hundreds of millions of dollars in losses a day after an unexpected surge in the Swiss franc sent shock waves through markets.

FXCM Inc., a major U.S. retail foreign-exchange broker, emerged as the biggest victim so far and had to be rescued by an emergency $300 million lifeline from investment firm Leucadia National Corp.

Shares of FXCM, one of the largest retail currency brokers in the world, were suspended on the New York Stock Exchange on Friday after the company said client losses on Swiss franc trades threatened to put it in violation of regulatory capital rules.

Citigroup Inc. and Deutsche Bank AG will each lose about $150 million on the franc’s appreciation, said people familiar with the firms. Goldman Sachs Group Inc. said Friday that the franc’s move will be immaterial to its earnings. Losses at Barclays PLC will be in the tens of millions of dollars, people familiar with the bank said.

FXCM was among several firms that fought CFTC efforts to limit leverage at 10 to 1, saying in a March 2010 letter the proposal would have a “devastating impact on the retail [foreign-exchange] industry” and “drive it largely overseas.” The letter was signed by FXCM Chief Executive Drew Niv and eight other brokerage CEOs. The limit eventually was set at 50 to 1, meaning an investor could borrow $50 for every dollar put in.

Thank Central Banks

The funniest story to date is without a doubt FXCM, but also consider It Only Takes One: Hedge Fund Manager Who Survived Five Debt Crises Wiped Out Overnight on Swiss Franc.

And this is what it has come to: Central banks have so suppressed volatility, that hedge funds need to leverage to get suitable returns to justify their 20% fee on profits.

And so they do. And this is the result. Hmmm. I sense another moral to the story here.

Mike “Mish” Shedlock