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China’s Yuan Push Gives Hope to Asia’s Robot Traders: Currencies

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China is seeking a greater role for the yuan in global trade and investment, loosening controls as part of a once-in-a-generation economic overhaul and signing agreements to trade the currency more freely with financial centers from London to Singapore. Photographer: SeongJoon Cho/Bloomberg

March 19 (Bloomberg) -- China’s effort to loosen its grip on the yuan is just the boost Asia needs to catch up with the rest of the world in shifting dealing onto electronic platforms.

The surge in investment that’s likely to follow the liberalization of the yuan will help such trading take off in Asia, according to Boston-based research firm Aite Group LLC. Citigroup Inc., the world’s second-biggest currency trader, plans to execute about half its Asian foreign-exchange business electronically in two years, up from 35 percent to 40 percent now, said Adam Gilmour, the New York-based firm’s head of regional currency and derivatives sales.

“Asia’s response to e-trading is a lot more muted compared with the rest of the world,” Gilmour said in a March 12 interview at Bloomberg’s Singapore office. “It’s a matter of educational effort to get it accepted.”

Citigroup’s electronic trading in Asia lags behind progress in the global foreign-exchange market, where firms carried out 55 percent of last year’s deals online, according to the Bank for International Settlements in Basel, Switzerland. Electronic platforms have been slower to gain traction in Asia because companies there make greater use of foreign-exchange swaps, contracts that tend to be handled by humans rather than machines.

Asian Differences

“The micro-structure of Asia is different with much more emphasis on import-export business and less investment-related flows,” Javier Paz, a senior analyst at Aite Group, said in an interview yesterday. Globally, “the market is moving toward electronics because of efficiency and speed,” he said.

In Singapore and Hong Kong, Asia’s biggest foreign-exchange centers outside Japan, an average of 53 percent of transactions were done in the form of foreign-exchange swaps in April 2013, compared with 41 percent in the U.K. and 27 percent in the U.S., according to the BIS’s latest triennial survey, published in December.

China is seeking a greater role for the yuan in global trade and investment, loosening controls as part of a once-in-a-generation economic overhaul and signing agreements to trade the currency more freely with financial centers from London to Singapore. It began direct trading between the yuan and New Zealand’s dollar today.

Trading Band

The People’s Bank of China doubled to 2 percent on March 15 the range in which the yuan can trade on either side of a daily reference rate, after last month saying an “orderly” broadening of the band was among its 2014 policy goals. This may boost trading in the currency of the world’s second-biggest economy and the use of products that are executed electronically more often than foreign-exchange swaps.

Moving more of its Asian currency business onto these platforms may help Citigroup cut costs after its fourth-quarter earnings missed analyst estimates amid a decline in bond and foreign-exchange trading.

Banks’ income from foreign exchange is also being squeezed as volatility, a key driver of revenue, declines amid the unprecedented amounts of cash being pumped into the financial system by central banks. Deutsche Bank AG’s Currency Volatility Index, which measures anticipated price swings for nine currency pairs, fell to 7.14 percent on March 12, the lowest level since 2012, from a one-year high of 11.21 percent in June and a peak of 24.24 percent in 2008. It was at 7.26 percent at 12:18 p.m. in New York.

Justify Costs

The global investigations into the alleged manipulation of benchmark currency rates -- first reported by Bloomberg News in June -- may encourage banks to adopt electronic trading.

“Regulatory overhead has surged, forcing banks and participants to find ways to justify their fixed costs,” Axel Merk, the founder and president of Palo Alto, California-based Merk Investments LLC, which oversees about $450 million of foreign exchange, said by e-mail on March 17. “This has led to a bifurcation where some institutions are heavily investing into automation whereas others are leaving the field.”

Asian currency regulations may also be limiting demand for online platforms in the region, said Satoshi Okagawa, a senior global-markets analyst in Singapore at Sumitomo Mitsui Banking Corp., a unit of Japan’s second-biggest lender by market value.

The global foreign-exchange market has been slower to replace human traders with machines than other sectors such as equities because most trading takes place away from exchanges.

Human Benefit

Without a central repository showing the flow of completed orders, traders have been forced to piece together information about the direction of rates from traders and salesmen. People have also been needed because early computerized trading systems weren’t reliable and couldn’t handle larger currency deals.

Online transactions accounted for about $2.96 trillion of the $5.34 trillion daily turnover in the global foreign-exchange market in April, up from about $1.64 trillion in the same period of 2010, according to the BIS, which was formed in 1930 and acts as a central bank for the world’s monetary authorities.

Proprietary systems, such as Citigroup’s Velocity platform and Deutsche Bank AG’s Autobahn offering, made up 12 percent of overall volumes last year, compared with 11 percent in 2010, the BIS said. Deutsche Bank is the world’s largest currency trader.

“We’re pushing this hard,” Citigroup’s Gilmour said. “It’s inevitable that more and more foreign-exchange transactions will go online, and we want to make sure we’re there for when that happens.”

To contact the reporters on this story: Kristine Aquino in Singapore at kaquino1@bloomberg.net; Masaki Kondo in Singapore at mkondo3@bloomberg.net

To contact the editors responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net; Paul Armstrong at parmstrong10@bloomberg.net Jonathan Annells

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