ALERT: Euro impending collapse, but don't worry - FX is simple

Forex is the most simple market in the world.  As we explain in our book Splitting Pennies - Forex is the underpinning of the world"s financial system.  Although it is also the least understood market, there"s nothing "sophistocated" about FX.  Take a dollar, exchange it for a euro.  The rate changes - exchange it back.  Simple!  Trading money.

There is no "2 day settlement" in Forex, a custodian, there"s no Reg D, no Reg NMS - there"s no HFT front running your orders, there"s no "order types" - there"s no exchange rules (because there"s no exchange).  Actually, when you strip away the complexities of most markets like securities, bonds, real estate, commodities, FX is many times over the most simple market.  

Understandably, the securities market is the most widely promoted to investors because of the potential for making high returns from participating in corporate ownership (and thus ownership of profits).  But securities are a derivative.  Investors don"t really own the companies - they own the shares.  And actually to be technical, they don"t own the shares too - they are controlled by a huge custodian DTCC.  The securities, bond, and futures markets are the core of modern capitalism.  But they aren"t a necessity, they are an abstration and thus - have complex rules.  Or to say differently - the banking system needs the real economy - the real economy doesn"t need the banking system.

How do these abstract markets drive inflation?  Here"s how.  QE doesn"t directly go into the economy.  However, by keeping interest rates low, both in real terms and buy the Fed"s various asset purchase programs - it means money has never been cheaper.  With cheap money, it"s easy for i-banks to borrow at zero or near zero rates, invest in any index at 2x or 4x leverage and get their 20% - 40% per year with virtually no risk (that is, no seen risk - there is huge tail risk that one day the market will collapse, which it will for sure, like the big bubble that it is.)  

The "stock markets" have become so intertwined with the real economy, they have made themselves a necessity.  Like a virus that has taken over a host, now it would be practically impossible to kill the market without affecting the overall economy.  All of this has become so complicated, with so many involved parties - it has become a giant spider web.

On the topic of the Fed and their direct stock market alleged manipulation, consider the following.  The Fed is owned by the member banks.  The Fed gives it"s QE to the member banks, almost all of which are now publicly traded companies.  Here"s where the paper trail begins for the "conspiracy crowd" about the Fed being owned by nefarious 13 families:  Public disclosure rules mean that anyone can lookup what"s going on at Bank of America (BAC).  Hiding significant information at public companies is very difficult, and becoming more and more difficult with the digitization of records, communications, and basically all aspects of business, which by the way is all "doubled" and recorded on a network level by ATT (T) another public company - and stored in an NSA database.  America Inc. is technically a corporation and the states such as South Carolina are more like countries (hence the name "states") - although you can"t buy and sell shares of America Inc. you sort of can, it"s called immigration - citizens of USA are sort of like shareholders.  And there"s a short side too, record numbers of US Citizens are giving up their citizenship.  So, does the Fed manipulate the stock market?  It"s not a fair question, because Fed ownership and operations are completely intertwined with the stock market.  During the time when the Fed was created, America was just passing the wildcat banking era, where there were thousands of private banks.  Do not confuse "private banking" with a "privately owned bank" - private banking is discreet services for rich people who may want to hide their assets or not let others know how rich they are.  Privately owned banks are nearly non-existant in the USA today, for a number of reasons - mostly caused by generational wealth transfer and generally a trend towards the institutionalization of assets.  What does that mean?  It means that 100 years ago, things were in YOUR name, if you were JP Morgan or Andrew Carnegie.  Today, it"s all in tax havens, the Carnegie foundation, trust funds, and almost nothing is in YOUR name.  That includes banks, which are mostly publicly traded and thus, publicly owned.  The individual has become obsolete.  

So all these tendencies, make the market so complicated it"s even confusing to describe.  

All this drama created by Nixon is really in the eye of the beholder - this idea of "economic collapse" is a fantasy promulgated by religious types in armaggedon style packaging, as if the Earth will explode and burn in a big singularity event.  The reality is that "economic collapse" is happening every day, simply that only some of us notice it.  

Forex simply guages the tides as they ebb and flow, EUR/USD rate changes, but not really that much.  Brexit gave us a 9% move which is huge for FX but not really statistically significant in the grand scheme of things.

Take a look at EUR/GBP for last 10 years:

This is a monthly chart.  You can see why FX is not interesting for the general public.  But it takes a lot less time to understand FX than the stock markets.  FX is simple.

As we head into a potential complete meltdown of the Euro, and tomorrow"s NFP, we"re heading into an event that may change the face of FX forever.

Dear Trader, With the upcoming second round of the French Presidential Election this weekend, we require that your account balance plus any open profit or loss covers at least 3% of the total notional exposure across all EUR crosses and EUR Equity Index CFDs by 4pm (UK time) Friday, 5th May 2017. Where the cover is lower than 3%, we may reduce your positions to increase the cover on your account before the market close. Exit polls will be released prior to the market open on Sunday, 7th May 2017 and there is increased risk of wide spreads and large price gaps on the market open and through the night. Please ensure you are comfortable with the exposure on your open positions leading into the market close on Friday, 5th May 2017. If you have any queries, please do not hesitate to contact Client Services by calling +44 20 3192 XXXX or emailing XXXXXX. FX and CFDs are leveraged products that can result in losses exceeding your deposit. They are not suitable for everyone so please ensure you fully understand the risks involved. Kind regards LMAX Exchange Client Services Team

To get a primer on what this FX is all about and how it"s really more simple than any other market - checkout Splitting Pennies - Understanding Forex.

SEC Freezes Accounts Of "Highly Suspicious" Traders Who Made $3.6 Million On Fortress Takeover

First, it was the leak of the massive Heinz-Unilever deal that may have scuttled the Warren Buffett-inspired transaction, now it appears that another recent megamerger was leaked 4 days ahead of the announcement. On Wednesday morning, the SEC froze brokerage accounts of several unnamed traders who made more than $3.6 million in profits by trading in the four days before the $3.3 billion takeover of Fortress Investment Group was announced by Japan’s SoftBank.

According to the FT, the traders placed “highly suspicious” orders for shares and contracts for difference, or CFDs, through Singapore-based Maybank Securities and a brokerage in London, R.J. O’Brien. Breaking the second cardinal rule of insider trading, i.e., never to buy stocks in bulk in the day ahead of the announcement (the first such rule is never to buy calls the before a deal is announced although the "insiders" did that too), all the trades through Maybank were made within a 24-hour period before the deal to buy the US-listed private equity firm was announced to the market; meanwhile trade through R.J. O’Brien took place between February 10 and 14, the day the deal was disclosed the SEC reported.

“The timing, size and profitability of these trades are highly suspicious,” the SEC said in a court filing asking for the freeze.

As the FT adds, the SEC is seeking a judgment to force the traders to disgorge the profits and pay a penalty. SoftBank’s offer for Fortress was a 30 per cent premium over the private equity firm’s closing share price that day. Also, as the SEC further notes, it appears that the rookie traders decided to really bring attention on themselves by also breaking Cardinal rule #1: a burst of option buying ahead of the deal. Just like in the case of the Unilever deal, which saw a surge in call option volume for both Unilever and Kraft Heinz ahead of the announcement...

...  the size of bets in the options market prior to the deal raised eyebrows in the US, leading several market experts to believe that information had been leaked ahead of the deal.

The volume of options trading in Fortress was more than eight times the normal level ahead of the deal’s public announcement. Specifically, customers of Maybank bought 950,000 shares in Fortress hours before the announcement, selling them the next morning for $1.7 million. R.J. O’Brien’s customers bought CFDs and shares in Fortress, which they sold on February 15 for $1.9 million, according to the SEC’s complaint seeking the freeze.

Also notable is how quickly the leak appears to have emerged: the Maybank clients began placing the trades on February 14, building up a $5 million position, 33 minutes after Fortress’s board of directors received an email with draft resolutions approving the deal, according to the SEC. Only two days before, there was “serious doubt” as to whether the deal would even go through, the SEC complaint said.

Discussions between SoftBank and Fortress had begun in December, and the two companies initially planned to finalise the deal over the weekend of February 10-12, putting it to a board vote at Fortress on February 12.  The R.J. O’Brien clients began buying CFDs on February 10, through an account with Merrill Lynch, just before that weekend. The only other time Maybank bought any Fortress stock through its account at UBS was in February 2016, when 10,000 shares were bought and later sold in April.

As the FT notes, the emergency court order obtained by the SEC on February 24 will prevent the traders from accessing any of those gains. As yet, the SEC said they do not know the identities of the traders, but said in the complaint they are “believed to be foreign traders trading through foreign accounts”.

In recent years, suspicious trading before deals has been under increased scrutiny by the SEC and regulators around the world after insider trading prosecutions in New York over the past decade exposed the extent of the crime. The SEC has yet to launch a probe into the far larger Unilever leak(s).