Corporate payroll conversion - why is it always overlooked? | Forex Factory

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Corporate payroll conversion - why is it always overlooked?

  • #1
  • First Post: Edited 4:14pm Mar 7, 2009 3:52pm | Edited 4:14pm
Yes, forex is a market where trillions are traded every day.

But on FF we see countless posts refering to books about the stock market.... these books tell us how to interpret the psychology of candlestick patterns, and how to apply TA successfully.

When do we stop and say: "Wait a minute! Forex is not a speculative market!" Speculators are only a small percentage of the entire trading population. When do we realize that standard TA for speculative markets (like the NYSE) is moot?

Darkstar said it best: Exxon is a US company, but operates overseas. It must convert all of its $ to Euros to pay its employees operating overseas. These transactions are why the forex is so large - not because of trillion dollar hedge funds speculating on FX.

And you have got to rationally think that these payroll conversions are entering and exiting the markets randomly all hours of the day, creating tons of white noise into the "psychological" trading of the speculators.

Just something to think about.
  • #2
  • Mar 7, 2009 6:29pm Mar 7, 2009 6:29pm
Ive said the exact same thing several times.

These large trades for companies are arranged In blocks, and Id guess there is rarely enough liquidity to make the transaction at One price. In theory, who ever is arranging the Trade will have to move price to a point they suspect there will be enough liquidity to fill the trade.

For EG. If they Need to sell Euros for USD but the market is trading short on the daily, they will force the price above a Resistance level to shake out traders and hopefully open up enough liquidity to fill the order. This all goes against traditional TA.

All that TA does is help the Initiators of a directional move, be that a PA pattern or an indicator/MA. If the TA trader can workn out a plan for a superior Exit then they possibly have a chance of being profitable, but you have to remember that your making the profits for the traders that entered before you/taking on the extra risk.
Living the adventure in my head.
  • #3
  • Mar 7, 2009 7:10pm Mar 7, 2009 7:10pm
It's common sense if you ask me.

Foreign Exchange - exchanging one currency to another. Think about how many ways this can occur.

It just reinforces the emphasis on using a stop loss, not to abuse leverage and to accept losses as part of the business {i.e. forget about searching for the almighty holy grail that never fails}.
  • #4
  • Mar 7, 2009 7:26pm Mar 7, 2009 7:26pm
I like this post. Do you have a 3rd party reference for where you got the info, Leon? Thanks.

Quoting Leonlorenzo
Ive said the exact same thing several times.

These large trades for companies are arranged In blocks, and Id guess there is rarely enough liquidity to make the transaction at One price. In theory, who ever is arranging the Trade will have to move price to a point they suspect there will be enough liquidity to fill the trade.

For EG. If they Need to sell Euros for USD but the market is trading short on the daily, they will force the price above a Resistance level to shake out traders and hopefully open up enough liquidity to fill the order....
  • #5
  • Mar 7, 2009 9:51pm Mar 7, 2009 9:51pm
OK let's do some quick estimates.

Exxon has about 100,000 employees.
Let's say half need payroll converted from USD to EUR
Let's assume Exxon for some reason has no Euros
Let's say average wage is 30,000 EUR per year
That's 50,000 x 30,000 = 1,500,000,000 EUR per year.
That's 15,000 lots traded per year.

Let's take a retail daytrader.
He does 10 lots 4 round-trips per day, 200 days per year.
That's 10 x (4+4) x 200 = 16,000 lots traded per year.

So a single retail trader does the same volume as the largest multi-national corporation's payroll. How many Exxons are there? How many traders are there?

Get real. Corporate payroll conversion probably accounts for <1% of forex volume.
  • #6
  • Mar 7, 2009 10:11pm Mar 7, 2009 10:11pm
From Wikipedia:

http://en.wikipedia.org/wiki/Foreign_exchange_market

An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are ...not widely known by other market participants.

It doesn't seem too significant most of the time. But what does seem significant is the number of players Wikipedia sites. The fact remains: much of this market is not speculative, but simply meeting the needs of pension funds, people traveling abroad, and other nonspeculative activities.

Getting back to my original point, do these nonspeculative exchanges ruin technical analysis?
  • #7
  • Edited 11:20pm Mar 7, 2009 11:01pm | Edited 11:20pm
Quoting tdion
From Wikipedia:

http://en.wikipedia.org/wiki/Foreign_exchange_market

[i]An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable...
Back to what I said before. The very nature of Traders (more-so Large ones(Even speculative)) needing liquidity to trade Nullifies TA, atleast in the sence traders here use it.

Price has to go up to find sellers so It can go down and go down to find buyers so it can go up.

That one sentence shows how difficult it is to predict market direction.
Living the adventure in my head.
  • #8
  • Mar 8, 2009 8:12am Mar 8, 2009 8:12am
I've read a few times over the years that there is a certain time of the day and week when banks like DB will make huge conversions for corporate customers. I don't know if it's true, but some of the people who have worked for banks should know if it is or isn't. They even have a name for it, but I can't remember it. Anyone...Bueller?
  • #9
  • Mar 8, 2009 1:28pm Mar 8, 2009 1:28pm
Quoting euclid
OK let's do some quick estimates.

Exxon has about 100,000 employees.
Let's say half need payroll converted from USD to EUR
Let's assume Exxon for some reason has no Euros
Let's say average wage is 30,000 EUR per year
That's 50,000 x 30,000 = 1,500,000,000 EUR per year.
That's 15,000 lots traded per year.

Let's take a retail daytrader.
He does 10 lots 4 round-trips per day, 200 days per year.
That's 10 x (4+4) x 200 = 16,000 lots traded per year.

So a single retail trader does the same volume as the largest multi-national corporation's payroll....
Big difference. Corporations are exchanging real currency and the amounts exchanged aren't inflated by insane leverage. Most of our retail trades never go to the market. Do you really believe every time we trade a standard lot that 100,000 dollars is being moved in and out of the market?

We are only a by product of the real market.
  • #10
  • Mar 8, 2009 9:29pm Mar 8, 2009 9:29pm
billflet,
The forex market, with no central exchange, consists of a web on interconnected market makers. Retail market makers are just as much part of the market as any other. There is no separate market for us. And yes your 1 lot order if not matched with another client will be sent on to the interbank market.

tdion,
It is my contention that non-speculative order flow can be safely ignored due to it's minute size compared with speculative order flow. At $2T per day that's say $450T per year forex volume. Total imports + exports for USA for 2008 was $3.4T, less than 1%. It's not worth worrying about the little bit of random disturbance. Just observe and measure the actions of the speculators.
  • #11
  • Last Post: Mar 8, 2009 10:34pm Mar 8, 2009 10:34pm
[quote=euclid;2588519]billflet,
The forex market, with no central exchange, consists of a web on interconnected market makers. Retail market makers are just as much part of the market as any other. There is no separate market for us. And yes your 1 lot order if not matched with another client will be sent on to the interbank market.

I understand this. Our brokers internally match long positions against short positions and the disparity goes to their second tier liquidity provider(s). I think it's fair to say that retail brokers are able to match the bigger share of orders in-house, most of the time, and most of our orders won't leave our broker. May be I'm wrong though. Do you have any figures indicating otherwise? Not being sarcastic--just conversing.
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