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Stock Market Operations

Notes The equity markets often can hit a lull, resulting in shrinking volumes and activity. As a result,
it may be hard to open and close positions when desired. Furthermore, in a declining market, it
is only with extreme ingenuity that an equities investor can make a profit. It is difficult to short-
sell in the U.S. equities market because of strict rules and regulations regarding the process. On
the other hand, forex offers the opportunity to profit in both rising and declining markets
because with each trade, you are buying and selling simultaneously, and short-selling is, therefore,
inherent in every transaction. In addition, since the forex market is so liquid, traders are not
required to wait for an uptick before they are allowed to enter into a short position – as they are
in the equities market.
Due to the extreme liquidity of the forex market, margins are low and leverage is high. It just is
not possible to find such low margin rates in the equities markets; most margin traders in the
equities markets need at least 50% of the value of the investment available as margin, whereas
forex traders need as little as 1%. Furthermore, commissions in the equities market are much
higher than in the forex market. Traditional brokers ask for commission fees on top of the
spread, plus the fees that have to be paid to the exchange. Spot forex brokers take only the spread
as their fee for the transaction.

Caselet Currency Wars May Boost Forex-market Trading,
HSBC Says

HSBC strategists believe that the onset of a “currency war” would see foreign-exchange
markets increase in importance to asset allocators.

The strategists said “the resurrection of the [idea of] currency wars has revived the
prominence of foreign exchange as an appropriate asset class to express a view.”
The term “currency war” refers to the situation where countries seek to devalue their
“currency to boost their trading position against rivals.
Currencies had lost their allure as a pure-play asset-allocation tool, as investors struggled
to work though the implications of unconventional easing”, the HSBC strategists said.
“Global central banks injected massive amounts of liquidity into asset markets to support
the global economy after the recent financial crisis, but with different results for currencies.
Quantitative easing in the U.S proved to be U.S. dollar negative, but quantitative easing in
the U.K. was neutral for the British pound”, the strategists said.

“And the euro zone’s long-term refinancing operations, popularly known as LTRO,
eventually had a positive impacted on the euro”, they said.
“Previously, it was far easier to express a quantitative-easing view via bonds or stocks”,
the strategists said.
However, in a “currency war” environment, foreign exchange suddenly “becomes the
obvious way to express a given view,” they said. “If countries are heading for conflict,
foreign exchange will of course be the front line.”
Offering the Japanese yen USDJPY +0.33% as an example, the strategists said that, if an
investor believes Japan will succeed in weakening the yen, then the logical way to bet on
that view is via the currency.

Contd...

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