How did you get started in foreign exchange? Malcolm: I started off in the City of London, working for Bankers Trust International in their cash department. Then I got a job as a foreign exchange trader at the Bank of Nova Scotia, still in the City. My job there was to liaise with the Toronto head office trading operation and to eventually move to Toronto. That was in 1972.
I was, therefore, introduced to trading foreign exchange very early on as a young man and I fell in love with it. I thought it was brilliant. My career since then has taken on a number of guises, but has centered typically around foreign exchange, bank treasury operations and computing. My professional career has always involved finance in one way or the other. It's taken me all over the world.
After Scotia, I traded foreign exchange in the US. Later I worked for Citibank in their North African and Middle East regional office in Athens and traveled extensively around the region—Bahrain, Dubai, Egypt, places like that. I also worked for Citibank's operations in Riyadh, Saudi Arabia.
After Saudi Arabia, I briefly worked in Bermuda, and then I worked in Switzerland for a number of years. Eventually I ended up working for the Credit Suisse head office. They sent me to Australia in 1989 to their operation here, Credit Suisse Bullion Pacific. I was the project manager in charge of writing a complete banking system for their boutique Gold Bullion operation. CSBP was quite a specialist merchant bank, pretty unusual to be honest—trading physical bullion as well as all kinds of weird gold derivatives. Finally, my last 'real job' before becoming a full-time private trader was as CIO for Prudential-Bache Securities in Australia. I went solo as a private trader in 1999. Foreign exchange is now my primary vocation.
That's an extensive resume! Malcolm: It gives you a little bit of background. I've always loved trading. But long term, I always wanted to do it for myself. I was always a little disappointed in banking because it's so removed from the retail side. Foreign exchange, until relatively few years ago, was the domain of the banks because they were the only ones who had access to 'wholesale spreads'—basically the interbank trading market was a private club. As an individual, you couldn't trade forex because you would be paying a much larger spread, and have physical settlement issues. Of course that has all changed.
I eventually got into trading for myself, through equities of course, because that was the first liberated market for a retail person. A few years ago you guys came along and it became possible, almost for the first time, for individuals to trade foreign exchange at interbank prices. That's when I made the switch completely from equities to foreign exchange. It was like coming home for me.
Did you go to university? Malcolm: I don't have a university degree, but I do have my banking qualifications. At the time I should have been going on to higher education but my parents moved. I made the decision to just go out into the actual world to try and make it. While I didn't have the university qualifications, I realized I had an extra three years up my sleeve—so I got my banking qualifications really young. That really helped me get ahead in the City and probably was a contributing factor to how I got on the trading desk so young.
Are there specific currency pairs that you trade? Malcolm: I analyze everything. I analyze every pair you have on your books. I don't have any favorites in terms of what I want to analyze. However, I don't trade much in the way of exotics because I find the spread is impossible to overcome.
Would you view yourself as a fundamental or a technical trader? Malcolm: Primarily technical: you have to bear in mind that I am first of all a 100% automated trader. All my trades are done through an API. I don't do manual trades at all. All my analysis is done by number crunching on the computer. That is completely consistent with my background and the way I view things. I wanted to be in the market in the first place because I believe with the right mathematical analysis and with enough systems behind me I can give myself an edge. That is my fundamental belief. And so far, touch wood, it's working and has worked for a number of years.
I have looked at fundamental analysis very seriously. For example, for my last real job I deliberately joined a stockbroker to see the wealth creation business from the inside. I attended the morning meetings just to be a fly on the wall, to hear the analysts talk. I studied what they were saying and took their recommendations very seriously to find out for myself if there was any demonstrable edge in fundamental analysis.
After some five years with the company I came away with the conclusion that the only reliable analysis was quantitative analysis, not fundamental. And that took me right back to where I was coming from anyway. You take your numbers and you crunch them and you come away with some conclusions. So I've looked very seriously at fundamental analysis and, in general, I tend to stay away from it. That doesn't mean necessarily that I have my eyes closed to what is going on in the world. Interest rates still are a major driver in forex.
But when you were trading in the early '70s, that was from a more fundamental than technical side, was it not? Malcolm: LOL! Quite honestly, it was seat of your pants stuff. Looking back it was a total joke. Those were crazy times; there was practically no training for traders. Most traders back then made their money by ripping off their clients.
I am an infinitely better trader now than I was in those days. Quite frankly, I didn't have a clue back then, but then nobody else around me had a clue either. It was a combination old boy's/young punk's club. You had your daily limits, and from memory it seems we traded on pints of beer and testosterone—it was fun!
If you are in a take-profit situation and your system is telling you to exit rather than hold on, how do you bring yourself to exit even if it's still running in your favor? Malcolm: That is not an issue at all. My trading is 100% automated, all based on APIs, so I trust it to do whatever's needed to get the highest probability of coming up with an overall profit. The question you pose has to be asked and answered at the analytical stage, and then implemented accurately. I don't look at the markets in real time at all. I basically check my balances and APIs once every 24 hours.
Does your system trade every single day? Malcolm: All my systems look at the market every five minutes. I always have positions open and do not worry myself whether I am short or long—the API looks after it. That's the way I trade, but it's not necessarily a philosophy, just a model. My API includes all the rules for entry and exit along with any take profits and stop losses. I don't look at the market real-time, nor do I ever consider overriding my system, unless the override becomes a new rule. Crucial to all this, my risk control is also controlled by the API and varies depending on how my equity is doing.
I don't get emotionally involved with the markets at all. The only time I actually look at charts is when I am doing my analysis. I like to look at the charts to see if there is anything I am missing in terms of the types of analyses I need to be doing. Then I do the analysis, come up with the models and, if they look reasonable, I implement them for a relatively small account. Then I monitor the account's equity curve to make sure the models are working. If they are, I slowly increase the capital allocation for the account. Automated trading is a very different approach from your standard trader who is hunched over a screen all day long. Really, there is no comparison.
What charting systems do you use? Malcolm: Again, you have to bear in mind that I am a 100% automated trader with absolutely no desire to be a manual trader. To my mind, there is no point in looking at trend lines or such unless there's a way of automating the process.
The only charts I look at are your charts, plus the charts I create from my own data. It's certainly nice to have a view of what happened over a period of time. That can be a simple line chart or a simple candlestick chart—in an instant you can see the characteristics of a currency over a period of time. After that I go back to number crunching. Charts, quite frankly, are not overly important to me, but I wouldn't want to be completely without them.
How did you find out about OANDA? Malcolm: One of the financial web pages had a real-time table of currency rates, a small one inch by one and a half inch square on the page. I followed it through and I thought, "This looks interesting!" I took it from there. That was my first introduction to OANDA.
I started manual trading with OANDA, then 9 or 12 months later, in 2004, the API came out and I started using it to the exclusion of all else.
How do you find OANDA's API system? Malcolm: I think your API system is excellent, the best one out there. And I have looked at a lot of the others. One of the great advantages for you guys is that you are the account custodian as well as the market maker. People may not realize the importance of that, until they actually start digging down deep. Every trading decision I make is based not only on my current position, but on my up-to-the-minute NAV. At the trading stage, this information is really critical. Just grabbing your real-time NAV at the moment you want to do a trade is like pulling teeth on most other platforms. It's very, very difficult—if not impossible. Fortunately, it's completely inherent with the OANDA platform.
Where do you see FX in the next 5 to 10 years? Malcolm: I might be missing something here completely, but I don't think I see anything revolutionary happening in FX. There will be evolution I suppose. With more and more players in the retail space, they will sort themselves out with four or five good ones. I'd like to see true options though.
Globally, I think forex funds management will become more regulated, particularly in the States. A year or so ago, I co-founded a funds management business, Zone Capital, based here in Australia. We had to jump through legal and regulatory hoops to set it up and operate it. It's a lengthy and expensive process. Europe is much the same. The U.S. seems to be radically behind on regulation, as far as I can tell. I can see that changing.
Looking at what is happening in the world—in the last decade, there have been tremendous advances in computer technology and the sharing of information. The whole world is flattening out. One can only assume that it will continue, but there are risks as well. There are things happening that could blow it up. I hope to goodness it doesn't happen. Assuming these problems resolve themselves and we continue moving forward, I think it will be an evolving process. I think we have seen most of the major foreseeable advances and now we will see incremental steps.
What news services do you use? Malcolm: I read the New York Times online and stuff like that for my own edification. I don't use news per se for any trading decisions, although I do use it for analysis.
Do you stay up for US data releases like NFP? Malcolm: I am fast asleep when that comes out. Sorry, I am not trying to be flippant. I realize NFP is a significant announcement, and I have done quite a bit of analysis on it. Should I trade it specifically? Should I stay away from it (i.e., close any existing trades)? Or should I just ignore it?
With the vast majority of news events, I consistently came up with the answer that the best thing I can do with my API is to totally ignore them. They certainly create noise, but the end result seems balanced when considered over a reasonable period of time.
I did go through a period, probably two and a half years ago, when I was actually shutting down my system for some announcements, even though I wasn't trading directly in the currencies affected by the announcements. But now I've gone back to the stage where I don't see enough movement from announcements to make it worthwhile to stop trading. I'll now run with whatever position I've got. After all, most of my back testing ignores news, and trading should be consistent with analysis.
In any case, news spreads are virtually impossible to overcome. Not to mention that news trading against a market maker is predatory, and therefore not sustainable. I have a long-term business model and want a long-term relationship with my market maker.
Do you have any thoughts on OANDA? Malcolm: I've always taken a great interest in OANDA. I have a good relationship with the people there, and hope this continues for many years to come. Perhaps most importantly, I have always found OANDA completely open and honest in all its dealings. On the occasions when there was a trade dispute, you have always investigated the issue objectively, and to my mind you've always 'done the right thing' in any subsequent adjustment.
The completely variable trade sizing you offer has to be one of greatest attractions, because it means I can get risk management precisely to the level I want. Currency converters and tools like that are all second nature to me. I probably built that software before you even put it out. If you understand the process and you can calculate it, you can put it into Excel or write it in custom code. I personally don't really need that service.
So what do I need from OANDA? Spreads are always an issue. Spreads are my cost. They are what I have to overcome before I can make any money. They are the reason I can't trade a lot of pairs I would love to trade. For these pairs, I do analysis first on a mean reversion basis, and it comes out as a loss. So I flip it all around, do it on a trend following basis, and I still come out with a loss. Exactly the same signals taking the opposite trade, but both scenarios give me a loss, and why? Because of the spread. Anything you guys can do to get spreads down is obviously beneficial to me. You will be rewarded with substantially increased turnover.
Financial security is always an issue, of course. You've probably heard it a thousand times. It's always the biggest concern for people like us who have capital with you. People fail, companies fail and we don't want to lose our money to financial failure. Anything you can do to make the company more secure and to give your clients more confidence in that security, the better.
And audit facilities! I have literally millions of transactions across multiple accounts. Audit issues are a nightmare.
Where do you live in Australia? Malcolm: I live in a rural location two hours outside of Melbourne, Victoria, near the coast. The nearest town is Foster, about a 25-minute drive away, and my nearest neighbors are over 1.5 kilometers away—it's peaceful! One of the good things with technology is that you can do this anywhere, provided you have an Internet connection.
If you organize yourself correctly it's remarkable what you can do. I've only got an ISDN connection, and no mobile coverage, but I only need the connection for management. All my actual trading is done from two servers based in the US—both in secure facilities, operating 24-7.