By Patrick Graham

LONDON (Reuters) - Graham had been trying to grab some sleep at home before a busy night's work when his phone started buzzing with text messages.

It was 10 p.m. on June 23, and voting had just ended in Britain's referendum on its future in the European Union. What followed was one of the biggest nights in the history of his business, the $5 trillion-a-day global currency market.

The next few hours were an exhilarating time for Graham, a dealer who lives by his wits in a fast-moving market - but who also belongs to an old school of traders that has shrunk due to major changes in the banking industry since the global financial crisis.

The text messages were from sales staff at the international bank where London-based Graham works as a proprietary trader, managing up to a $150 million in trades at a time using his employer's own funds.

Graham had planned to start trading later on referendum night, but they alerted him to an opinion poll suggesting voters had opted for the status quo. Then as the results began rolling in, the truth dawned: the poll was wrong and Britons had decided to leave the EU, leading to the kind of market volatility and huge turnover in which traders make - or lose - their money.

"Sales guys woke me up with messages about the poll and from then on I was just wired," said Graham. "I just had a ball. It was the most fun I've had trading in years."

Graham requested anonymity in speaking to Reuters - few dealers have been willing be named in the media since a market-rigging scandal hit their industry - but was happy to relate his experiences on the night Britons voted for Brexit.

Sitting in his home office, he made the first of several dozen deals worth millions of dollars that would end in a profit of several million the next morning.

The pound rose on the poll, only to dive on the results, marking its biggest swings since it was floated freely in 1973. The yen shot up against the dollar as investors opted for the perceived safety of the Japanese currency but later weakened.

"Actually I lost money on sterling initially, but I caught the yen move at the right time and from then on I was just trading in and out till about 10 the next morning," he said.

Turnover that night was huge. Currency trading platform EBS has said that daily volumes at least doubled to top $200 billion while spot trading in currencies on platforms owned by Thomson Reuters jumped by three times.

The question is: how many more days will there be like the night of June 23-24?


Traders like Graham have long been at the heart of the currency market, world's biggest and whose capital is London. Their buying and selling of large amounts of currencies has helped to maintain a deep pool of liquidity, but a series of changes in financial regulations and banks' business models means they are a dwindling breed.

Decades of largely uninterrupted growth in the currency business has stalled since it topped $5 trillion a day in 2013.


A three-yearly report by the Bank for International Settlements due in September is expected to show volumes have now fallen.

Banks, spurred by regulators' demands that they hold more capital following the 2007-09 global crisis, have been rethinking their approach to the business. This has involved moving away from aggressive trading on their own account.


This proprietary dealing in spot currencies and options has made the banks billions in profit over the past decade, but regulatory rules now require them to set aside much greater amounts of capital as a buffer against potential losses on this risky business - an expensive proposition for the lenders.

At the same time, dozens of senior dealers have been suspended, fired or in other ways seen their careers grind to a halt as a result of allegations of market-rigging which have so far cost the banks around $10 billion in fines.

Unlike Graham, many dealers have moved to hedge funds or other alternative "market-making" houses which are trying to fill the gap left as the banks retreated more to the lower-risk business of dealing on behalf of clients.

Evidence suggests that at their new homes, the dealers - known as "voice" traders to distinguish them from "black box" computer trading programs - have struggled to deliver profits, undermining the flow of capital and credit into foreign exchange investments.

Macro hedge funds, which invest most directly in currencies, have failed to turn a profit in four of the past five years. Europe's biggest such fund, Brevan Howard, is in its third year of negative performance

"You do hear this from the funds: that voice trading has not worked out," says Alex McDonald, the head of London's Wholesale Market Brokers Association.

"The options market is the place for the hedge funds but they need liquidity to be there and they do not have the banks on the other side because they (the banks) are no longer running the same size of options books."

Graham put it more simply: "All these guys who had strategies for making money as bank spot traders have had to go somewhere else. But it is not clear whether they know how to make money as a hedge fund."


While the old school struggles, the new school of programmers and mathematicians who build complicated computer models and algorithms have already turned a majority of all currency deals electronic.

The industry data shows machine-driven systematic macro funds which apply such strategies have racked up a 5.2 percent return since January.

This has brought with it a new set of headaches, however.

Computer traders want access to the ultra-competitive prices, in the form of narrow spreads between buy and sell rates, of the bank-to-bank trading market. Lenders therefore built a series of "prime-broking" businesses that provided their fund clients with credit and trading infrastructure.

However, a number of computer funds were badly caught out last year when the Swiss National Bank (SNB) abruptly ended a cap on the franc, and the currency shot up.

Worried about the risk of providing credit through the prime-broking system, several major banks have abandoned the practice, while others are demanding that clients hold more capital and have put prices up by as much as 30-40 percent.

A handful of non-bank players, including U.S.-based broker FXCM and Dubai-based ADS Securities as well as fellow new entrant Saxobank of Denmark, have emerged to fill the gap, but the net amount of credit available to speculative traders still seems to have fallen.

"This is an evolution which has been going on for a long time now," says David Newns, managing director of Currenex, one of the biggest of the wholesale platforms that facilitate brokers, clients and banks in doing business with each other.

"It is no secret that after the SNB last year banks had a long hard look at the franchises. But we still need to have a structure that supports credit-intermediation. The question is what that finally becomes."


Transaction costs will also rise for non-speculative participants such as pension funds and companies - which also need to make big currency trades to run their day-to-day business - without a deep and diverse foreign exchange market.

Further automation may help to keep the banks' dealing costs down but unless they can pass on the higher cost of capital to their clients, growth in the currency business is at risk, said the head of prime broking at one of the foreign exchange (FX) market's top 10 banks.

"There are innovative things you can do with the technology and more programing. But for now clients aren't paying enough for the capital they are using. Capital requirements (for banks) have gone up 20 times compared to three years ago but pricing for most clients is up by at most a third."

Still, in an era when central banks have been flooding financial systems with cash via quantitative easing, the currency market ought to be able to overcome its problems.

"You would have to imagine there would be capital lying around in this environment which could be put to work in FX," said McDonald. "But whether or how that will happen we don't know."

(Additional reporting by Maiya Kaidan, graphics by Nigel Stephenson and Anjuli Davies; editing by David Stamp)