Chatting to someone this week I heard the refrain, probably
for the thousandth time in the past three months, that it’s so hard to make
money in foreign exchange markets at the moment.
Making money is not meant to be easy of course, if it was
we’d all be on the beach, but if I look at what has happened in recent times I
have to confess to being a little surprised that people continue to complain
about the lack of opportunities. From my perspective the opportunities are very
much there – a well-signalled 16% move in Cable is one – so why is it people
are not, or give the perception that they are not, making money?
For once I don’t think the answer is market structure,
although the regulatory and litigious environment in which participants operate
does play a role.
Obviously the capital adequacy rules are playing a part in
reducing the appetite for medium term risk, but most of the moves we are seeing
are much shorter term than that.
Talking to people in the currency management business it
strikes me how their time horizons have shortened, where they used to have a position
on for weeks at a time, now they are very much looking at the markets
intra-day, possible for a few days at the most.
The rise of automated risk management has coincided, it
seems to me, with a rise in mean reversion thinking in the industry – and this
also plays a role. After all, if the move is likely to stop in fairly quick
time why hold the position? Equally, in such an uncertain environment, it’s
natural that people think “any profit is a good profit” and don’t push their
That said, in sterling this year there have been plenty of
opportunities to make money but, amazingly to me, I had someone tell me last
week that they had had a “tough year” trading the pound. I have to confess I
did wonder if one of my old voice brokers was still involved in the business –
he was famous for suddenly deciding, on a whim, that “I will not allow you to
sell the proud pound”, and stuck by that for hours at a time (you either hoped
his colleagues heard you desperately trying to sell it or tried your luck
elsewhere) – but more rationally wondered how that could be?
The answer is, I believe, an illuminating example of how
traders are thinking now – and just as clear an example of why they are
It seems that my acquaintance has been too slow into most of
the moves – even though they use technology to execute.
The problem has been that rather than provide a strong
profit base for the rest of the year, Brexit night was apparently difficult in
that a structural short position was stopped out in the spike to 1.5000 and
above when the polls closed. This led to the traders concerned losing
confidence in market conditions and wanting more information before actually
Earlier this week I attended an interesting lunch meeting
hosted by Thomson Reuters in Sydney that featured a panel discussion on the
impending US election. One of the many interesting points made that struck a
chord with me was one speaker’s observation that they had never seen so little
pre-positioning ahead of what is obviously a potentially major market event.
This echoed comments by Citi’s head of G10 FX strategy
Steven Englander, that I referenced in an earlier column, who also pointed to
the remarkable lack of pre-positioning.
What is clearly happening is participants are reluctant to
preempt events – even if they are likely to be as predicted. This means they
all wait for more information before acting but, of course, market price
reflects all known information so the market makers are, for once, ahead of the
On Brexit night, my acquaintance’s team apparently agreed a
sell signal post-Sunderland but the market had already gapped lower 500 points,
which, in the mean reversion era, meant they had to reassess. The next
reassessment came when it became clearer and clearer the vote was to leave, and
of course the market had disappeared another 700 points.
At this stage, having missed what was pretty much an
unprecedented 1200 point move, they accepted they had missed the boat and
waited for the next signal, which of course they missed!
The point I think this highlights is that this strategy –
effectively no pre-positioning – goes against one of the fundamental basics of
trading; be positive and proactive and, more importantly, be one of the first
into the position!
I am fond of sharing with the delegates on the ACI Australia
Dealing Simulation Course something I was told years ago by a fund of funds
manager responsible for billions of dollars. He told me, “great traders
position with 25% of the available information (or less); good traders with
40%; and bad traders with 51%”.
The point being made was the market had already moved to
reflect the information so logically the bad traders were already too late, or
more likely were only going to be in the position for a very short time.
That story was related to me in the early years of the
electronic boom, when most traders were still manual, but it is still relevant
today. Put simply, if you don’t pre-position not only are the execution algos
likely to be in front of you, but so too are the automated market makers.
The problem then, lies not with the market structure per se, rather it is an old-fashioned
failing that characterises an uncertain environment. Most people could have
told you sterling was going to have a bad year once the Brexit vote became
clear, but few were actually brave enough to actually take a position.
This is also a reflection of the industry’s (actually of
life’s) dependency upon data – we need as much data as possible before we can
actually make a decision. The problem is, for markets at least, the more
information you have, the more the move has already happened.