I am probably not the only person nervously awaiting the
outcome of next week’s US election, although I suspect many have much different
– and to them much more important – reasons.
My concern is how the FX market handles any surprises. On
one hand, given the Brexit experience, I am confident there will be no issues,
but on the other it seems inevitable we will have at least one, sharp, nasty
move in markets. Given the peculiar ingredients of this election USDMXN will
obviously be in the forefront of most speculators’ minds and I am not sure that
market will be able to handle the interest.
Spreads will obviously be wide and moves wild so I suggest
this is only one for the very bravest (or most foolhardy!)
The good news is we are once again dealing with a
“known-unknown”, we don’t know who will win but we know someone will (although
I did recently watch the Veep series where the election ended in a tie – can
that happen in reality?) Assuming there is a winner, even if it comes as a
nasty shock to the markets one has to hope, given the recent flash crash in
Cable, that central banks stand ready to provide liquidity if – and I should
stress the ‘if’ – it is needed.
It is an interesting facet of recent FX market action that
the risk of flash moves is no longer exclusive to people trying to exit a position as it was for so long.
The lack of pre-positioning for the event is quite striking – I have spoken to
several institutions, none of whom can discern a skew in their clients’
collective positioning – which means we could well see a sharp, nasty move as
people try to get into the position.
Given the likely confusion early in the piece – and how the polls seem to have
tightened – the wise move seems to be waiting for a clear signal. As discussed
by Citi’s G10 FX strategist Steven Englander last month, more and more
investors are scared of being whipped out of a position and as such are waiting
for a stronger signal. Price equals information, therefore they have to be in
the first few through those particularly small doors if they are not to find
they have hit what may be a temporary, or actual, high/low.
For the market maker Tuesday could represent their worst
nightmare. We know there is likely to be an event at some stage – there could
well be three or four – but you can be sure that every customer will be
demanding your price within a three second window. This is why the ECN model typically
thrives during events – market makers don’t necessarily exist on them, it is an
expression of interest venue, if you don’t want to buy at 10, why bid there?
There will be some making markets, but as has become the way
of markets over the past few years, only when there is something else
available. I find it wryly amusing that most market makers are only too happy
to make a price, as long as there is another “exit” price out there on another
venue (sometimes via a correlation – good luck with that Tuesday!) What they
are saying is, “I will make you a price as long as someone makes me one” – it’s
one reason why the faster players typically stand in slightly longer – they are
confident they can get out before other market makers.
That doesn’t make them better, just faster – and, in my
book, it doesn’t make them a market maker either. The true definition of market
maker is someone who sticks their head above the parapet and says, “my two-way
price is…” when there is nothing out there – so we’re back to brave (and
So I think it’s inevitable that we will see some nasty price
gaps in foreign exchange markets on Tuesday, unless the result becomes very
clear cut at an early stage. This also means we will probably see some shameful
behaviour from all sides – from market makers who will give lie to that name by
pulling the plug just when they are needed, and by “customers” who will
complain that no one will make them a price when their sole intention is to
slam the market and make money at the expense of the poor sap who makes the
At the end of the day there is a really good argument for
market holidays when these events take place (and this is a tongue in cheek
suggestion, but not totally) because the reality is that genuine, end user,
clients in the foreign exchange industry are not going to go near the market
during known periods of turmoil. They either have their hedges on, or are
content to take the rough with the smooth.
What we are left with is a market populated by people trying
to make a fast buck – and good luck to them too – to whom we, as an industry,
owe nothing. So it will be nice if we get through this event without what
nowadays seems to be the inevitable aftermath of claim and counterclaim of
people trying to re-paper trades, not being there to make a price, or slipping
a stop a massive amount.
It would be nice, but I have a nasty feeling that’s not
going to be the case. More likely Tuesday will become the latest example of the
foreign exchange markets’ new behaviour pattern, which can simply be described
as “all or nothing”.
Good luck everybody.