The starting point for this column has to be the observation
that, by and large, foreign exchange dealers do like a moan. Whether it is a
market maker complaining of being picked off, an alpha generator bemoaning the
market going the wrong way or a client believing it always acts at a
disadvantage, there is, at the FX market’s heart, a collective culture of
This is no bad thing; who after all, doesn’t like to sound
In recent years we have had complaints (some very justified)
over latency arbitrage, attempts at running fixes, the lack of liquidity in the
market, less resting orders in the market, the speed at which moves happen…the
list goes on…and on!
I tend to listen to these complaints with an inward smile –
mainly because this is undoubtedly how I sounded all those years ago when I was
trading – and dismiss them.
I am unsure then, how to address the events of the last week
in foreign exchange markets – specifically the acrobatics performed by the Bank
of England and the European Central Bank, both of whom have done little to
contribute clarity to the monetary policy debate.
The Donald is fond of proclaiming anything that doesn’t
match his view of the world as ‘fake news’, and we have had the wonderful
‘alternate facts’ approach in the US. Perhaps Europe (while the UK is still a
part of it!) can now add to this rich pantheon of phrases, ‘guesswork
How else can we explain Bank of England governor Mark Carney
prompting a fall in sterling one week with comments suggesting its easy policy
will continue, only to prompt a rally in sterling the following week with
comments suggesting a rate hike was likely? Or yesterday’s hark back to the
sort of confusion associated with the European Central Bank in its early,
chaotic days, when the bank was forced to “clarify” comments by its president
One is tempted to think that either these central bank heads
feel volatility is too low in foreign exchange markets, or the FX market is –
not for the first time – over-analysing matters.
Either way, there have been the usual complaints across
social media – that bastion of the sane and level-headed – as well as in my
inbox and messaging apps, that FX markets are a “nightmare” to quote one
correspondent. But is it fair to, on one hand complain about the lack of
volatility, while at the same time complain about flip-flopping central bankers
triggering these moves?
Clearly it is not and I would suggest that the former of
those two complaints is a much bigger problem than the latter. Central banks
need to be careful their ability to deliver a message is not diluted by a
growing distrust that the message will be changed the next time someone speaks,
but generally speaking I would have to say that anything that provides an
opportunity for alpha should be welcomed by anyone associated with that game?
I suspect the challenge for some lay (once again) in the
changed market structure. Many years ago, central bank comments and other
events were broadly welcomed because they provided the impetus for moves and
there was time for a decent number of players to get onboard and make some
money. The market adjusted quickly but there were resting bids or offers along
the way, not to mention the first few prices after an event were pure
Nowadays the price engines are very good at firstly judging
how far the market should be priced away from the last trade and, above all,
they are very quick to adjust their pricing. Yes, last look plays something of
a role because they can guess where the market is and reject the trade when
they are wrong, but more broadly most are using similar datasets and as such
will achieve consensus quickly.
This means the human trader (not sure if anyone has designed
a whinging computer yet but we’ll assume not) has the perception that the
market was here…now it’s here (100 points away)…and nothing happened in
Actually quite a lot happens in between but you have to have
the ability to act quickly, which is what many lack.
I was talking to someone the other day about trading
strategies and I argued that maybe market participants should be looking to
trade around events in a new manner?
My argument was, as highlighted by the example above, that the
market prices in information so quickly now that you have to be lucky to get on
the trade at a reasonable level.
I used the example of someone who believes Cable is going
lower over a one week or longer time horizon and suggested that what it really
needed was a quick assessment of the new information and whether it really
changed the big picture? If it didn’t, I argued, then surely use the spike,
such as that created overnight by Carney’s comments, to establish a short at
In essence I suppose I am advocating using events to get
into a contra position rather than a
‘with trend’ position. I have to confess I am unsure whether anything has
really changed with the Bank of England’s stance on interest rates – the next
move was always going to be higher and by just 25bp, it’s just a matter of
In these circumstances all the past 24 hours has done is
provide better levels to sell and thereby establish the position that the Cable
bear wanted in the first place. The stop can sit at a better level as well and
will not be potentially disastrous to the P&L.
Throw in the FX market’s liking for a bit of mean reversion
and you have reasonable grounds for such a strategy.
It strikes me that thinking in FX has reflected that of the
wider world – it is very short term. The lack of returns, thanks in part to the
lack of a decent trend and short term volatility that triggers stop losses,
means investors and other alpha traders in FX have been turned off longer term
strategies. Even the retail FX market is populated with traders who have been
sold the latest ‘bot’ to take advantage of short term price inefficiencies
(that’s arbitrage to you and me and funnily enough these ‘bots’ are about as
successful as the average retail punter, i.e. not at all!).
I do wonder if, given how the pendulum always seems to over
correct, we will witness the return of the medium term trader, albeit with a
different strategy to before?
All that will be realised in the fullness of time of course,
so until then I have one message for those continuing the FX industry’s rich
bloodline of whingers. Rather than moan about these sharp moves triggered by
mini-events, why not try to take advantage of them? It involves thinking
differently but guess what? Sometimes that works.