Traders do like to moan – I know I did – maybe because it’s
therapeutic, maybe because it is (occasionally) true that they are unlucky.
More often than not though, it’s because they’ve got it wrong.

I mention this because in the course of reading through an
article posted on Monday
about the new firm TechFX Traders, it struck me
that in addition to the negative numbers I cite at the top from hedge fund
indices, it’s been a long while since I spoke to a macro trader who was really
enjoying life.

It is important to note that there is an old unwritten rule
around being a trader – particularly a spot FX trader – specifically that no one
wants to hear from you when you’re doing well. For years in London you could
meet with other traders for a social evening and the chatter was never about
how well you had done, the best stories always started along the lines of, “You
think that’s bad? Let me tell you about my afternoon…”

It’s just a fact of life – the best war stories are the
negative ones!

So with that rider firmly in place, I wonder why, on the
face of it, macro traders are, to use the technical market expression, “having
a ‘mare”?

I would go into a long missive about the technicalities of
equity markets but as I noted in my column marking my recent FX anniversary, I
don’t like equity markets and never have done. So I’ll focus on FX and rates

So why are we not seeing the performance? It’s not as though
we aren’t having events or are absent a trend. I fully accept that events can
catch a trader out but surely the shrewd thing if it is a ‘known-unknown’ is to
step away or only have a small position?

The events are also following a pattern to a degree – the US
political scene is rather chaotic (and that’s being generous), the
geo-political outlook is unstable and there is a real lack of clarity still
over a couple of key issues such as the hard or soft nature of Brexit.

In the past I have been a little critical of certain FX and
global macro traders because they have seemed to me to be little more than
trend followers and to an extent I still think the major indices that measure
trader success are dominated by trend followers.

But it makes me wonder how much of a trend these people
really need?

So far this year we are looking at the 10 year Treasury
Futures Index being up around 4% – and it has been very much a ‘trend’ move with
few, if any, sharp reversals of note.

Equally, looking at FX and one of my favourite (not really)
sources of information – the charts – EURUSD is around 9% higher and again it
has been a steady uptrend without a sharp enough pullback to threaten a long

I do accept that USDJPY is a lot messier because of, ahem,
“other influences” (yes I am passing on scurrilous rumours of official
influence from Japan!), but even there if you sell above 114 and buy below 110
you’re probably going OK (best to leave it alone though I accept). Even Cable
would have got you five or so per cent, although I accept it takes a brave
person to buy sterling in the current environment!

Generally speaking, shorting the DXY should have got you
7-8%, so to argue, as some still apparently do, that there is no trend is
fallacious at best and excuse making at worst.

I do wonder if we are looking at psychological damage here
though? The market has had a traumatic few years in terms of genuinely low
volatility and a lack of events and followed, in FX at least, by the trauma of
the Swiss franc debacle, the Brexit vote and its aftermath, the election of The
Donald and the odd flash crash.

I have spoken before about a great piece last year from
Steven Englander, now at Rafiki Capital , who wrote about the lack of
pre-positioning in markets. Partly this is a result of recent under-performance
and a desire not to rock the boat to any large degree – traders (or investors)
will rather wait for the event to occur and then jump on it.

The problem is, of course, that the markets are so much
better at pricing in events and with news reading algos driving the market
making process a trader has to be pretty sharp to be able to get into a
position before the market has gone 50 or 100 points. And of course in a great
manifestation of the law of sod, 50-100 points is about what you get for a
relatively minor event like a comment or an economic release.

So it could be about pre-positioning, or the lack of it, but
it could also be about too conservative risk management (i.e. stops way too
close to the market) or a lack of patience. Perhaps traders are nowadays too

If the latter is the case then this is a lasting impact of
the advent of the HFT arbitrageur followed by high speed, highly correlated
market makers. I wrote a few years ago about how macro traders were getting
whipped around by the electronic white noise and were necessarily shortening
their time horizons on positions and this has definitely been a feature of
market over the past couple of years. It is somewhat ironic, though, that at
the same time as we have all bought into the benefits of short term scalping,
the strategy barely seems to be making money. It’s hard not to think that, as
is often the case in financial markets, the industry pendulum has swung too far
one way.

I suspect part of the problem is that too many traders are
influenced by options markets which have become very good at handling and
predicting event impacts. This means that when, as seems to have happened in
recent years, traders fall between two stools – on one hand the high frequency
scalping game and the other the long-term trade and hold strategy – they are in
a kind of limbo. There are moves there they can exploit, but the products they
are using (options) just don’t offer the returns of cash. The problem with the
latter, of course, being the cost (in capital rather than carry) of expressing
a view in cash terms.

It is nice to report, for once, that this issue has not to
any great degree, been driven by regulatory change. Rather I feel the problem
is – and again I am afraid I have to point the finger at options businesses and
their ability to hedge risk almost perfectly – a general unwillingness on the
part of traders, management and investors to actually take a mark-to-market
loss. It feels as though a mood sets in which, while it is not panic, is a
negative mind set that has people thinking, “I can’t let this go further”, when
that is exactly the thing they should do.

I fully accept it is easy to ask these questions and attempt
to answer them with no money in the game but I am genuinely interested in why,
in the current environment, too many traders are struggling? Is it the impact
of the computers and their logic that states take the money and run (3,000
times a day!) or is it a structural shift too far – one that traders need to
address and get back to doing what they do best –trade according to their style
but with confidence.

If that can happen I think the market will be a better
place, but for us oldies there is little to fear – there’ll still be some good
horror stories to share with our mates!

Twitter @lamboPnL

Twitter @Profit_and_Loss

Colin Lambert

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