Today’s Irrational is very much based upon the ethos in which the accolades were imagined – in other words it’s based upon nothing more than its ability to irritate me. If we are being honest, this year has not been a vintage one for headlines – I don’t know if it’s me but I sense the world is getting worn down by the constant bickering amongst politicians, most of whom turn to (at best) half truths when challenged. Throw in an increasing wariness of publicly stating anything humorous for fear of upsetting someone (which is very easy to do, another facet of today’s world seems to be extreme sensitivity) and the quality of headlines we saw just a year or two ago have gone missing.

I suppose headlines like last year’s winner – “FX – as mad as a bag of ferrets” – are no longer acceptable because they upset people from the north of England (who are, I am sure, the only people to have these animals as domestic pets), or promote cruelty to animals. To an old Cable trader it’s all a little sad – people are so earnest!

So when I looked to pick my Headline of the Year it fairly quickly became clear that the pickings were thin – and it was at that stage that I let irrationality take hold.

It simply does my head in to read so many headlines, click bait for FX people, banging on about how FX traders are confused by Brexit and that markets are nervous.

In the past this may have been the case for there were literally tens of thousands of institutional traders trading markets that would have had a position on – now that number is a lot lower, unless like a good retail broker you want to dress up thousands of retail accounts as “institutional”. I genuinely struggle to find a banker who is actually trading this stuff for a start – most traders I speak to are liquidity providers and they hedge the flow out, normally within seconds. Yes, they could get unlucky with the timing of a Brexit-related headline, but it’s unlikely. Traders at banks are not encouraged to take positions unless they are given them by a client – again because of the fear factor in the world today. After all, imagine the horror and shock if a bank trader actually makes money by taking a view on the market – I am sure there is a law firm somewhere who will be able to dress that up as market manipulation or front running.

Actually, as a digression, I think I have stumbled upon the source of the lack of humour in the financial world at the moment – those vultures…sorry lawyers…ready to pounce on even an innocent mistake (and at $300 million for prosecuting one case you can see why they chase the FX ambulance).

Back to the Irrational, I do not think there is half the fear or confusion that some headline writers will have you believe when it comes to the Brexit outcome. I accept this is not the traditional “known-unknown” where there is a binary outcome, but it’s not that much more complex. The UK is going to leave the European Union in March next year unless another referendum is held and won by the Remain camp. The only unknown here is how bad the exit could get economically for the UK?

I really enjoyed* one story that discussed how traders are turning to derivatives to hedge their uncertainty over Brexit and how this was putting pressure on market makers. This is rubbish of course, because those market makers charge an appropriate premium for these deals and can effectively hedge any risk to themselves, leaving only upside. Don’t you find it funny that insurance companies are always first in the headlines after a major disaster with concerns over their viability, yet that year they make just the same (often more) money? Welcome to the world of an FX options trader – if risks increase so to do premiums – the only real risk here is being taken by the buyer of the option – and even that is limited.

On the cash front people are rarely holding positions long enough to be caught up in the whirlpool of headlines, the FX market structure is different these days – news happens, the market moves as LPs react and then traders decide whether the event has been priced appropriately. There is little or nothing to hit on the way to the first post-event price and there is less guesswork involved because computers won’t guess.

So with thanks to the headline writers I would kindly ask them to take the next four months off – and in many ways I would extend that the analysts of the world, for I really enjoyed**receiving countless emails overnight telling what had happened to sterling post the calling of the no-confidence motion. Sadly, none of them were able to throw any insight on what might happen going forward – and don’t we all love a strategist who tells us about the past?

The foreign exchange market has faced so many events over the years and has generally handled them well. The only time this market gets nervous is when there is a huge imbalance of positions a la SNB Day. Look at the Brexit vote night itself – yes it was busy but how many people really got hurt? Someone obviously did but it’s a real struggle to find them because the market functioned well. Hopefully someone will point that out to the mainstream financial media.

Twitter @lamboPnL

Twitter @Profit_and_Loss


*I didn’t

*I didn’t

Colin Lambert

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