With a “Happy Thanksgiving” to our US readers, let’s keep this short, sweet and cautionary.
There are currently a remarkable number of M&A deals going through with deals worth $70 billion announced on Monday alone. Several of them are cross-border and are likely, therefore, to involve at least a degree of FX activity – some of which could be very sizeable.
It is testament to the FX market’s functioning that historically very few of these transactions have been spotted in the market, from the days where a desk would work an order for almost a week to the modern TWAP (and benchmarked) algo, there is a lot of volume that goes through the market relating to M&A transactions.
The next month could be interesting, however, for it is, of course, December – traditionally the worst month of the year for liquidity – and the number of deals in recent weeks does seem to be far in excess of anything we have seen in the past couple of years.
The advantage for the firms trying to hedge all this business is that there are so many that they could get tangled up in each other and throw the order sniffers off the trail, but any large ticket will be a challenge – especially with the added bonus of the UK election! There is no doubt that the order sniffers will be out in force looking to jump in front of any order they can spot so it is probably best – and this is probably me preaching to the converted – to make sure that any executing party makes sure their customer knows in no uncertain terms that things can go wrong.
Any pre-hedging will have to be disclosed and I suspect keeping the customer fully up-to-date would be a good thing to do – it may also help the executing party ensure the customer doesn’t leak, for as we saw during the Bogucki/HP issue, the latter was not above sharing details with third parties.
If this spate of deals does lead to these big tickets hitting the market it will be a great opportunity for firms to showcase their qualities – I used to love the challenge of executing a large ticket without the market noticing, it was the supreme expression of a dealer’s skill, which is why I was amazed that people thought it OK to share information at the start of this decade. It will, however, also bring challenges, as noted above, and I for one, sincerely hope that one of the many deals we have read about in recent days, does not re-emerge as a story in two years’ time thanks to an opportunistic lawyer.