I consider myself a reasonable man, therefore it came as something of a surprise to me to find I was becoming a Troll on Twitter. Having realised this, however, I have decided to embrace the role and have dedicated myself to ridiculing sensationalist FX journalism and research.
Just briefly on the subject of being surprised, my thanks to the wits amongst you who were very quick to point out to me just days after mentioning West Ham, the Montreal Canadiens and winning in the same sentence, that both teams were horribly beaten within six hours of each other! Thankfully, last time I checked the Giants were winning…ah wait…
Either way, back to trolling and my realisation that, like Howard Beale in Network, “I’m not going to take it any more”.
Last week was the 30th anniversary – as I am sure you are all aware – of the “Crash of ‘87” when equity markets plummeted more than 20%. It was this event that really triggered my distaste for both equities traders and its market structure. I had to go to a different trading floor for an internal meeting that afternoon in London and by coincidence it was the equities floor. I recall people panicking, even tears in evidence, and the noise was incredible.
I returned to my desk on the FX floor and things were busy, but very normal. The atmosphere was also pretty usual – in spite of the meltdown happening across the Pond and, soon, around the world. Prices were made, risk was taken, profits and losses were booked – basically at the same time as the equity market almost ceased to function, FX worked fine. It wasn’t the first time it had happened and it certainly wasn’t the last time we witnessed such a difference.
All of which makes me ask – as I did on that day 30 years ago – ‘why would you want the FX market to be like that?’ I also looked at the market and thought to myself, ‘That’s a one way street – must be the easiest thing in the world to trade.’
Obviously that is irony, but my point is the equity market structure is given to rapid moves because it is dominated by the herd instinct, at the moment it is being driven by investors buying stocks – for yield of all things – every time there is a dip.
FX is very different and you rarely get those big sweeping moves – partly because of the mean reverters in the world, but also because the natural hedging requirements that underpin the market. I understand there are firms out there that want everything to be the same – a lot of the time they are stat arb shops looking for either latency or to correlate everything. One of the beauties of FX is that a natural hedging trade can enter the market and throw out correlations – at the end of the day, flow dictates the direction.
For years now certain interests have been trying to impose an equity market structure on FX – look at MiFID II – and the reason it hasn’t happened is simple. That structure is inferior to the one that already exists in FX. It may suit equities – I’m not sure it does – but it doesn’t suit FX.
All of which leads me to my reason for trolling. I think a move in the magnitude of 20% deserves a big headline, so I was hoping the headlines about NZD’s “horror session” and “collapse” on Friday were ironic. They weren’t. There are people out there who think a 1% drop on a fundamental piece of news represents a “horror session” – and of course, in the era of currency wars there was nothing horrible about it for the new Kiwi government.
Equally, a 100 point drop in a perfectly orderly fashion (I am told there were prices and trades all the way down and liquidity was good) is not a “collapse”. When Cable went from 1.50 to 1.30 on Brexit? That was a collapse.
I don’t know why it irritates me so much – perhaps it’s because headlines such as this suggest to the ill-informed that the FX market structure is broken when it isn’t – but irritate me they do. I therefore, commit myself, dear readers, to ridiculing and highlighting ridiculously sensationalist headlines, because believe me, anyone that saw some of my trading books will understand that I know exactly what a “horror session” really looks like.