There’s nothing like a crisis to bring out the best and worst in people and the Covid-19 calamity is right up there with the best of them. Overall though, in terms of markets, I am not that surprised by how things have gone, indeed I am a little bemused at the amount of people who express their surprise to me that the financial industry has handled the mayhem of the past few weeks with little drama.
In FX we had a few issues at one or two multi-dealer platforms during the past week which caused a flutter or two, and sources tell me that liquidity provider (LP) performance has been varied, with three or four names standing out as offering a consistent service in decent amounts, across multiple currency pairs. We should not be surprised by this, however, because firms have spent a lot of resources making sure they have sufficient capacity (even though one told me ticket numbers exceeded their ‘worst case’ scenario by about 20% one day last week – the system coped), and have invested heavily in their pricing and risk engines to be able to cope with such volatility spikes.
I have yet to hear of a major LP switching off, although the quality of some streams to certain channels were downgraded, as is the LP’s right, and platforms generally – aside from the primaries – hit yet new peaks, so all is OK in the foreign exchange world. That is the case because some firms were brave enough to make a call on their product offerings and were in the right place when customers were scrambling for another way to trade. I am a firm believer that the only time a service provider is really judged and an opinion formed by the customer, is when the smelly stuff hits the fan. The customer experience is dictated by either how good the help desk is, or whether, in FX terms, the price remains consistent and robust.
Those firms that did invest in their pricing and risk technology deserve a pat on the back, because there are plenty who believed that volatility would never return and as such this demanded a different business model. I am willing to wager than some LPs would have had to switch off or at the very least severely curtail their streams had they still been operating on their old technology stacks. Equally, those firms that invested in mobile trading apps are experiencing a boom in activity because while customers were very reluctant to embrace it three months ago, now they appreciate it can offer a more secure way of trading that someone logging on to a personal laptop at home.
The challenge for service providers, and markets more generally, is in the difficulty of maintaining a pricing service in a mobile environment, frankly I am not sure it can be done, so the very real risk remains a virus outbreak in both the main centre and the disaster recovery site derails us.
In terms of price action in the markets, it is heartening to see that the FX market can still handle extreme conditions, but we should also note that fixed income markets also got through the week largely unscathed, as did, with the help of a few circuit breakers, equities.
There needs to be a sense of perspective, however. I was amused – as many others apparently were – to read a headline in the Australian Financial Review which described “a market panic like we’ve never seen before” on Tuesday. Either the headline writer is 16 years old (possible) or they got carried away with the hyperbole (probable) because even equity markets have seen worst days. In FX terms, recent activity merely serves to highlight how the market structure has improved – turnover probably hit new highs globally (especially in spot), but in terms of how far the market moved? Nowhere near the best of them, probably not even top-10 – and I don’t include the Swissie and sterling flash crashes in that.
We need this perspective because while expressing surprise at markets coping, some conversants also seemed to think the model was proven and things would get back to normal. I don’t agree. I believe in volatility terms and market moves, it could get a lot worse, before it (inevitably) improves.
This means maintaining a vigilant stance, not getting complacent about things and ensuring that those customers who really need the FX market – corporates and investors – get the liquidity they require. On which note, an interesting anecdote to close out from a source at an LP this week – one of the asset management companies that has been quite loud in backing alternative liquidity channels apparently complained last week that their pricing wasn’t as good as it could be from the major LPs. Funny that. Who’d have thought that treating a service provider badly could rebound on someone…