Buy side market participants have indicated that although
trading conditions were sometimes challenging following the UK referendum
decision to leave the European Union, there was liquidity available in the
“Essentially it’s what we expected to happen in the event of
a Brexit,” says Javier Corominas, head of economic research and FX strategy at
Record Currency Management. “Spreads did widen, probably about ten to fifteen
pips on spot but that is what we expected. So you can feed the market in small
chunks. As I said on the recent Profit & Loss webinar, trades of two to
three million are the new ten to twenty million.
“Liquidity isn’t great but you can drip feed orders into the
market. The Bank of England has come in and made facilities available for banks
to draw on and coverer their shorts, so it’s been somewhere between normality
and the SNB, but nowhere near as bad as the latter,”
Meanwhile, Paul Chappell, CIO of C-View, describes liquidity
conditions as “surprisingly good” following the Brexit decision.
“It was an event that rolled out progressively and so became
increasingly clear over time that there was going to be a Brexit. As a result
it wasn’t a frantic thing and it was impressive how much liquidity and price
porting was available,” he says
Chappell adds that markets will inevitably continue to be
jittery for some time following the Brexit decision and that this will impact
how buy side firms behave in the market.
“When you get markets like this it’s inevitable to a large
extent, particularly for discretionary managers, that you actually end up
deleveraging. If you’ve got this much volatility you end up almost by necessity
taking relatively smaller positions or employing less leverage,” comments
The chief risk officer at a European-based FX hedge fund
agrees that there was liquidity in the markets today but cautions that the
spreads were significantly widened out.
“It was good enough to get out of a position if you had to,
but it wasn’t tradable in my opinion,” they say.
“I guess it could be worse – if I was a market maker I
wouldn’t have been giving better prices but as a market taker there wasn’t any
point trading these prices.”
They note that the market was largely caught unawares by the
Brexit decision but again say that it was a different scenario to when the
Swiss National Bank (SNB) dropped its peg to the euro last year.
“As of last night the market had roughly five to one
discounted the possibility of a Brexit. So when the news came out the other way
I think that it caught a lot of people on the wrong side. But I would say that
this was less of a surprise than the SNB, for example if you were a retail firm
you probably weren’t taking a risk in this decision one way or the other.
The SNB decision just came out of nowhere whereas although
people may have been positioned wrong here I don’t think as many people were
positioned in the market to begin with. So while the decision may have been a
surprise that fact that there was going to be a decision was a known thing and
so if you were risk averse you probably weren’t in the market one way or the
other,” they say.