CLS Releases Analysis of Brexit-Related Events

One week after releasing analysis of activity around the UK
election, and as the first anniversary of the vote approaches, CLS has released
analysis of Cable spot volumes during Brexit-related events.

Unsurprisingly the analysis highlights how volumes spike
during unexpected events. The data indicate that the Brexit vote, the Cable
flash crash of October 7, 2016 and this month’s UK election were the three
busiest days for Cable in the last 12 months – closely followed by another
surprise event, the calling of the snap election on April 18.

From a daily average around the GBP 45-50 billion market,
CLS says that volumes in Cable spiked to GBP 187 billion at 3am UK time as the
decision of voters to leave the European Union became clear.

On the day of the flash crash, CLS handled GBP 135 billion
in value, during the UK election it was GBP 118 billion and UK prime minister
Theresa May’s calling of a snap poll saw the utility process GBP 101 billion.

The volume is calculated from instructions received by CLS,
which is adjusted to reflect the reporting convention of the Bank for
International Settlements’ Triennial Survey of FX Turnover. In April 2016, the
latter reported spot sterling volumes of $222 billion equivalent, however the
BIS does not break down spot data by currency pairs. CLS says that the
“majority” of trades confirmed are done so within two minutes of execution.

Reinforcing the rather obvious message that unexpected
events attract more activity, CLS has also released analysis of volumes around
other Brexit-related events. It says that on the day the UK High Court ruled
that the prime minister could not trigger Article 50 without parliamentary
approval, volumes reached GBP 80.6 billion; the actual triggering of Article 50
saw volumes at GBP 62.1 billion; the prime minister’s speech during which she
laid out the UK’s plan for Brexit negotiations prompted another surge in
activity – to GBP 86.3 billion.

While noting that, as expected, the market reaction to the
expected or scheduled events was “subdued”, CLS says, “It is interesting to note that, while both the
referendum on EU membership and the UK general election had unexpected results,
the referendum had a bigger impact on the FX market and produced a much higher
spike in volumes.”

The utility
does not offer any analysis on why this may have been, however it is fair to
say that the vote to the leave the European Union had much stronger direct
economic consequences compared to a change of government.

It is
probably also notable that the referendum was the first real “shock” to
conventional wisdom in a 12-month period that continued to produce surprise
results. By the time the UK election came around, although the outcome was a
surprise, the market was well inured to them. There is also the fact that while
the Conservative government did not win an outright majority, neither did it
lose power – this is something else that may have kept a lid on extreme

contents itself with the conclusion, “It seems that initial reaction to the
referendum results was the strongest and produced the highest daily peak in
GBPUSD volumes. Nevertheless, Brexit-related events continued to occur during
the whole period and to produce spikes in GBPUSD volumes.”

the daily data, CLS has also released hourly data from eight Brexit-related
events, starting with the initial vote and concluding with the calling of the
snap poll. Last week CLS and Thomson Reuters released analysis of UK election
volumes, this can be found here.

The hourly
analysis highlights the event-driven nature of FX volumes for while the day of
the EU referendum was the busiest for Cable volumes the actual peak in activity
was lower than others.

On June 24
2016 as the referendum votes were announced, CLS volumes peaked at GBP 17
billion. It was a similar picture on the day of the flash crash, when volumes
peaked at GBP 13 billion.

compares to a peak of GBP 25 billion on 30 June 2016 when Bank of England
governor Mark Carney hinted at a rate cut; and GBP 28 billion when the Bank
finally followed through on the policy easing on 4 August.

When the
Bank of England surprisingly to some kept rates on hold on 14 July, the volume
peak was GBP 22 billion, while the peaks for the UK High Court decision (GBP 17
billion); the PM’s speech (GBP 18 billion); and the calling of the election
(GBP 16 billion) were all lower.

Aside from
the High Court decision, which was on the same day as another Bank of England
monetary policy announcement and therefore had two spikes in activity, all bar
the referendum and the flash crash had single spikes in activity.

If nothing
else the data provide a graphical picture of an event driven market and it is
noticeable that the volume levels during and after the referendum results
exhibited a much flatter pattern, being consistently above CLS’s 2016 hourly
average. The first spike in activity likely came with the Sunderland result and
was followed by the peak when it became clear that the UK electorate had
surprised just about everybody, however activity remained above the GBP 10
billion mark for several hours before fading into the European close.

the flash crash saw activity peak close to or at the GBP 13 billion registered
in the hour of the actual move itself on two more occasions. The first is
around 11am UK time when Cable suddenly dipped from 1.2400 to near 1.2200 –
prompting fears another crash was on the way – the second is in the period
prior to the London 4pm Fix which could signify speculators taking profit.
Certainly after the move to the 1.2215-20 area Cable rebounded to 1.2400 and
traded steadily thereafter, something also likely to prompt position squaring.

contrast, the other days analysed all present patterns showing activity being
very close to norms except for a period after the event outcome.



Colin Lambert

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