Expecting the Unexpected in FX

The now infamous “SNB Day” forced a number of FX market participants to
re-assess some of their long-held assumptions and business practices.

As liquidity evaporated fresh concerns were raised about the lack of risk
taking experience and appetite amongst some sell side institutions and the
impact of technology on liquidity in stressed market conditions.

As some firms reportedly attempted to re-paper certain trades it also
added fuel to the ongoing debate about whether or not the practice of last look
still has a place in the modern FX market. This is debate that has continued to
rage on, notably at a very lively debate at Profit
& Loss’
Forex Network New York conference in May.

Meanwhile, even before January 15 some FX prime brokers had been
“re-assessing their client footprint”, effectively off-boarding clients that
were either considered too risky or not considered profitable enough to
continue servicing. This trend has been exacerbated since SNB Day, with more
and more firms struggling to get access to credit.

The other major risk event since SNB Day has, of course, been the UK’s
surprise decision to vote in favour of leaving the European Union.

Although volatility has been low since the Brexit vote, this might be about
to change with a controversial US election in November, a potential rate hike
by the Fed later this year, the actual departure of the UK from the European
Union at some point and the perennial banking and economic problems that
continue to bubble under the surface within the EU itself.

What then, have market participants learnt from these two major risk
events and how can they apply these lessons when faced with extreme volatility
in the future?

Is a market where there is less principal risk being taking by liquidity
providers, credit provision is increasingly being driven towards less
well-capitalised firms, liquidity pools are fragmented and a rise in algo
trading means that the market can move in the blink of an eye, really
well-placed to withstand unexpected volatility?

This is exactly what the opening panel, FX Volatility: Creating a New
Playbook
, will discuss at Forex Network Chicago on September 28.

Click here find out more information about the event and see who is speaking on
this panel.
    

Colin Lambert

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