Articles tagged by Liquidity
I don’t think there is anyone out there who
doesn’t think the FX market performed well under the stress of the surprise
outcome from the UK referendum last week, but I suspect the real test is only
Following the results of the UK referendum decision to leave the European Union last week the common consensus amongst FX market participants has been that the biggest surprise – apart from the result itself – was how well the FX market handled ...
Do risk managers need
to fundamentally re-think their approach to markets? Specifically, are they
paying enough attention to liquidity risk, assuming, of course, that there is
even a way to accurately and dynamically determine this risk in markets?
I ask ...
conditions are changing in the FX market, they are not necessarily getting
worse, claimed panelists at Profit &
Loss’ Forex Network New York conference.
Although Kevin Kimmel,
Chief Operating Officer, Citadel Execution Services FX, mentioned that FX
market liquidity ...
XTX Markets has joined Broadway Technology
as a liquidity provider in foreign exchange, Broadway announces.
“As the liquidity landscape evolves in FX
it is important to be able to provide our clients with increased connectivity
options to support their business”, ...
Multibank platform providers need to broaden the range of
liquidity options that they offer clients in order to thrive in the diverse FX
market ecosystem, said panelists at Profit & Loss' Forex Network New York conference.
There has been much discussion ...
As client requirements evolve in response to changes in FX
market structure, services providers need to be ready to adapt to these new
demands, said panelists at Profit &
Loss Forex Network Toronto conference last month.
Liquidity has been a big ...
Changing the habits of a lifetime is a very difficult proposition in the foreign exchange industry, but is now a prudent time for some platform providers to have what will no doubt be some very difficult conversations with their liquidity consumers about actually paying for it?
FX liquidity is a more valuable commodity than ever and LPs continue to look at where they stream, what the value from that venue is, and how they can, if at all, warehouse the risk profitably.
Suggesting that FX liquidity takers pay to access precious foreign exchange liquidity was just the hot topic predicted if the level of correspondence was anything to go by, and while the consensus seemed to be, from the anecdotal evidence, that most people prefer the "both parties pay" model, this raises issues for me. Inevitably last look has a role to play, as pointed out by several correspondents, and if last look is used then yes, the LP should pay for the free option
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.
With the latest Bank for International Settlements (BIS) survey showing the first contraction in the size of the FX market since 1998, some market participants have commented that this is further evidence that the banks – long the principal source of liquidity – have stepped back significantly from the market.
This has left a clear opening for alternative liquidity providers, some of whom have been very public about their ambitions in the FX market. Some of these alternative liquidity providers have been quick to emphasise the fact that they do hold positions and take risk in the market, as opposed to just recycling liquidity or arbitraging between different areas of the market.
“I don’t believe in the idea of liquidity provision,” says one market source, adding: “Liquidity is a service, it’s not just provided, and all services have a price tag.”
There has been a broad re-pricing in a number of services provided to FX market participants over the past few years, and this is true of liquidity services as well. Of course, the big shift appears to be that banks are moving from a principal business model, where revenue is generated from spreads, to an agency one, where revenue is generated by charging a fee.
Currenex has launched a new trading platform, X2, designed in response to the changing liquidity profile of the FX market and the evolving requirements of institutional FX traders.
One important feature of the new platform is that it is based on HTML5 technology, in contrast to the Java-based multibank front ends that populate the market today.
Speaking exclusively to Profit & Loss Rick Schonberg, global head of product for trading and clearing and the North American head of trading solutions at Currenex, says that although Java “serves its purpose today and will for many years”, there are advantages to having an HTML5-based front end.
The subject of liquidity is very much to the fore in foreign exchange markets again following what has been termed a “flash crash’ in Cable in early Asian trading.
The pair broke through 1.2600 and fell very quickly to below 1.14 before going on a mini rollercoaster ride before finally recovering to 1.24.
Although the move is very much being seen as a flash crash, sources say there was good trading volume most of the way down with markets only getting very thin on a break below 1.1800. The low according to Thomson Reuters Matching, which is the benchmark for Cable high/lows, was 1.1378.
On October 7, Cable flash crashed in early Asian trading, leading to chaos in the market and an official investigation into events surrounding the move. Colin Lambert takes a look at what happened.
A few minutes into October 7 UK time, at 12.07.03am to where there are grounds to believe that the transaction is be precise, Cable traded through 1.2600 having fallen 30 points in the previous minute. Just 23 seconds later it traded below 1.2200 and 45 seconds later it had traded at 1.1378 on one platform.
Just two minutes later the market was trading back above 1.2100 and just 10 minutes after the initial move, Cable was trading above 1.2400. The market had “flash crashed”.
A new survey of hedge funds finds that almost half of respondents believe that decreased market liquidity “is a secular shift that is here to stay”.
The study was conducted by State Street in partnership with the Alternative Investment Management Association (AIMA). It finds that regulations stemming from the 2008 financial crisis, coupled with historically low interest rates and slow rates of growth in the global economy, have constrained the ability of many banks to perform their traditional roles as market makers, which in turn has impacted broader market liquidity conditions.
You can tell things are expected to be quiet – Happy Thanksgiving by the way to my American friends – when this column turns to those great philosophers Ozzy Osborne and Clint Eastwood for inspiration, let alone – and this is not for the first time – going all “Oliver Stone” on you. Either way, I suspect December is going to be a very interesting month, to finish off a quite extraordinary year in terms of peoples’ ability to get things wrong.
Giovanni Pillitteri, global head of foreign exchange trading at GTS Securities, talks to Profit & Loss deputy editor, Galen Stops, about how his firm takes a holistic view of financial markets in order to build effective FX strategies.
In recent years there has been a well-documented trend of non-bank market makers expanding out of their traditional core equities business to trade FX. GTS Securities is one such firm, with Pillitteri explaining how its equities expertise can help inform and improve its FX strategies.
“We look at the various asset classes in a very holistic way and there are multiple strategies that we have that has correlations between FX and equities,” he says.
In a speech in New York last night, Timothy Massad, chair of the US Commodity Futures Trading Commission (CFTC) argued that the changing nature of liquidity is not principally caused by regulation.
Discussing the various impacts of the UK decision to leave the European Union on June 23, Massad said, when discussing liquidity in derivatives markets, that during the vote and immediate aftermath prices did not disappear and market depth was good.
However he added, “We must also recognise that liquidity today has changed. There is an iconic model of liquidity: traditional dealers who use their balance sheets to make a market for their customers regardless of price. Dealers who will catch the proverbial “falling knife”— that is, they stand ready to buy even if prices are rapidly falling. That is not how our markets work today.”
New regulations imposed on banks since the financial crisis could be contributing to “flash crashes”, according to Christopher Giancarlo, a Commissioner at the Commodity Futures Trading Commission (CFTC).
Speaking at ISDA’s Trade Execution Legal Forum, Giancarlo said that when the British pound suddenly dropped 6% against the US dollar in October, this flash crash was exacerbated by a lack of market liquidity.
He continued: “In fact, there have been at least 12 major flash crashes since the passage of the Dodd-Frank Act. The growing incidence of these events shakes confidence in world financial markets.
Isaac Lieberman, CEO of Aston Capital Management, talks to Profit & Loss deputy editor, Galen Stops, why it’s hard to find uncorrelated markets to trade right now.
“Volatility is very compressed right now because there’s a lot of central bank activity and markets are very highly correlated,” says Lieberman.
He adds that the FX market needs a “theme” that will cause it to break away from other markets, but that in the meantime “we’re certainly waiting for volatility to return”.
Lieberman says it’s become very hard to find uncorrelated markets, with equities, rates and FX all trading in unison and therefore dampening volatility. One reason for these correlations is the lack of interest differentials, but he also highlights central bank intervention as another factor that is causing this.
Colin Lambert has retrieved the trusty Profit & Loss Crystal Ball from the dark recesses of the office, given it a wipe, and peered into the future to produce 10 predictions for 2017.
There is little doubt that as an industry foreign exchange is a more optimistic place than it was just 12 months ago – and hopefully the majority of themes in this year’s Crystal Ball reflect a more upbeat message.
es, the coming year will not be without the challenges of legal battles that have dogged the industry for the past three years, but if nothing else the shock factor has worn off and most people see what is happening as the continuation of a long process.
A new paper uses trade repository data to forensically analyse the Swiss franc de-pegging and while Colin Lambert finds its conclusions are familiar, the paper offers other insights
The story is familiar to anyone in the foreign exchange business – on January 15, 2015, the Swiss National Bank shocked the markets with the announcement it was abandoning its Swiss franc ceiling to the euro at 1.2000. Chaos ensued as EUR/CHF collapsed over 40% before recovering sharply, after which the industry was left to rake over the ashes of what was to many a debacle.
In recent years, the FX market has had to cope with some major spikes in volatility, forcing firms to adjust how they trade this market. The number of large market moves on the back of thin liquidity during unanticipated (and anticipated) market events seen last year – from SNB to Brexit to the US elections – raises the question whether there a need for a new “FX Playbook”.
Speaking at Profit & Loss Forex Network Chicago, Stephen Flanagan, executive director, global FX e-commerce risk manager at JP Morgan, highlighted how firms have made adjustments.
Profit & Loss introduced a new format at Forex Network Chicago, which took place September 28-29. The second day was dedicated to the Profit & Loss Challenge, during which conference participants broke into working groups under five key topics: Geopolitics, Regulatory, Liquidity, Execution and Technology.
Raising the curtain on the day’s discussions during a new format on Day 2 at Forex Network Chicago, managing editor Colin Lambert kicked off with a series of questions to get the conversations going with topic speakers.