A new research note from Pragma Securities is seeking to challenge the perception that banks are increasingly stepping back from providing liquidity to FX markets.
The firm notes in the paper that the “typical narrative” is that
reduced appetite for risk, controls on
capital at banks, as well as juniorisation of dealer staff have all contributed to this withdrawal that led to an “increased fragility of the FX markets”. The paper adds that the general consensus seems
to be that liquidity is getting more expensive, and while spreads are
narrow in times of normal volatility, in
times of market stress dealers effectively pull away from the markets, contributing to extreme volatility and events like flash crashes.
Pragma Securities has released a new report that analyses FX spot market data in order to provide a more accurate definition of exactly what constitutes a “flash crash”.
Arguing that previous reports on flash crashes “have tended to look at individual events in isolation” and that “discussion of the recent trend at industry events has been correspondingly anecdotal”, the paper attempts to define what a flash crash is and then systematically track the incidences of flash crashes using this definition.
The latest round of FX turnover data from a group of the world’s FX Committees show that volumes dipped slightly in October 2018 compared to April last year when they hit a new high mark. Average daily reported UK FX turnover was $2.6 trillion per day in October 2018. Although this is the third largest turnover figure on record, it represents a 4% decrease from the record high of $2.7 trillion reported in April 2018. Turnover by instrument was mixed in the UK. Spot increased for the third successive reporting period, gaining 3% compared to April 2018 to reach $775 billion traded per day. This represents a 14.5% year-on-year increase in volume.