WM Fix Trading Still Predictable, But Less So: Pragma

New
research by Pragma Trading shows that while the situation has eased, there is
still a degree of predictability around the direction of the London 4pm
WM/Reuters Fix.

In research
last year, Pragma showed that the widespread use of TWAP (trade weighted
average price) algorithms by executing agents during the Fix, had led to
predictable trading patterns that were not only observable but also tradable,
however it now says that the momentum pattern has “deteriorated to the point it
provides no value”.

Rather than
seeing the shift as evidence banks and customers have abandoned the TWAP
methodology of executing Fix business, Pragma says market participants are “modulating
their trading behaviour based on price action to “arb away” the predictability
we’ve reported on [previously]”.

The latest
research note, which studies Fix trading activity in Q3 2016, does suggest it
is still possible to discern the direction of the Fix, however it says the value
of the information represents about half a basis point in predictable momentum,
followed by a one basis point reversal.

Pragma
stresses the latest findings are only related to “normal” 4pm Fix sessions,
i.e. not those involving month or quarter ends when amounts traded are much
larger, as it does not yet have a large data set on which to conduct analysis
for the month ends and as such is unable to determine whether the dynamic has
shifted totally.

Significantly,
the firm reiterates its criticism of asset managers’ use of the Fix to hedge
exposures, noting, “In treating the WM/Reuters Fix as an actionable trading
benchmark, the buy-side is forcing too much liquidity demand into too short a
window of time. Significant net imbalances result from correlation among market
participants’ liquidity demands, and create market impact for those on the
wrong side of the imbalance.

“These
participants are consistently paying a significant premium to reduce risk
against a benchmark that is, ultimately, arbitrary. Buy-side firms should
continue to advance these conversations internally and with their customers in
order to achieve best execution for asset owners.”

Colin_lambert@profit-loss.com

Twitter
@lamboPnL

Twitter
@Profit_and_Loss

Colin Lambert

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