Happenings in and around the FX Market. Newsletter for November 2016.
US Presidential election. Decided already?
The evolution of the FX market. What is the future path?
Not much to write home about on the FX side. Markets seem quiet with focus on key events. Mainly CB announcements get a quick 1% move and then it seems to remain quiet again to the next event.
US Presidential elections coming closer and seem to be decided before people have a chance to vote. As I am neither a citizen nor a resident anymore, I do not really feel there is value in commenting too much on it. The choice is clear. Either the first woman, which nobody really likes or trusts, will be president. The other choice is the guy with lots of money, believing this election is a show about him and otherwise is rather clueless what has been going on in the world, outside of his golden Tower and his Twitter account. The current polls clearly predict that the same woman will move back into the White House, where she lived as First Lady for eight years. Ending in another typical “half guilty” Clinton scandal in 2001.
Still, we would warn that with Trump, we might have another “closet voter” effect and polls could be similarly wrong as they were with Brexit in the UK and the “right wing party” AfD in Germany. We will see on November 8th if the closet voters can swing this around for the Donald. I am clearly not as committed to a Clinton win, as many of the Bookies are:
For the FX Market, we would expect a Trump surprise to bring major volatility into the entire Financial Market. Hillary Clinton will extend the Obama years with continued growth in debt but possibly more involvement in foreign policy. Overall more of the same and very little short-term uncertainty, i.e. low volatility for the Financial Markets.
The evolution of the FX market and its future path. The world woke up to a big surprise on October 7th. The FX Market Flash Crash in GBP during “light trading” Asian markets. Overall not something unexpected for us. There were many lows posted, and every exchange and market maker could pick their own.
People complain about HFT and auto hedgers and the lack of “real” market makers. People complain about the lack of liquidity in this 7% move or better in this 12% roundtrip in a few minutes. People complain about slippage on stop loss orders. People complain about k/o options being triggered. People complain that this was manipulation of a few. Not too many happy buy- and sell side participants in the FX Spot market these days.
In other words, the FX Spot market has undergone a large transition in the past 8-10 years. Let’s look at 15 changes that have quietly impacted the FX market in the past decade:
- Growth in the number of ECN’s, lead to more fragmentation, with HFT counting for 60-80% of the maker volume on most of these venues.
- Traditional Interbank Platforms like EBS and Reuters Matching opened for buy side, especially HFT. These Interbank Platforms are now losing volumes quickly.
- HFT as direct liquidity providers for buy- and sell side participants. Even for top tier banks.
- Emergence of dark pools, lead to more fragmented liquidity.
- Key players have stopped to run for “top spot” in Euromoney survey. Providing liquidity more selectively now.
- Move of flow management from “stubborn and slow” traders to Algo trading and auto hedging.
- Wrong assumptions of the size (BIS survey) and the liquidity of the FX Spot Market.
- Shut down of bank proprietary trading desks.
- Misconception of “Liquidity Mirage” as true liquidity, seen in aggregator.
- Customers chasing best execution, focusing on aggregated top of the book of 5 to 20 market makers and venues. Leaving tracks of execution in the entire market.
- Changes in customer behavior, mainly due to regulations.
- Lack of market information and color.
- Lost trust in bank providers due to investigations of past years and present.
- As a self-regulated market, the FX community missed to react to these changes and to integrate the new breed of market makers into updated codes, standards and best practice guidelines
- Fintech disrupters start to gain traction and hijack some traditional FX flow and revenues to cheaper and more customer friendly channels.
What will happen in the future? We believe that “mini” flash crashes will become daily business, as soon as one-sided volume hits the market. Regulators will take a very close look and most likely ban this OTC market onto a few exchanges in the next five years. This move is being anticipated and pushed by some platforms through heavy lobbying and by others through big investments. Traditional Stock Exchanges like Deutsche Börse, Bats and Nasdaq have started to position themselves in the FX Market. For them, it seems the logical path for this market, which is traditionally tracking behind the equity market evolution in so many ways.
For a more detailed report on how future changes in the FX landscape will impact buy- and sell side participants, please feel free to contact us directly.
We wish everyone HAPPY Halloween and Thanksgiving already.