The Last Look…

“Normalcy” has returned to some elements of financial markets with the return of the weekly CFTC Commitment of Traders report, which begs the question – is there a positive reason for this data release? From a market structure perspective, I am struggling to think of one.

I raise this because, as noted, the fallout from the Ion Hack finally seems to be abating, but also because I received a message from a trader recently expressing their frustration at not being able to access the data “to help their trading”. The “help” in question was not, I was assured, merely a question of finding extended positions in the data, but it was a part of it, with the trader overlaying the CFTC data with their own technical analysis to find the “crowded” trade that could be at risk of reversal.

There is absolutely nothing wrong in this, of course, but it does beg the question, why is a regulator – in the interests of transparency – helping create what could be the conditions for sharp market reversals? I fully understand that such reports can help regulators monitor markets, but do they have to be public? Could they not be used by the authorities as I suspect they were intended, to help flag potential risks, but kept out of the public limelight aside from investigations into alleged wrongdoing or flash moves?

In FX terms, this is not a big issue, thanks to futures’ relatively minor role in the global market, however my conversant was keen to see it extended, where possible, to OTC markets. This would be, I suggested, nigh on impossible thanks to the reporting burden and sheer amount of data involved, but I don’t see how it can help the market function anyway.

This became a broader issue following the short squeezes seen in equity markets around the GameStop episode, and if anyone thinks boosting assets to ridiculous and unsupportable levels is a good thing, then we are destined to be in different camps on the debating forum. Effectively, what the availability of data on major traders’ positions provided were conditions ripe for moves that were not exactly “flash” but were equally irrational. It also served to increase the violence of such moves.

It’s another measure aimed at taking risk absorption out of markets and helping the multitude of short-term, high frequency, trading firms

At the heart of the issue is the difference between listed and OTC markets, of course, but underpinning the listed market advocates’ rationale is providing information to the retail investor or trader. At which point, I get a little controversial in my view by asking, should we specifically care about them?

Major financial markets, to the retail punter, should come with a health warning – they are contesting in a pool with participants who have multiple times the resources and, importantly, the technology to react quickly – certainly quicker than the average retail punter – when things go wrong. To me, financial markets have always been a “consenting adults” playground, if things go wrong, then you have to take your lumps and move on and (hopefully) upward.

I don’t have hard data (when has that ever stopped me?) but I suspect the number of retail, or “small institutional’ players as certain brokers like to term them in an act of self-aggrandisement, is far outweighed by the number of investors in mutual, pension and other funds. By all means allow them to do their research and pick their stocks, commodities and currencies by whatever method they prefer, and also provide them with market access to execute their plans, but I don’t see the market structure value of providing data on other participants’ positions.

At best, this provides traders with an improved form of mirror trading; at worst it provides the basest elements in the markets with the ammunition to plan ambushes. I also think there is a broader problem under the radar in that these data are not just being used by retail traders. Institutional firms have access to this as well, and they can act in bigger size if they want to disrupt the market (nickel anyone?).

Ultimately, all public disclosure of positions does is narrow the time horizon in which popular positions are likely to be held; exacerbate any pullbacks; and take some of the steam out of trends. This leaves us with markets of the character of much of the last decade – lots of short-term whippy price action, but lower risk of positions going wrong on a large scale.

It’s another measure, in other words, aimed at taking risk absorption out of markets and helping the multitude of short-term, high frequency, trading firms that support so many US exchanges (and others worldwide of course). Is that helpful for markets? I remain unconvinced.

colin@thefullfx.com