The Last Look…
Posted by Colin Lambert. Last updated: May 8, 2023
I had some great conversations off the back of last week’s column regarding the Glen Point case and about option barriers in particular – it’s something that has always been an issue in our business, and probably will remain so, but it was interesting how divided my (very limited) feedback was.
What was initially notable to me was the number of people who thought I was a little ambivalent on the rights and wrongs of the Glen Point case – I should make it clear that I cited that example from the FX Global Code at the end for a reason!
My thinking is very much in line with what seems to be the overall majority of the industry – if there is one motivated seller and a similarly-minded buyer can’t be found, the inference is very much what the US authorities made of it. My issue, and point of the column, was how the US authorities could have made life much easier for themselves had they a knowledge of, and were to support, the Code.
More generally, quite a few people raised the subject of the eternal “sovereign name” often rumoured to be defending a barrier of some sort. Should these names not also be arraigned by the US justice system for its activities, or is its sovereign status a barrier (pun intended) to such a course of action?
My response was pretty firm – how do you gather evidence, if it exists, based upon a rumour? One benefit of the Code is that is has, to a degree, curtailed some of those “market colour” conversations that were very much based upon a sales person’s imagination and desperation to talk to a customer. This means there are less, according to my sources anyway, of these rumours doing the rounds.
Of course, this does not mean that such activity doesn’t take place, it’s just in the case of Glen Point there are (inevitably) chats involved that offer pretty damning evidence, and it all took place at a time of the year, let alone a day, where only someone highly motivated would take on a large position in that fashion, and demand the market hits a specific level.
What is did find striking was an admittedly minority school of thought that said this is yet another example of how the FX industry should be a market for “consenting adults”. This is a point I have made before on other subjects and I suppose it also plays a role in option barriers.
Should, for example, both sides of a barrier trade be able to trade with abandon and have a battle to see who can win the day? After all, if the owner(s) of the Glen Point barriers had stood on the bid long enough in the late (US) hours of Christmas Day, it could have proven to be a very expensive episode for the fund.
The fact is, at the end of the day, the fund traded in an unusual fashion at a very unusual time of the year – and that should get antennas twitching
Aside from the fact that the Code expressly warns against such conduct, my problem with this approach is that it tilts the market in favour of the player with the deepest pockets. This means that the biggest balance sheets in the market can write options to their hearts’ content, but barring an economic event that turns the market, they are hardly ever likely to lose (and if they are effectively hedged they aren’t anyway – this is the equivalent of an insurance contract after all).
To me, option barriers are in the same bucket as stop losses – they will be forever controversial and the subject of discord – but they are also important tools of the trade and, largely, handled well.
What the industry needs is a method of rooting out egregious examples of someone trying to take out a level – again to refer back to my point on those with the deepest pockets, if players can protect and trigger barrier options, how is that different to targeting a stop loss? The FX market is a consenting adults world, most markets are, and I don’t quite understand how the US authorities can claim investors were hurt by what happened in USD/ZAR with Glen Point without also acknowledging that some may have benefitted.
The fact is, at the end of the day, the fund traded in an unusual fashion at a very unusual time of the year – and that should get antennas twitching. The rest, like the rumours of sovereign funds, is mere white noise.