The Last Look…

Sometimes, I hear an idea so ostensibly silly, I feel the need share it – and today is your lucky day. Of course, this would not be the first idea I have dismissed out of hand that becomes reality!

In some ways this is an alien concept to so many in the FX world today, but a certain generation (mine!) will remember the mix of anticipation, excitement and nerves that preceded a major data release. Which is why I was surprised, when talking with a couple of prop traders, recently it was suggested that all major economic data be released out of market hours.

My scepticism was helped by the thought of taking so much fun out of the market – it may not always go right (it doesn’t!) but trading markets around data releases is good value – why stop it? The idea, it appears, comes from a small group of people in the business, many of whom had either been carried out, or had had to do the carrying out, following large moves post-data. The idea is, simply, if the data is released when the market is closed, then the over-extended moves will be reined in, and there will be less pressure on stop losses and margin calls (and the fact that there was attention on margin calls just highlights how big a role retail/small institutional is playing in today’s FX market).

Immediately my response was negative – starting with the rather important point that the FX market doesn’t actually close, unless the idea is to release all data at the weekend, and even then, there are places to get pricing. So to start with, I observed, there is no real window during which the data can be released, to which it was suggested that it could still be released at weekends or during a 15-minute window at the end of the US day, when platforms are being re-booted for the date change.

This was, to me, bordering on nonsensical – take the most illiquid time of day, when the fewest number of dealers, or quants, are at their desks, and release major data on the world! The counter-argument was simply that by the time everything re-opens, the “right” price would be streaming and the reaction would be a lot calmer. Those that were the wrong way would be cut out, but their stops would be executed at a “fair” level, rather than “run” by the holder of the order(s).

It is at this point I know what you’re thinking and I made the same observation – what if your stop is 30 points away and the market opens 70 away? How is that better? At which point the conversation descended into anarchy and, frankly, I lost interest.

As can happen though, a few weeks afterwards, I thought about it a bit more and wondered if there was a better way to release these data?

The school of thought that says, “if it ain’t broke, don’t fix it” has a point, for problems around data releases are, thankfully, rare. That said, we do have instances of leaks, or errors in the publication which can cost significant money. More pertinent, perhaps, is how some players seek to gain an advantage in gaining access to the release in front of others.

The obvious defence in the face of such activity is the one chosen by so many LPs – widen the spread (significantly) for a few seconds either side of the release until they know the data. Another option is to simply not stream for those few seconds, although I am not sure how that sits in exchange world, for example, where designated market makers are punished for not streaming a price (although this is less an issue in FX of course).

This is by no means the first lack of respect for genuine LPs I have witnessed, and it will not be the last, but hopefully moods will shift over time

There are some, I understand, who believe the authorities could use more efficient mechanisms to transmit the releases, but if you are aiming for the fairest environment possible, then surely the current system of timed release (often with a journalist lock in) via the major news services seems to work best. The journos are in a room cut off from the outside world – they are given the data ahead of time to ensure they can not only get it right on release, but can also publish some analysis.

This all sounds very much like the status quo, however I suppose it is fair to question whether this is the best way – especially in a world dominated by automation and unbelievably fast speeds of transmission, compared to the times when these procedures were first put in place?

One option could be an automated release from the relevant authority to which all players in the market can subscribe. The problem is this would be a heavy lift for, as an example, a government department often seeking to cut costs, not increase them. One possible solution is a connectivity fee for all who connect, but then will the regulators like this given how it may shut out so many smaller players?

Aside from the rather bizarre nature of my initial conversation, I suspect one reason this subject was even raised is liquidity – or rather the sense of entitlement on the part of consumers that it should always be available to them. We have lived through a prolonged period of low volatility which has seen a large number of liquidity recyclers enter the market as they sense an opportunity to churn and burn flow for fractions of a tick. As things get busy, a lot of these firms disappear and, naturally, spreads widen.

This happens because some erstwhile genuine LPs have exited the market or pulled back because they simply couldn’t win enough business during quieter periods; or those LPs that are left and genuine risk absorbers who, at a spread, will take the risk on. The need is to clearly explain to some consumers that 0.00001 wide in EUR/USD is the outlier, not 0.0001 (or more).

Data releases can often constitute major events in the markets, and as such it is the right of every LP to protect themselves during such periods – otherwise it is tantamount to standing in front of a runaway steamroller to try to stop it, rather than wait for it to pass and then jump on and apply the brakes.

This is by no means the first lack of respect for genuine LPs I have witnessed, and it will not be the last, but hopefully moods will shift over time. If people are worried about their positions over numbers do one of two things – don’t have the position or swallow the pain (and the pleasure) when it goes wrong (or right). Of course, a third way is to make a price straight after the numbers themselves…

The very fact that some consumers feel the need to make such a strange suggestion in having data released out-of-hours is not so much a complaint about how the data comes out in my mind, it is a “back-door” complaint about not being able to get a price whenever they want it.

There is only one observation to make on that – you can always get a price when you want it, it just may not be the price you want. Welcome to the real world.

colin@thefullfx.com