The Last Look…

2026 has started pretty much how 2025 proceeded – random events spiking interest in markets, although this year, thus far, they haven’t triggered major volatility. Normally, this environment would prompt me to suggest that more risk should to be taken in the market to generate P&L, but the lack of real volatility suggests other forces are at work, are they good for the market, however?

Those forces are the existing risk management policies of many market makers, most notably the banks, which measure risk holding in seconds, perhaps a small number of minutes, as internalisation dominates. Historically – and you don’t need to go too far back to see this – the sheer randomness of the events we are witnessing would have driven vol seriously higher, and it would have stayed there. Thus far in 2026, this hasn’t really happened.

It could be that managers are looking at the numbers, where they are making really good money thanks to the “broker” model, and not seeing the value in risking change. This feeds into the more general risk-averse culture that exists in today’s banking world, thanks, admittedly, to the misdemeanours of a previous generation.

This does not have to be the case, however, for surveillance systems are so much better than they were, which should provide a sense of security for those pondering increasing risk. That said, I sense that the broader culture is still too confused over what is, and what is not, acceptable, or even worthy of clarification – we exist in an environment within which this concept of risk is tantamount to a dirty word.

This is a shame, because opportunities are being missed, but again, to exploit them, a slightly different approach needs to be taken, which involves the “R” word again. What is needed to maximise returns, surely, is more discretionary input into the risk management process on dealing desks? At the moment, the machines run everything, and they are programmed to make small incremental gains. Fair enough, but look at the Macro picture – there is so much happening that is being missed by so many in firms that remain the heart of the FX business.

As I often like to do when talking about the trading business, I would invoke what is happening in the hedge fund world – albeit a little later than expected. A large number of hedge funds are looking to recruit macro experts to complement their systematic approach. This makes perfect sense given the performance numbers involved. At the end of November, the latest data currently available, discretionary macro, as per the SG Macro Trading Index, was returning more than double the same sector using quantitative techniques.

Clearly, those who are taking a less systematic approach to markets are thriving, while those that rely upon the models are struggling

In the CTA world, the BarclayHedge Discretionary Traders Index ended 2025 near +8.72% (some funds still have to report), while the Systematic Traders Index was +1.64% (the Elite Systematic Traders Index was just 0.03% up). Clearly, those who are taking a less systematic approach to markets are thriving, while those that rely upon the models are struggling.

I understand that the profit streams are different, but imagine the difference to a bank’s FICC business if they could add a unit operating on a discretionary basis? I stress they are not comparable, but the e-business is akin to systematic, and it performed well thanks to market share, but how much better would the overall business be if there was an old-fashioned discretionary desk operating?

There are a few banks out there with this model operating, and while they cannot tell me numbers, at least two have told me the business has outperformed thanks to an increased risk function, but more importantly, who actually runs that risk. You have to feel sympathy for anyone in the systematic world trying to programme a trading function, for far from settling down in 2026, the early signs are that things are going to get even more bizarre and chaotic.

To bring us back to the question at the top of this column, therefore, is it good for the industry that these events are not triggering more vol? It really depends upon where you sit, and while the trader in me wants to say of course it’s not good, even I have to accept that for the hedgers – the people the industry is meant to be serving, this is pretty good, because even though there is uncertainty, the market is ignoring it – or is frankly bored by the antics of Washington DC – and so they can hedge with a degree of ease, according to their schedules.

There is a bigger picture, however, for the industry takes in more than just investors and corporates – and here, I have to turn, against my nature and better judgement, to data. In the BIS Triennial Survey, the Reporting Dealers, Other Banks, Hedge Funds and Private Trading Firms segments were responsible for 76% of spot business. These firms are not only hedgers, therefore more volatile markets are probably good for business – if they have the structure to take advantage of it.

It is hard to get away from the sense that FX markets underreacting to events is unlikely to last. At some stage, it is likely that the TACO strategy, which is one factor subduing volatility, blows up, and players better be ready. To do that, they need to broaden their thinking and take a step back, maybe a decade or so, and make sure that their approach to risk is multi-faceted. At the moment, too many firms think internalisation is success – it can be, but only if the resulting risk is internalised to varying degrees – and occasionally for a lot longer than is currently the case.

colin@thefullfx.com