The Last Look…
Posted by Colin Lambert. Last updated: October 4, 2022
The next week or so will see both EBS and Refinitiv release their volume data for September and both should make for decent reading. The data from the first group of FX platforms highlights what we all knew – September was a really busy month for FX markets – so the primary venues should also have good news to share.
I have thought this before of course, and, not for the first time, been wrong, but when it comes to the volume data from these venues, through the prism of the events of the past couple of weeks, there are a couple of things to understand.
Firstly, if they don’t see a reasonable bounce in activity – the other ECNs to report are up around 30% year-on-year – this tells us that their historically strong position in Yen (EBS) and Sterling (Refinitiv) really has disappeared. These markets have been very busy and that historically has meant good news for the respective primary venue.
The second – and more positive – point, is that notwithstanding what the volume data shows, these venues did their job in stressful conditions. Talking to people in the industry it is clear that both venues provided decent liquidity and solid market data (which is now, it could be argued, their primary purpose – no pun intended) throughout.
To put some context on things, the Bank of Japan intervened (officially) for the first time since 1998 – a year when few, if any of the “secondary” ECNs were up and running. I don’t know how the BoJ intervened, but back in 1998 it would have been using local banks, who in turn would have probably turned to the voice brokers. This then, was the first time that we saw major intervention from Japan (and we won’t talk about how the central bank sold $20 billion only to see the market come all the way back within a day) when the first source of liquidity and trading was electronic.
Talking to traders about conditions, none seemed fazed by what happened in the yen, the BoJ was sensible about how it intervened by timing it for the UK open and, I am told, there were trades most of the way down – in no way did the market gap the way it used to.
The same seemed to happen in Cable during the collapse to a new all-time low just a day later, although as someone very pertinently pointed out last week, there was an element of fortune in that it happened at a time (very early Asia) when traders typically leave resting orders on the CLOB rather than await a move to the level, as is often the way in more liquid times.
Some peoples’ definition of “orderly” has been horribly skewed over the years to the degree that any volatility is seen as “disorderly”
Refinitiv’s Matching traded, as I hinted at last week in this column, at most points on the way down, and only got a little scratchy on the initial rebound. Since the mayhem of that day, the market has, I am told, been busy, but orderly – and that, I believe is the big story here.
Some peoples’ definition of “orderly” has been horribly skewed over the years to the degree that any volatility is seen as “disorderly”, but what we saw in both the yen and Cable was anything but. Yes, the market moved, a reasonably long way, and yes, it moved quickly, but whoever wanted to trade could do so throughout – there is nothing disorderly about that.
Historically at times of great uncertainty and higher volatility, the FX market has tended to turn to the no-last look venues for liquidity, hence why EBS Market and Matching generally see a healthy bounce in these conditions. Now, of course, there is more competition in LMAX Exchange (which does not formally publish FX volume data on a monthly basis) and Cboe FX’ firm pool. The latter saw a 42% increase from September 2021, above trend, but its month-on-month growth was actually below the average at 16.8%.
There is one other, more general, aspect to look at going forward – will the volatility in these currencies be sustained? FX markets in recent years have been characterised by relatively short bouts of volatility, before settling down – will it happen here? The chances are it will not (there’s the kiss of death – sorry everyone!) because there are simply too many events taking place and we have, for the first time in a decade, proper interest rate divergence.
This is probably good news for anyone in the FX business, and less than good news for hedgers, but what is positive for everyone is that the FX market structure is standing up well, and the CLOB model continues to play a crucial role in that structure.