FX Liquidity: The great disappearing act, GBP style October 7th Asian hours

Upon review of our proprietary interbank market data in GBPUSD late Thursday US & UK/ early Friday Asia (23:07 GMT Oct. 6th / 07:07 HK Oct. 7th), it clearly debunks the low that the media is referencing, 1.17 or 1.18 handle.

It is clear the broader market is under strain, and FX liquidity has been impacted for several reasons. A few thoughts across our FX TCA data and themes from our more than 100 buy-side clients on four continents:

• The low that several market participants have agreed on is 1.1491 as of now. This is quite different from what you see on Bloomberg where they still have something on the 1.17 and in other news articles the 1.18 handle. There were bids hit on a few platforms on the 1.13 handle that we heard about, but not enough size that anyone is considering it relevant for option one-touches, etc. There were several prints at and around 1.15. While each bank can debate the merits of the right level (some think 1.1830), clearly liquidity is atrocious even despite out of hours trading time.
• As far as our ITAP calculation is concerned, we are not going to use anything below 1.1491. That being said, anyone that was hitting bids in that short window below 1.2250 or so is going to have a very poor result compared to any day’s average rate including ours as the market was only there for a matter of minutes and spent the rest of the day above 1.2250.
• Structurally, we are seeing more and more of these types of moves in the FX markets, and expect to see more of them moving forward. In our view, the regulatory environment has taken away banks’ ability to carry proprietary trading risk, both in the US, and in Europe. Unfortunately OTC is becoming more of a quote and cover market by the day. Banks can’t hold much risk or take a proprietary position, coupled with fewer market makers, these kind of moves are the result.
• We saw a similar move in USDZAR yesterday as well if you look at that chart, again same thing. None of the bank traders can take a punt and hold a short USDZAR position anymore, so the result is no one will show the offer once it gets moving higher, so you get these very quick, autoregressive moves with no liquidity.
• Non-banks making markets, Hedge Funds (HF) & High Frequency Traders (HFT), can still act like the banks used to (from a regulatory perspective). If more HF / HFT’s enter in this capacity to provide the liquidity banks no longer can, we could see some structural improvement in liquidity during the calm markets. As the article below references during times of stress, we are going to continue to see these types of moves anytime someone wants to unload a lot of risk in a short amount of time.

Included below is a link from Zero Hedge, that utilizes JPM’s research to describe Friday’s GBP events. The author from JPM sums up the reality of HFT liquidity nicely, despite Zero Hedge’s sexed up headline, blaming them for the crash in GBP, incorrect in my view, I think it is a PR stunt for readership. This information goes to many discussions I had at TradeTech London with large asset manager firms regarding HFT’s role and their provision of liquidity. We can talk directly to get in to the nuance if of value. Reach out at +1 508 283 5852.


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