The Reason Why Trading Currencies Is Now The Most Difficult Since Lehman
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Feel like trading FX has become next to impossible, with massive, gaping bid-ask spreads, strange "tractor beams" at key technical point in major pairs, completely unexpected stop loss runs, and - of course - central banks behind every corner? Don't worry you are not alone. According to Bloomberg, that's precisely the case as "it hasn’t been this difficult to trade currencies since the collapse of Lehman Brothers Holdings Inc. shook markets worldwide."
The difference between the price at which traders are willing to buy and sell major currencies has widened to the most since the 2008 financial crisis, according to data from JPMorgan Chase & Co. Bid-ask spreads have expanded even as the amount of trading climbed amid the most foreign-exchange volatility in over a year.
JPMorgan Chase’s measure of bid-to-ask spreads is about 18 percent, the highest since 2009. The gauge is calculated by dividing the gap between the prices at which traders are willing to buy and sell currencies, by the mid-point between the two.
The problem is that while it is not as expensive to trade as it was after Lehman collapsed, traders now have to contend not only with momentum ignition algos which trade in a very haphazard, utterly irrational way to catch as many traders offside as possible (the exchanges selling the stops data to the highest HFT bidder does not help) , as well as with even more irrational central banks, which one day promise one thing, only to turn around the next day and blow up everyone who believed them.
From Bloomberg: The root of the illiquidity is surprise central-bank policy actions, led by the Swiss National Bank’s decision last month to drop its currency’s peg to the euro. Traders are less willing to make wagers as prices swing, with the franc surging 15 percent versus the shared currency and the Canadian dollar dropping 6.7 percent versus its U.S. counterpart since the start of the year.
“The moves took people off guard,” said Peter Gorra, head of foreign-exchange trading in New York at BNP Paribas SA. “Depth really has changed and the lack of liquidity will remain as the market is broken for the time being.”
Liquidity has declined as the bank’s global option gauge of currency swings climbed to as high as 11.68 percent last month, the most since June 2013.
Another reason why liquidity has collapsed: in the past year a crackdown on FX trading has revealed that the bulk of the institutional market participants engaged in illegal collusion and have been chased out (none have gone to prison of course). It is so bad in fact that as the NYT reported, the "U.S. Is Seeking Felony Pleas by Big Banks in Foreign Currency Inquiry" (yes, funny).
But the biggest reason why after completely manipulated stocks and bonds, it has become almost impossible to trade FX as well is well-known to everyone:
“Central banks around the world are now massively in play,” said Neil Jones, head of hedge-fund sales at Mizuho Bank Ltd. in London. “And the sovereign-divergence trade is more in the cards than it has ever been, keeping volatility bid. January saw a decline in liquidity, yet there isn’t a crisis or contagion.”
So just wait until there is a crisis or contagion. And as to what happens, when more central banks pull an SNB and lose control, well... it will be best to watch from very far away.
Until then, pray to this man, who also happens to be one of the main reasons why trading FX is now next to impossible.
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