NEW YORK--(BUSINESS WIRE)--Recent changes to the calculation of the WM/Reuters spot FX rate (or ‘Fix’), coupled with a shift in how banks handle client orders, have created unusually predictable patterns in the FX markets, according to research released today by Pragma Securities. The report, titled “New Trading Patterns Around the WM/R Fix”, also finds that algorithmic traders are well positioned to improve their performance trading in and around the window.
David Mechner, CEO of Pragma, said, “In recent months, the huge, efficient spot FX market has become predictable around the 4 pm London Fix. Changes in the Fix methodology and how firms are trading around it has created patterns that can be exploited to improve trading performance.”
The research provides the first look at how spot FX trading activity has transformed since the Fix window was expanded from one to five minutes in February 2015. In response to this change, as well as to criticism around FX rate scandals, major banks have segregated Fix trading from their spot desks and trading client Fix orders using a straightforward “time-slicing” approach that divides and executes orders evenly over the five-minute window.
As a result, spot FX trading activity around the Fix window has become predictable since February, as major banks execute orders in lockstep:
- Predictable rate momentum and reversion – As orders are now split evenly across the five-minute window, rate changes have consistent momentum throughout the full period, and reversion afterward. This means that by watching the first minutes, traders can know what to expect later in the window and just after.
- Predictable spikes in volume and volatility – volume and volatility step up as the window opens, then revert back to pre-window levels as soon as it ends.
In the research note, Pragma explains that a root cause for the emergence of these patterns is asset managers’ heavy reliance on trades pegged to the Fix, which concentrates demand imbalances into a short period of time. “Buy-side firms trade the Fix to minimize tracking error against indices, but they are paying a significant price in market impact. Meanwhile, the FX markets are continuously changing, and the buy-side is being forced to take an increasingly assertive approach to understanding and directly controlling its trading,” said Mechner.
To access Pragma’s research, please visit www.pragmatrading.com.
About Pragma Securities
Pragma Securities, headquartered in New York City, is an independent provider of quantitative trading technology and analytical services. Its broker-neutral, multi-asset trading solutions power asset managers, hedge funds, brokers, banks, and exchanges. For more information, please visit www.pragmatrading.com.