Market Doesn’t Move In Random~

March 17, 2007

OK I’ll try and very very briefly explain the examples I’ve already listed, but don’t really have time to list a load more I’m afraid.

1) Central Bank Intervention;

The central banks of many countries are active in the foreign exchange markets, both to manage the size and diversity of their foreign currency reserves, and to dampen down excessive liquidity in their own currencies. Most visible amongst these is the BoJ, who have often over the past few years been very aggressive buyers of USD/JPY whenever the yen looks like it’s getting too strong (in the eyes of the Japanese MoF). As this is often at or near the same levels time and time again, this activity is imho arguably non-random.

2) Fixing Trades;

There is a growing use of pre determined times to execute larger trades. Several services exist to provide a ‘benchmark’ rate at a certain time each day, and a customer with business to transact that requires a clear audit trail showing how the price was arrived at can choose to ask their bank to execute this trade ‘for the fix’. This means that the Bank in question undertakes to do the trade with their customer at the fix rate (sometimes with a spread built in, sometimes not). Obviously, if the order is a very large one, the bank is liable to start executing the business in the market a little earlier, in order to complete the trade at or near fix time. e.g. for a large EUR/USD sell order, if, for example the EUR/USD market is at 1.2050 when the bank is given the fix order, and is at 1.2000 whe the fix is published, the bank will hope to have sold Euros from 1.2050 all the way down to 1.2000, rather than scrambling to sell the Euros immediately prior to the fix. Obviously this raises a potential conflict of interest for the bank, as the lower it can drive the market at fix time, the more money it will make. Thus fixing times can be a little volatile, as the banks will attempt to quickly push the market in their favour right before the fix. Main fix times for London traders are 12:00 (Frankfurt Fix), 13:15 (ECB Fix) and 16:00 (WM Reuters Fix). In my experience, corporate customers often favour the FFT fix, while institutional names favour the WM fix (for reasons not worth delving into here). No-one likes the ECB fix as the rates are too volatile relative to where the market actually is at 13:15, for structural reasons. Note all times are London time. Again, I think there’s a good case to be made for this constituting non-random activity.

3) Squaring up;

Simple really, if there’s been a big afternoon move (particularly on a Friday or before a holiday) then many people will square their positions prior to London, or often NY closing. This particularly applies to bank spot desks, many of whose traders do not always run overnight positions. Thus there is often a little counter-move prior to the close. Again, I think this is far from random.

Hope this clarifies a little. They were the best three examples I could think of at the time but I’m sure I could drum up more if I could be bothered. But I can’t. đŸ˜‰

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