Trading is predictable during WM 4pm fix, says Pragma

Solomon Teague
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Trading within the five-minute window of the WM 4pm fix has become predictable due to the widespread use of algorithms among banks and buy-side institutions, according to research published by Pragma.

The concentration of trading around the five-minute fix window, and the widespread use of time-weighted average price (TWAP) algorithms, is creating strong momentum in rate changes throughout the window, often followed by a marked reversion, according to Pragma, a provider of algorithmic trading technology. 

The effect is most pronounced at month- and quarter-end, when trading is heaviest.

Pragma research has found the pattern of trading during the five-minute window is usually set within the first minute. 


Pragma first identified this trend last July, in research that identified new trading patterns that had arisen as a consequence of the widening of the fix window. Its latest report suggests the trend has been surprisingly persistent, and that the momentum and reversion pattern is markedly stronger at month- and quarter-end than on ordinary trading days.

The study states: "Conditioned on the direction of the rate move in the first minute of the fixing window, returns peak about 10 basis points higher, and revert about 6bp on quarter-ends. On month ends, the rate momentum after the first minute of the fixing window peaks at about 6bp, and reverts about 4bp."

Guy Debelle, assistant governor of financial markets at the Reserve Bank of Australia and chairman of the Bank for International Settlements' (BIS) FX Working Group, acknowledges use of algorithms increased markedly as a result of the WM window being widened to five minutes in late-December 2014. 

This helped banks track the fix price, and was also an easy way to implement the regulatory recommendation for execution separation, he tells Euromoney.  

Shift away

More generally, the share of algo trading has increased inside and outside of the window, says Debelle. 

Banks are shifting away from handling fix orders as principal trades on the spot desk and moving toward agency-style execution, typically using TWAP algorithms that trade steadily during the five-minute fix window, according to Pragma.

The TWAP algorithm, also known as time-slicing, breaks an order into smaller trades that are executed at evenly spaced intervals, providing execution prices that are likely to be closer to the average rate during the trading period, and therefore the fix. The closer traders are to the fix, the less their tracking error against their benchmarks.


Although Pragma observed the momentum effect during the fixing window on ordinary days has weakened since the WMR fix methodology change last February, the reversion appears to be just as strong. This effect, too, is likely to decline over time, but for the trend to have persisted for as long as it has – at least a year – is unusual. 

Traders typically adjust their behaviour to avoid or exploit these kinds of trends, which quickly causes them to change or break down. However, traders have less flexibility to do this when it comes to the fixing window.


David Mechner,

David Mechner, CEO at Pragma, says: "The pattern around the fix is unusual, especially in a market as liquid as foreign exchange. The microstructure effects our research typically focuses on tend to be more granular and less robust. But the combination of factors driving people to trade around the fixing, such as regulation, bank policies and buy-side mandates, makes this pattern very strong and persistent."

The research shows that while the market generally operates efficiently, there are issues the industry needs to work on to deliver further improvements, says Mechner. 

"When we first observed the effect, we expected it to weaken more quickly than it has," he adds. "These kinds of inefficiencies don’t usually last, especially after research is published exposing them. But in this case, the constraints on behaviour are very hard to change. It is going to take time for the industry to resolve these issues."

One possible resolution would be for the market to diversify away from the 4pm fix, benchmarking to fixes at other times of day. The pressure on firms to trade this window is felt across the industry, but some institutions, such as passive index funds, are particularly constrained in when they trade. 

At the other end of the spectrum, the fix is less relevant for absolute returns investors such as hedge funds. However, banks and other funds that do trade the fix could change their behaviour, and if some do it might encourage others to follow.