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Foreign Exchange

Euromoney FX Survey 2011: Buyside Q&A – Liquidity provision: everything changes and nothing changes?

The key theme for FX pricing last year was normalisation, say fund managers. Gone are the days of sky-high spreads and vanishing market makers; stability is the new status quo. But has liquidity provision from the banks actually got better? The answer seems to depend very much on when and where you're trading.

Interviewees:

Mark Hewlett, partner, Anello Asset Management

Adrian Lee, president and CIO, Lee Overlay Partners

Stefan Nobel, chief dealer, SKF Treasury Centre

Stu Simmons, head of dealing, Macro Currency Group

Bhav Trivedi, senior trader, Record Currency Management

Euromoney: What’s liquidity provision been like over the past 12 months?

Mark Hewlett: We deal with 18 banks – firms who give us direct market access. That gives us better liquidity. We might open a position with JPMorgan and close it with BarCap.

We’ve had very few issues with provision – maybe one order a month a bit wider than we liked. To be honest, as an industry, we’re probably the most competitive market out there. That’s why everyone wants a slice.

Euromoney: Has better price provision actually deepened liquidity?

Bhav Trivedi: In terms of liquidity, spreads have come in a long way since the crisis. Obviously they’ve blown out a bit following the Japan quake, but they're normalising. Whether that’s liquidity returning or just tighter pricing is another matter. You could argue it’s more the latter.

But prices normalised pretty quickly after May; any bank who lagged behind trying to make a couple of extra pips was punished.

Euromoney: What has bank liquidity provision been like?

Adrian Lee: Liquidity can be a treacherous thing in currency markets. It can be what it wants to be at any stage. Trade the wrong currency at the wrong time, and you’ll pay through the nose. There’s no guarantee you’ll have it when you need it in a crowded market at peak times. A classic example would be the Aussie/yen carry trade, two summers ago. Trading was very illiquid as all the banks invested in and wanted out the same day.

Euromoney: Are there any sticking points?

Stu Simmons: Volatility is certainly down, but that’s a cross-market trend, in equities and fixed income too. The market normalised very quickly after the flash crash. The yen was the biggest mover.

Turnover is higher on a long-term perspective, but liquidity is not always as deep as it appears. You’ve got to be trading in the right time zone for your LatAms, for instance.

Euromoney: What is the picture like outside the spot market?

Stefan Nobel: It depends on when you're talking. MDP liquidity now is as high as it’s ever been. But five years out, options liquidity is terrible. For any option beyond a year, it is impossible to judge whether the price is correct or not. The spreads are too wide.

Euromoney: How has electronic trading affected the options market?

SN: I may be old fashioned, but I think trading is not the same as it was 15 years ago. You can't get the same feel for the market any more. I know people at banks who feel the same way. The machines can’t give you liquidity in the same way that a voice could. Five years ago, you could pick up the phone and trade a five year outright euro/dollar option no problem. Now, it takes time to get a price.

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