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TFX scores own goal with stop loss

If we believed everything we read then we would assume that trading on exchanges is good and in the OTC is bad. But the truth is not quite so simple, as an incident Monday morning shows.

On Friday, USD/ZAR finished around 7.7650. But when the markets got going Monday, it shot up to a high of 8.2316. A cynical buy-side contact immediately suggested that the cause was investment banks chasing stops in a thin market since Japan was shut.

The reality was actually far more interesting and highlights that it is not always rosy in the exchange-traded FX garden. It also shows that it is not necessarily always better to trade on a quote-driven platform, especially when there are no quotes in the system.

The move was caused because the Tokyo Financial Exchange (TFX) set an out-of-the-market closing rate of 8.4150 for its ZAR/JPY futures on Friday; the real market was around 11.4550.

One savvy bank informed its clients that as a result there would be a flurry of stop losses triggered on the open, which duly materialized. “TFX feeds prices from five banks currently, and looks like one of them showed very wide bid/offer (3 Yen wide) price at the close of Friday and somebody hit the very wide bid at 8.4150,” the bank said.

It added: “Since it is a good print on the exchange, the stop-loss orders and margin calls were all triggered this morning at the market open, thus we saw USD/ZAR spiking up to 8.2550

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