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