FX liquidity contraction on Brexit day: As banks widen spreads, how will PBs fill orders for retail brokers?

During the liquidity contraction as bank desks raised the spread on GBP pairs, LPs do not want to get caught on the wrong side of a trade in a fast market. Here is a look at it from the Prime Brokerage perspective


Today, Britain becomes an independent sovereign state following yesterday’s referendum on European Union membership in which the British public braved wind and heavy rain to head to the polling stations to cast their vote.

Whilst the long term result may well lead to prosperity for British industry and the solidity of its world-dominating and highly sophisticated banking sector and institutional electronic trading industry as well as the wider economy as bureaucracy gives way to self-determination, the immediate aftermath has demonstrated uncertainty in the markets with a FTSE dive during the early hours of the morning, and perhaps more importantly, the British pound having plummeted in value to a 31 year low.

In the days preceding the referendum, the polls demonstrated a consistent level pegging between those who wished for Britain to remain in the European Union, and those who were planning to vote for Britain to leave the European Union.

Therefore with such an uncertain outcome, banks called for their FX trading desks to remain manned during the course of last night, with temporary dealing rooms having been set up, takeaway food having been ordered for employees and bunk beds rented so that traders could remain on the premises all night and catch short stints of essential rest before returning to the trading screens to execute voice and manual trades, and to supervise specialist algorithmic systems that had been implemented in order to make the most of the markets during this uncertain time.

At 4,00am, when the votes were counted for the North Eastern region of Sunderland and the balance was tipped in favor of an exit from the European Union, the pound took a massive nosedive in value.

The ensuing result is that the interbank FX desks among London’s largest FX dealers, which are also the world’s largest FX dealers, increased spreads by half a sent on currency pairs that include the British pound.

This in turn created a liquidity shortage from Tier 1 banks to prime brokerages, and ultimately inhibiting the ability for order flow which is provided on an agency basis to be distributed to and from retail traders.

This morning, during the early hours, FinanceFeeds spoke to a professional trader who executes algorithmic trades via several well known North American brokerages.

James Watson CEO ADS London (1)
James Watson, CEO, ADS Securities, London

This particular highly experienced trader explained “Liquidity dried up during the Brexit period, meaning that brokers couldn’t hedge. This appears to indicate that once again, only b-book brokerages will likely be able to weather this without liquidity shortages.”

The professional trader further explained “keep an eye on whoever you know to be using solely an agency model as those are the brokerages that will be first to fall.”

Liquidity providers which are based in London are widely recognized to be very secure with large capital bases and very solid relationships with Tier 1 banks. ADS Securities is one particular company that absolutely fits that description and is headed by highly experienced industry professionals that understand the prime brokerage model inside out.

Earlier this morning, FinanceFeeds spoke to James Watson, CEO at ADS Securities in London in order to establish the prime brokerage position on this matter. “It does not come as a surprise that the forex market saw a liquidity squeeze last night, as markets managed the risk carefully.”

“There is, as we have discussed previously, a recognised issue with an underlying liquidity gap in forex markets driven by the contraction of PB services. However it is fair to say that the market certainly was not expecting this outcome either” continued Mr. Watson.

“This raises two key points. Firstly, during such abnormal conditions we have to expect that the spread will widen as LPs do not want to get caught on the wrong side of a trade in a fast market” – James Watson, CEO, ADS Securities, London

“Secondly” explained Mr. Watson, “The prime-of-prime brokerage service from ADS Securities is specifically designed to help provide our counterparties sufficient gravitas to be able to access liquidity during events like this. But as we’ve previously said, we cannot rectify this market failure on our own – there is much growth yet to be seen in this emerging Prime of Prime space.”


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