Osler & Turnbull: Dealer Trading at the Fix

Transcription

1 Osler & Turnbull: Dealer Trading at the Fix Discussion Dagfinn Rime BI Norwegian Business School and Norges Bank home.bi.no/dagfinn.rime

2 4pm Fix: Main FX benchmark price Very nice paper on a very important topic New predictions on dealer-trading related to fix Benchmark prices are very useful Huge market: Daily spot volume (apr.16): USD tr 1.6 Financial customers: USD bn 93 Usage of Fix? Derivatives linked to Fix Used for index-creation (MSCI) Evaluation of international portfolios etc. Osler & Turnbull FX fix

3 Fix institutions Fix orders: No risk, no transaction cost, for customers Customers incentive: Minimize tracking errors in portfolios. End-of month portfolio evaluations: Huge fix-orders This paper: Model trading behavior before the fix. Free-riding or Banging? Free-riding: Trade early (and cheap) Banging: Trade a lot within the fix-window Concave vs. Convex price path before fix Osler & Turnbull FX fix

4 Convex or Concave Price Path? Figure 1: Exchange Rate Dynamics Around the London 4 pm Fix Mean price path from 6 minutes before to 6 minutes after the London 4 pm fix using tick-by-tick quotes from Reuters Dealing, and interbank trading platform, for USD EURUSD, USDCHF, USD. The series begin in February 1, 1996, except EURUSD, which begins May 5, All series end on December 31, 213. All Figure: series are indexed Prices to 1 at 3:45 pm. around Declining prices the have trends fix reversed for the average EUR :3 15:45 16: 16: :3 15:45 16: 16: CHF :3 15:45 16: 16: : : : :15 Osler & Turnbull FX fix

5 What do we know about the 4PM Fix I 4pm compared to other time-of-day. (5min data) Figure: Trading activity 4 AUD 6 CAD 3 5 Number of trades 2 1 Number of trades Number of trades 3 2 Number of trades

6 What do we know about the 4PM Fix II 4pm compared to other time-of-day. (5min data) Figure: Volatility and idiosyncratic volatility Volatility and idiosyncratic volatility AUD vol idio vol.5 Volatility and idiosyncratic volatility CAD vol idio vol.4 Volatility and idiosyncratic volatility.6 vol idio vol Volatility and idiosyncratic volatility vol idio vol.4

7 What do we know about the 4PM Fix III 4pm compared to other time-of-day. (5min data) Figure: Price impact of order flow 8 AUD 8 CAD 7 7 Price impact of OF 6 5 Price impact of OF Price impact of OF Price impact of OF

8 What do we know about the 4PM Fix IV 4pm compared to other time-of-day. (5min data) Figure: Autocorrelation of exchange rate changes.2 AUD.2 CAD.1.1 ρ.1 ρ ρ.1.2 ρ.1.3.2

9 What do we know about the 4PM Fix V 4pm compared to other time-of-day. (5min data) Figure: Predictive power of order flow 1.5 AUD 1 CAD Predictive coefficient of OF Predictive coefficient of OF Predictive coefficient of OF 1 1 Predictive coefficient of OF

10 What do we know about the 4PM Fix VI 4pm compared to other time-of-day. (5min data) Figure: R 2 of order flow regression 16 AUD 18 CAD R2 of price impact regression R2 of price impact regression R2 of price impact regression R2 of price impact regression

11 What do we know about the 4PM Fix VII 4pm compared to other time-of-day. (5min data) Figure: adj. R 2 from Factor Structure 28 AUD 18 CAD R2 R R2 2 R

12 Naïve perspectives Fix orders are for free for customers, but imply risk for dealers: How to cover the cost? No cost: trade all within fix-window! buy and sell at fix, but can t explain excess trading and post-fix reversal Trade sufficiently to move fix so that make a return (excess trading). Both pre-trading, volatility at fix, and reversal. But what are the quantities? And: But who is on the other side! Osler & Turnbull FX fix

13 Is it a big problem? Size of fix-orders? 1% of fin.volume end-of-month,.1% else? Overvaluation: Say 2% end-of-month,.2% else? Cost: USD bn 1 in 27! Fines so far? $ bn7.5 ($ bn1.7; bn2.5; mio85; bn1.2; 1bn.) Osler & Turnbull FX fix

14 How much excess trading? I Figure 1: Exchange Rate Dynamics Around the London 4 pm Fix Mean price path from 6 minutes before to 6 minutes after the London 4 pm fix using tick-by-tick quotes from Reuters Dealing, and interbank trading platform, for USD EURUSD, USDCHF, USD. The series begin in February 1, 1996, except EURUSD, which begins May 5, All series end on December 31, 213. All Figure: series are indexed Prices to 1 at 3:45 pm. around Declining prices the have trends fix reversed for the average EUR :3 15:45 16: 16: :3 15:45 16: 16: CHF :3 15:45 16: 16: : : : :15

15 bigger price reversals than on average across all end-of-mo How much (see, e.g., excess CHF/USD). trading? II Figure: Prices aroundfigure the fix 4: Rate Paths Aroun EUR/USD /USD 25

16 Modeling Fix is very hard! Dealer behavior? Risk management vs. profit-seeking? Numbers are not clear Price impact? Flow is (may be) predictable: Should it have price impact at all? Who is on the other side of the trades? Why any? Apparently many, but Price Impact high as well Collusion: Difficult: Credible? How to punish deviations? Did Bandits Club accomplish anything? Osler & Turnbull FX fix

17 Summary: Main contributions A very thorugh discussion on dealer incentives Special focus on pre-trading: Free-riding vs. Banging the close Excess trading Concavity vs. Convexity in pre-trade price path Interesting, but would better with Trading data I would like to see more on the post-fix price evolution I learned a lot. Recommend reading. Osler & Turnbull FX fix