The Brexit Effect on Foreign Exchange (FX) Trading Systems

By Shardul Singh
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June 23, 2016 - The night of Britain’s EU referendum was an intense one in financial markets and especially for electronic foreign exchange (FX) business across the world.

Tens of thousands of FX trades totalling billions of Euros were carried out by Financial Institutions across the world in less than 24 hours. Most of these trades were executed over electronic FX trading platforms.

It was widely expected across the market that if the UK voted to leave the EU then it was very likely that sterling would be sold heavily amid significant market volatility across all currencies.

FX is very fast moving market where prices can move by tens or even hundreds of basis points in a matter of minutes and clients expect prices to be updated continuously. Therefore, market makers use computer algorithms to efficiently analyse market data and calculate prices for clients.

The night of the vote was very dramatic. Up until midnight, the polls suggested that the “Remain” vote would win. Even the leave campaign were saying so. But soon everyone saw the first signs of things to come with very strong results for leave in Sunderland and Newcastle, causing the GBP/USD rate to drop from 1.48 to 1.43 within minutes.

FX orders started to increase quickly with institutional investors looking to protect their portfolios from falling sterling by putting on hedges and others looking to take a position as the market moved.

The at 03:00 as more results started to come through indicating that leave was likely to win, sterling began to move very erratically, sliding from 1.45 down to about 1.32, a nine percent move, the biggest in history and in just 2.5 hours. The volume of trades being done in sterling during this period was immense (approx. 30 times more than the usual business). Heavy trading was observed in EUR/USD as well as large moves in USD/JPY from 103.6 to 99.3 in about 60 seconds.

Some financial institutions were reported to by Reuters to have stopped accepting new stop loss orders, an essential part of currency trading during the trading around the poll results, with others warning of potential gaps in their service. This suggested some firms might struggle to offer the liquidity in larger amounts due to the unavailability or overloading of their IT Systems.

Electronic FX trading systems, payment systems and online money transfer apps might see similar challenges again in near future when Article50 is invoked or during the Brexit negotiations phase.

A key priority for IT departments in the Banks, financial institutions, corporations, mention fund managers, insurance and FinTech companies would be to make sure that the relevant IT Systems remain flexible and agile enough to respond quickly to market moves and have total control over risk management. All of the statistical models that are used within the algorithm should be tested under different stress scenarios. Additionally, all sub-components and dependencies of the IT systems that would kick-in if the markets move to fast, would be assessed for adequate capacity and performance.

Author

  • Shardul Singh
  • Director, TRONIXSS
  • Financial Technologies, Risk & Audit Consultant

Shardul Singh