We recently published an article “Let’s get ready to rumble” where we explained that there are certain times throughout the trading day where volume and volatility spikes around certain “Fixings” (often referred to as Benchmarks).
Many of our readers have requested to know more about “Fixings”; when, where & how – and is it just FX that has fixings?
Let’s remind ourselves what a “Fixing” is:
Fixings occur at predetermined and pre-set times of day when the mid-rate (of executed transactions derived from multiple wholesale trading platforms) is averaged resulting in a mid-rate that is published.
Who uses/benefits from a “Fixing”?
Fixings are used by market participants for a variety of purposes, but most notably for valuing, transferring and rebalancing multi-currency asset portfolios (aka Asset Managers). In particular, the mid-rates produced result in the construction of published indices used for tracking multi-country/currency portfolios of bonds, equities or credit instruments, and hence are important in many investment valuations. That usage incentivises asset and other money managers to ensure that their FX dealing intermediaries execute their foreign exchange trades at the same mid–market price as recorded at the fix.
Other users, such as some sovereign wealth funds, or corporates (which often do not have active foreign exchange dealing desks), also tend to use the same approach of trading with their Banks at a guaranteed published fix price, in order to establish transparency of execution.
And Fixings are not only found in FX! There are fixings in Precious Metals aka. Gold, Silver, Palladium and Platinum which are generally known as the London morning (10:30GMT) and afternoon (15:00GMT) spot fix. The need for a metals fix follows the same rationale as an FX fix. However, the London Metals Fix is set on a conference call among 5 members of the London Gold Pool (Bank of Nova Scotia-Mocatta, Deutsche Bank, HSBC, Barclays and Société Générale). The price is then “fixed” when the conference call ends.
So what happens around “Fixing Time”?
There is a concentration of trading orders being transmitted to Banks shortly ahead of the fixing time (Although many orders can be given to a Bank hours before!). The Banks accept these orders and execute them in the market bearing the consequent price risk. In order to manage the risk associated with this order flow, Banks hedge by executing foreign exchange transactions in and around the calculation window, which results in the large spike in trading volume we previously discussed. This creates a market where the Bank is agreeing to execute these orders at an unknown price, which is established subsequently during the fixing calculation window. That price should be the clearing price which reflects the balance of supply and demand going through the market at that time and therefore prices should move as necessary, even if only temporarily, in response to these flows. In most cases, the Bank agrees to give the client the mid-rate of this (as yet unknown) fix price, whether the customer is buying or selling.
Because of the structure of the fix and the orders received many Banks will ‘trade ahead’ of the fix even where the activity is essentially under instruction from clients. Worse, it creates an opportunity (and an incentive!) for Banks to try to influence the exchange rate – by collusion or otherwise inappropriate sharing of information – to try to ensure that the market price at the fix generates a rate which ensures a profit from the fix trading.
So when are these major “Fixings”?
|Bank of Japan||00:55|
|European Central Bank||14:00|
|Bank of Canada||17:00|
Remember: there is likely to be heightened volatility in various instruments leading up to and following these Fixings – so be aware!!
Safe & Happy Trading!!
#tradesafely #doublehit #fxzoo