Robot Trades Inflamed Then Soothed Markets After Franc Shock

Algos are both sinners and saints at different times, says a consultant.

(Bloomberg) — High-frequency traders may have at first exacerbated currency swings after the Swiss National Banks surprise decision to drop its euro cap, before helping to calm the market faster than would otherwise have been the case.

Central bankers discussed the impact of such traders last month, according to minutes published Wednesday of the Global Meeting of Foreign Exchange Committees in Tokyo on March 23. The committees are composed of central bankers and representatives of the private sector, with Japan, the U.S., the euro area, and the U.K. among eight regions represented.

[One year after Flash Boys, the HFT sector has been exonerated, writes Dr. John Bates.]

The prevalence of algorithmic and HFT trading on electronic platforms could have contributed to the initial sharp price action in the Swiss franc but also could have enabled the market to stabilize faster than otherwise expected, according to the minutes, which were published by the Reserve Bank of Australia. Participants shared the view that FX market liquidity would warrant continued attention.

The franc surged more than 40 percent to as high as 0.8517 per euro within 20 minutes of the SNBs announcement that it would no longer defend a 1.20-per-euro ceiling. It retraced about half of that spike over the following 20 minutes and began to stabilize.

Switzerlands currency was at 1.04311 per euro as of 7:53 a.m. London time.

A gauge of foreign-exchange price swings jumped to an 18- month high that day, according to data compiled by Bloomberg.

Sinners and Saints

Algos are both sinners and saints at different times, Sean Keane, an Auckland-based analyst at Triple T Consulting, wrote in an instant message Thursday. Generally they add liquidity and improve market depth. At other times, the algos become dysfunctional and disruptive, and their negatives outweigh the positives.

The extreme volatility left some of the largest foreign- exchange traders facing losses and harmed some retail brokers, including FXCM Inc., which got a $300 million bailout from Leucadia National Corp. London-based broker Alpari (UK) Ltd. entered insolvency.

FXCM faulted the SNBs reckless actions for triggering a complete FX market breakdown characterized by an extreme lack of liquidity and pricing, in a statement dated March 11.

Electronic trading platforms have become increasingly prevalent in the $5.3 trillion-a-day market, currently accounting for more than half of all spot currency trades, the Bank of England said in its Quarterly Bulletin last month.

Banks reportedly switched off electronic platforms as quickly as possible after the SNB abolished its limit on the franc, while some dealers temporarily stopped providing price quotes, sapping liquidity in the market and adding to volatility, the report said.