Friday, 7 October 2016

GBP goes EURCHF. What's going on.

Ok, so I was wrong. Cable was not a good buy two days ago and just to prove me REALLY wrong the marvelous Antipodean time zone decided to ram GBP in a way that hasn’t been seen since the SNB spoofed EURCHF.

It’s the small hours of London Friday morning for me  and the reasons for GBP's freediving world record attempt haven’t yet been formulated. Now I'm afraid that if you started reading this expecting me to tell you what is going on in GBP, then sorry, I don't know. But having worked in FX for a good chunk of my life I can have a good guess at what is now going on in the banks.

First, every salesperson is struggling to call all their clients who had 'call levels’ at zones never expected to be hit, whilst trying to fill orders in systems at levels that they think they can get away with. Oh, hang on, no they can’t do that anymore as they need audit trails. So, they will all be huddled around spot desks arguing over whose order was hit at what. Said spot dealers will be shouting a lot and staring at an automated blotter that is slowly dripping in a queue of trades that their antiquated order and back office system in some far off distant place on the planet is trying to process. Basically, there will be a lot of ‘WHAT THE F### IS MY POSITION.. ARRRGH ‘ going on.

Meanwhile, clients will be calling in demanding to know why their stops were done 7% below current market and why no one called them. Because if they had been called they would have bought it back at 8% below current markets because they are all retrospective geniuses.

Managers will be trying to recite the rules of engagement for filling stops but can’t find them so call compliance. However, compliance is asleep because they are mostly based in Head Office and that isn’t in the Antipodes, apart from the Antipodean banks whose compliance officers will be teaching some course to the catering staff on how not to deal with Yemeni banks.

By now the dealing systems will be catching up with what's going on and the spot traders now fit into two categories:-

Group 1 who look at their position screens and see a vast profit who split into groups 'A' and ‘B'. 'A' stays very quiet knowing that sales will want some of the profit if they see how much it is and ‘B' who stand up and declare themselves as trading Gods.

Meanwhile Group 2, on seeing vast losses, immediately write emails to every manager under the sun blaming their staggering losses on system latency and the ridiculous guaranteed stop levels that sales made them undertake. If they are lucky management will swerve the losses into a contingency book, but if they are unlucky and the bank was thinking of replacing them with a 'Raspberry Pi’ algorithm, they will be out of the door by close of Friday.

But back to sales. Those that are still on the phone are quoting the reason for the fall on anything that they feel everyone else is saying because no one has a real clue. They will probably repeat what JPMChase or Goldman say as they reckon that the guys there are cleverer than them and more likely to know. So, clients will currently be being told that it is due to- "Barriers being hit at 1.25, 1.20 , and 1.15" and if they can't even manage that will say "Stop losses”, which is a great generalised term that demands no justification. But some foolish folk will have done a Bloomberg News search for GBP and decided that it is due to the news that fracking had been allowed in North West England. Which is of course rubbish, because we all know that it happened because Diane Abbott was made the shadow Home Secretary.

By now very senior management will have come down to the dealing room. Bearing in mind this is out of London time zone, the senior managers involved will have absolutely no idea whatsoever about Sterling so will ask questions to frantic spot and sales folks along the lines of "Has Brexit been announced?" or "is this is a big move?" The frustrated dealing staff will have to tread a thin line with them, alternating between wanting to tell them to p### off and ingratiating themselves with them as, with the size of the losses they can see, they may well be up before them the following morning.

Meanwhile sales are noted to be only saying, into phones and Bloomberg chats, “But seriously, that’s where it was” and starting to swear at overseas sales coverage who are trying to goad them into either filling their clients better or having any profits accruing through their clients stops reallocated back to them rather than staying in the center that ripped them off did the execution.

The options trading desk will have appeared to have turned Greek as that is all they are speaking, shouting things like .. "Watch your gamma", "check your theta”," where did I trade that delta" and "Oh shit, they said you made money shorting vol. “

For the sales guys with no clients with GBP orders, they will be feeling rather smug and trying to sound intelligent by quoting correlations as to what this should do for other pairs. Such as “Well with the cross correlations we should see a pick up in CNH/MXN vol and our model says that the 3m/1yr calendar spread is the way to play it”, only to find that if they try to get a price from their options desk they are told "you  moron! haven’t you seen what's going on in GBP?".

So, it will all be fun and games. Do I care? Not a bit. Because I am sitting at home, it’s the wee hours of the morning and I am about to go to bed chuckling mischievously to myself, knowing that London FX sales folk are going to have one hell of a miserable start to the day explaining to their clients why they have just lost 7% of their company's hedge book.

Oh and let's not forget all those corporate treasurers dusting off the wording for their 'due to FX volatility, losses were greater than forecast' statements to add to this year's accounts.



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Addendum - 15.30 BST.

Oh look, in record time, The first corporate excuse appears. Fancy that!

"You are filled, yes at the low sir, well someone had to be the low and it just happened to be you"-

So if he lost £15m over a 0.1100 GBP/USD move, face value of the FX trade must have been just over £160m. Not that huge and no where near the £1.6b I first eyeballed. I never was any good at FX.

20 comments:

cantdeletemyf-ingaccount said...

Bravo - just what I needed after tonight's madness. I'll sleep better!

Anonymous said...

Well spoken.

Asian Trader said...

great stuff!

Aydin Kurt-Elli said...

Brilliant. And defn right - it was Dianne Abbott :)

Unknown said...

Love it....big stop went through in thin market etc......technology changes but the old stories linger on 😂😂😂

Anonymous said...

Hilarious and spot on!

Anonymous said...

Haha....I was that option trader !! (thankfully long gamma and vega and no surface on really), PHEW

Dave M said...

Laughing through the eye of the storm...

Anonymous said...

brilliant

Justabeancounter said...

Another gem. Thanks Pol.

@Eureka_FX said...

So so true. I think you left out a subgroup of Group 2 traders. Those who farmed out their stops, which were filled God-knows-where, but didn't bother to farm out t/p's & bids lower down are are now short as sh1t wayyy down there somewhere in the abysss

Anonymous said...

In these days of ridiculously cheap implied volatility across the board (justified in most cases, as ranges are comatose), I find it very important to remind myself of one thing: even if you don't want to buy cheap volatility (because it will just decay anyway and the underlying doesn't move enough), you sure as hell better not even think of selling it.

Snib said...

Out of the market for 10 years but this made me smile

Saleh Zaidi said...

Do your math dude - 15 quid loss on 11 fig means approx 160 mio Gbp position
Wtf is 1.6 bio ?????

Polemic said...

Wow Saleh dude.. you duded the maths right out of me there. What a basic error. changed.

Saleh Zaidi said...

Hilarious article nonetheless - funny but very accurate

papadisamuele said...

Don't know as a trader but as a writer you have a future!!

Snib said...

Out of the market for 10 years but this made me smile

I_loved_markets_no longer said...
This comment has been removed by the author.
Anonymous said...

Not about GBP per se, but good article:
http://www.mauldineconomics.com/frontlinethoughts/federal-repression-system