Liquidity driving narrow ranges
|It never ceases to amuse me when I see headlines like “Euro on defensive as French election tests investor nerves” or “Pound falls a Brexit reality bites” and I look at the charts and see a forty point range for the Euro and sixty point range for Sterling.
The Foreign Exchange market is awash with liquidity. Whilst spreads fallen, no one should be fooled into believing that the reason for tight spreads in the interbank market is the same as narrow spreads in the “retail” or “speculative” market.
Liquidity has been the driver of a narrowing of spreads in the interbank market. The evolution of platforms and non-voice broking have enabled traders to enter and exit positions far more efficiently and thus spreads have narrowed considerably.
In the retail market the reason for narrow spreads, as with a lot of innovation, is marketing!
The broker market is saturated with new firms joining every day. However rather than creating a niche or taking advantage of an opportunity the techniques of attracting new clients are becoming hackneyed and predictable.
Spreads are a factor of the insatiable marketing budgets that are believed to attract clients. Old fashioned service driven are pushed aside and it's become a simple numbers game.
The belief that the narrower the spread the better the broker is simply nonsense. A trader will get a narrow spread as an incentive and what is not often considered is that when a position is being closed, the level is infinitely more important than the spread. So many trader chat rooms are driven by talk of spreads rather than security or price over service.
It is becoming more and more difficult to create differentiation but is climbing the Google ladder the best way?
A shakeout is coming whether that is driven by regulation or a black swan it is impossible to say.
So, what of the markets? Well it is easy to tell from the rant that opened this blog markets are pretty boring right now. Commentators are fitting stories around activity in order to create the impression of being “in the know”
We are in a “wait and see period” right now. Elections, Brexit, and Trump will all provide volatility tomorrow but for now flow is the driver. Capital investment and trade flows are the “traditional drivers and they continue to be the mainstay of the market but technology has created a highly efficient market where huge transactions are easy to handle.
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