Hot potato mode

“Everyone’s waiting for the bell, and no one wants to be the last person holding the last hot potato when Powell steps into the ring.” (excerpt from the Market poised on the edge of Fed theatre)

I just realized, after finishing my NY close market note with a hot potato metaphor, that some folks might not understand what I meant by passing the hot potato. Let me explain.

Passing the hot potato

Every trader knows the uneasy calm before a major risk event—the tape slows, liquidity looks fine on the surface, but underneath, the dealers are already twitching. What you’re really watching is the market flipping into what I call “hot potato mode.” It’s a dynamic born in the old voice-trading desk and now coded into eFX engines, designed for one purpose: survival when uncertainty is about to hit.

Back in the day, you could sense it in the room. Phones buzzing, brokers spraying axes, dealers quoting wide and quick, trying to dodge the big one. Nobody wanted to be the bag holder ahead of a Fed rate decision, an NFP release, or some geopolitical flashpoint. That instinct is still there, but today it’s systematized. The engineers running the eFX desks—note, they are not traders—literally toggle a model that takes the book out of risk-warehousing mode and into hot-potato mode. It can happen hours, even a full day, before the actual event.

What it means in practice is simple but brutal. A bank receives a customer order—say a chunky dollar sell ticket—and rather than absorb it, the dealer immediately flips it into the interbank market. The counterparty that catches it doesn’t really want it either, so they pass it again. And again. Around and around the potato goes, each dealer trying to offload exposure before it burns a hole in their book. The flows become a blur of transactions, not about directional conviction but about who can unload the risk fastest.

The irony is that to the casual eye, this looks like healthy liquidity. Screens are flashing, prices are moving, volumes are ticking up. But in truth it’s a fragile hall of mirrors. The depth isn’t real because nobody is willing to warehouse risk; everyone is just intermediating the same trade. The more the potato spins, the less information the tape conveys. Instead of revealing genuine positioning or sentiment, the interdealer churn strips the signal out of price discovery. What’s left is noise—a jostle of quotes divorced from conviction.

This is why markets can look calm and orderly until the event hits and suddenly gap violently. The pre-event whipsawing you see is just the potato being passed around, the market clearing its throat without saying anything meaningful. Then Powell walks to the podium, or the jobs print hits the screen, and the whole construct snaps. Whoever is caught still holding the position pays the price.

So when I talk about “passing the hot potato,” that’s what I mean. It’s the nervous system of the modern market under strain—dealers desperately trying not to be the one left holding unwanted risk when the real test arrives. On the outside, it looks like liquidity. On the inside, it feels like fragility. And every trader who has lived through one of those moments knows the heat that comes when the potato finally stops moving.

Now I have to ask myself how much of last night's US dollar sell-off was influenced by Hot Potato Mode, as the overnight move was not on the cards and not influenced by the curve, but dollar politics perhaps.