Can you really move the market?
In this episode of Truth About FX, Walter shares his perspective on how little volume it would take to actually move a market. He shares a story about a friend who used to work for a hedge fund and how they — the company — could shake the market. According to him, this could all happen in a blink of an eye and so timing is of the essence.
Hugh also shares his thoughts on this. According to him, it all depends to the volume of your trades to make an impact on the market.
Walter also does a quick throwback on an event with Oanda and how this gave him a whole new idea about the markets.
Download (Duration: 06:26 / 7.4 MB)
In This Episode:
00:57 – tick data
02:21 – year-end bonus
04:04 – spiky moves
06:03 – a deep market
Announcer: Sometimes, forex trading is a wild and wooly place to be. That’s why Hugh is here, to post your questions to Walter, the naked forex guy. Hugh’s got questions and Walter’s got the answers. Here at the Truth About FX Podcast.
Hugh: Hi, Walter. Can one institution control price in the forex market?
Walter: Well, that is a very interesting question. Thanks, Hugh. I think the data on this is actually counterintuitive. I saw the co-founder of Oanda, Richard Olsen, at the last FXStreet Conference that they’ve had. I don’t think they’ve had one since then and Richard Olsen was the most interesting presenter, I thought.
I think there were five of us or whatever there. He was probably the most interesting one and what he had was tick data that went back like 30 years or 40 years. One of the interesting things I remember about his presentation was it was surprising how little volume it would take to actually move the market.
Now the caveat is that only happens quickly. In other words, if you said you had this fund and you want to move the Euro, you want to bump it up, you could do that. It wouldn’t take that much like only 10 Million or a Million. It wasn’t really a lot in that instant. The caveat is that it’s just in that instant.
It is possible to definitely push the market quite but it’s not one of those things where you have to work it out to get some follow through. The other interesting thing is I have another friend who works — he doesn’t anymore because he works for hedge fund now. He worked for an investment bank in Europe and what they said was, their forex test, their biggest trade for the year was when they paid everybody.
The company wasn’t based in England but they have a lot of people in London so they would have to move money from Euros to Pounds to pay everyone at their end of year bonus. What that meant was their forex test, of course, is aware when the company is going to do exchange Euros to Pounds.
And so, the forex test would actually piggy back on top of that move. Now that they’ve forex tested and trade EUR/GBP — they trade EUR/CHF because they didn’t want to get, they were worried about getting caught or something like that. That’s what they did.
They just traded GBP/CHF but the idea was that because they were moving so many Euros out, selling so many Euros and buying so many Pound. Because a lot of these people at this job — I know a lot of the wizards now — most of their money you make for the year is on your end of your bonus.
Let’s say you’re making 60,000 Pound a year and at the end of the year, you may or may not get like a 3 or 400,000-Pound bonus. So all of these bonuses had to be paid for basically at the end of the year, in December, and that’s when they would make money.
They knew that they would move the market and they knew that they could make some money on that, the forex test could when the other area of this was doing, accounting area or whatever who was doing the transactions. That’s possible.
The other thing that is interesting to me is when there are levels, times of low volatility like low volume, there’s often times of high volatility during low volume. The classic example of that would be the thanksgiving holiday in the US. There are a lot of traders in London who won’t trade because they know that they are not going to trade later on that day in New York, on Thanksgiving Thursday.
But, what you’ll notice is that there will be some spiky moves. Why is that? Because there people out there — institutions out there — that want to move the market a little bit and they know that it’s much, much easier in times of low volume which could equal high volatility. Doesn’t always have to be that way — that case — but if you’re going to move the market you can.
You can do it for at least a quick time and it’s surprising that you don’t have to have much of a position to do it but, for a sustained move, I think you need to keep adding, keep working at it. And then, the other way to do it of course is to make your move when you know there is a lot of volume going on. That’s the other way to do it.
I don’t know all the ins and outs. I could pretend to know all the ins and outs of the institutions and how they do this but I think there’s a lot that goes into that. The thinking of, “Well, it’s Thanksgiving tomorrow so maybe we can push the Euro up a bit to get in some good shorts.” Because, we think that the Euro is going to go down that we want to push it up a bit, just inflate it a bit.
That happens in the stock market too at the big players. It’s pretty common. It’s not anything to be scared about. I think it’s not like you should think, “Oh, no. I can’t trade because they’re moving the market” or whatever. That is a little bit ridiculous.
For example, from my point of view, if you see a market being pushed, that might result in like a Kangaroo Tail or something which tells you that’s just a wick. It’s just long wick, there’s nothing behind it. It’s just a long wick that is going to reverse, that sort of thing.
I don’t really get caught up and thinking a lot about what the institutions are doing.
I know a lot of people do but it is not that important to me. I do think they do and they can and they will move the market a bit like that. So those are my thoughts on it. What do you think? What have you learned about that?
Hugh: It’s really interesting because once when you get to forex the first time, everybody tells you there’s so much equity. It’s such a deep market. That’s true to a certain extent. I was talking to this other trader and he mentioned that they created a program that would break up their trades and hide the trades from the broker.
Because if they put that trade through all at one time, then it would move the market a little bit and they would do some slippage. I thought that was really interesting and that seems to be the case.
I mean, if you’re trading small like some of us are then that doesn’t really matter too much. But, once you start pushing more volume I guess then, you can really mess up your entry there.
Walter: Yeah, it’s interesting. Great question, thanks.
Hugh: Cool. Thanks, Walter.