A lot has happened over the past couple of days; the Brexit is one of the biggest planned risks event to hit the currency market in the last 40 years! Here at the Apiary Fund, we have been getting some questions about both what happened and what is going to happen now that the UK has voted to leave the European Union.
On Thursday, June 23rd, 2016, head trader Shawn Lucas was glued to his computer screen watching the Apiary Fund stats and feeling shocked as the counts moved more and more in favor of the British exit from the European Union. These results caused quite a bit of turmoil--especially in the currency markets.
This post is going to be mainly oriented towards our traders here at the Apiary Fund; however, any traders who have wondered why it feels like your platform turns into a disaster during major volatility will find useful information here.
Our head trader, Shawn Lucas, and special guest, Jeff Crystal, held a live webinar the day following the EU referendum to help explain what happened. Traders who were unable to attend the webinar can view the recording by clicking here.
In the webinar they explained many of the ideosyncrisies of volatile markets. We'll be covering a few of those topics in subsequent blog articles, but one of the most interesting concepts they discussed was why some traders experience rejected trades during volatile news events.
Apiary Fund traders were notified prior to the referendum that, due to the implied volatility of the EU referendum, initial margin requirements would increase to 10%. Liquidity providers often change margin requirements during news events. The lack of funds to meet initial and maintenance margins requirements is the most common reason trades are rejected. Around 9:30 pm MDT, Shawn received a call from the fund’s liquidity providers notifying them that margin would be increased to 15% to reduce risk. During the following half an hour nearly 700 trades were rejected - mostly due to the change in margin requirements. The position size you use to trade during normal market events are often too big to meet the margin requirements during risk events and your trade is rejected.
Lack of Liquidity
Later during the evening, Shawn received another call (a “courtesy” call) from a liquidity provider informing Apiary Fund that they were freezing liquidity. During highly volatile times, liquidity can dry up as institutions seek the safety of the sidelines until a more orderly market resumes. This can be a cause for a rejected trade when there is no one or very few counter parties who are willing to accept your trade.
Managing risk is a liquidity provider’s primary focus. They are the big boys when it comes to volatility, but when they see that the markets have lost control, they’ll pull out. It's not always the value of the currency that sparks the decision to stop trading, sometimes it's other markets. Liquidity providers offset their risk with counter risk positions in the stocks, bonds, commodities, and futures market. So sometimes trades can be rejected due to risk in markets that are not immediately correlated.
Another reason we sometimes experience a rejected trade is because the data we use to make decisions is not accurate.
At the Apiary Fund, we have a risk management system that evaluates the integrity of the data we receive from liquidity providers. For example, the Apiary Fund receives data from three separate liquidity providers (soon to be a fourth). When our software recieves a quote from one of our liquidity providers it compares it against the quotes from the other providers to see if it is comparable in time and price. If the quote is outside the acceptable levels, the quote will be classified as invalid and any trades placed on that quote will be rejected.
During the Brexit referendum the data from the different liquidity providers varied greatly. Often the volatility and slippage was beyond acceptable levels and trades were rejected by either our risk management system or the liquidity provider - or sometimes both.
Please comment with anything specifically from the webinar you would be interested in learning more about.
On a final note, we are so proud of our traders and the skill/control they exhibited this past week. The Apiary Fund really is filled with quality traders.