Analysis: Pre-Referendum Client Positioning Shows Risks for Brokers Minimal
As the Brits are taking to the polls, Finance Magnates gets a glimpse into client positioning at major brokers.
Just hours before the final tally of the Brexit/Bremain referendum hits the wires, we are taking a look at the positioning of clients across some major brokerages that are regularly updating the sentiment of clients. The data should help us determine whether there is any disproportionate market sentiment which could negatively affect clients and their brokers.
According to data from 3 major brokerages, the balance of the positioning is much less extreme when compared to the Swiss National Bank event. At the time, the positioning ratios in the EUR/CHF pair were heavily biased towards a rally in the pair from near 1.2000. With over 90 per cent of the traders betting on a drop in the value of the Swiss franc, the post-SNB rally was massive.
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Looking at the British pound positioning today, we are seeing a much less skewed market with merely 54 per cent of traders at FXCM betting on a decline of the British pound against the U.S. dollar, and hence in a way betting on a Brexit.
Data from traders at FxPro is even less skewed with a more or less evenly balanced portfolio amongst the clients of the brokerage: 50.42 per cent shorts is a virtual tie in the tug of war between the bulls and the bears on the British pound.
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OANDA is another brokerage that is publicly publishing the open positions ratio of its clients and we see no news here either. Just above 50 per cent of the open positions of clients are shorting the GBP/USD pair, with the other 50 taking the other side.
As long as a brokerage has enough clients in both directions, the risks for it as a market maker are limited. The same goes for the straight through processing (STP) brokers, because if the market is evenly balanced the risks of a very sharp move are much lower.
While there might be a lot of volatility in the market, a prospect which can influence liquidity conditions substantially, the final outcome of the referendum is being priced into the market. In the meantime, for those of our readers who still haven’t seen John Oliver’s views on Brexit, the video below might make your day brighter (or grumpier), regardless of the outcome today.
The problem on the SNB was not the skew but the size of the movement compared to margin requirements. Most of the clients on the negative side went into huge negative balance, and brokers had big trouble to recover these debits, having to write-off most of them.
So a 50% long/short ratio means nothing. A big move can still get the broker in trouble with half of those customers, specially if the broker is STP and has to pay those losses to a hegde counterparty.
I would argue that the magnitude of the SNB move was precisely due to the one-sided skew of the market. If you are holding the view that positioning doesn’t matter, I wouldn’t argue with you. It is “the chicken or the egg” type of discussion. As to the margin rates, we have already established that brokers are well prepared cause they have increased collateral requirements heavily in recent weeks.
And in the case of the MM broker with balanced book, clients have limited downside (negative balance protection) while unlimited upside.
So a SNB like event will cause big trouble.
You forgot to include myfxbook.com’s community outlook: http://www.myfxbook.com/community/outlook
It seems to be about even about 60% short / 40% long. Here is a screenshot taken appx 20:15 GMT +7
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