A Different Summer

Post-Brexit Increase in Trading Volumes on Friday Likely to be Sustained

Trading volumes across the foreign exchange markets broke several records last Friday.

The substantial increase in trading volumes on post-Brexit Friday that has been observed across virtually all asset classes and universally across all trading venues and brokerages is unlikely to be abating any time soon. The financial markets will remain jittery with the British pound at the forefront until uncertainty is behind us.

Two major Electronic Communications Networks (ECNs) that are publicly reporting their metrics on a daily basis, Fastmatch and Hotspot, have seen trading volumes rise 2.8 and 2.3 times respectively, when compared to the previous trading day.

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Fastmatch reported that the daily trading volume at the venue totaled $39.8 billion, which compares starkly with an average of $14.3 billion throughout the month of June. The figures are similar at BATS Global Markets Hotspot, where the trading volume on Friday topped out at $59.5 billion, which compared to a monthly average of $26.7 billion.

Friday has proven to be the most volatile day on record for the British pound and will probably be listed on Wikipedia as “Black Friday of June 2016”. The following chart from Nanex LLC displays the intensity across virtually all currency pairs on Friday.

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Historically such big outbursts of volatility have been followed up with periods of intense market volatility lasting for some time. A testament to this is the increase in margin requirements at most brokerages in the industry. Not only they have managed to protect themselves, but also their retail clients, which tend to lose big in periods of similar market intensity (though similar is a strong word here).

The unparalleled move in the British pound resembles the shock and awe that we saw in the aftermath of the Swiss National Bank’s decision to allow the rate of the Swiss franc to be influenced by market forces. In the aftermath of January 2016, the forex and CFDs trading industry saw some months of robust trading volumes.

The same is valid across asset classes outside of foreign exchange, with a lot of senior traders at major banks fearful about their vacations this summer. The months of July and August have been typically slower for financial markets and Brexit might have just changed this status quo.

Below is a chart from Nanex LLC displaying futures trading activity during the Brexit shock on Friday.

 

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