Traders Blame ‘Insane’ Tech Advancements for Quiet FX Markets

(Bloomberg) -- Advancements in electronic trading may be crushing volatility in the currency market, making prolonged wild swings a thing of the past.

That’s the view of some of the participants at an annual industry shindig in Barcelona this week, where the impact of growing automation and algorithmic trading were the hot topics. Some warned that the lack of dramatic action creates the risk that market makers may exit as it becomes harder to generate profits.

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The comments come as volatility in the $7.5 trillion-a-day foreign-exchange market has dwindled to near the lowest in a year, making the turbulence around April’s US trade tariff news a blip in a longer-term decline. While traders thrive on big swings, a calmer environment could be good for asset managers and companies looking to hedge their exposure.

“The ability for volatility to collapse has gone up exponentially,” said Gordon Noonan, head of FX trading at Schroders, pointing to price action after US non-farm payrolls data as evidence of “insane” developments in electronic trading. “Spreads used to blow out for ages, now we’re back straight within 30 seconds.”

The shift has turned currencies into a strange corner of global markets, detached from the bigger swings seen in stocks and bonds despite a plethora of economic and geopolitical risks.

The calm shows up across multiple measures. The euro’s intraday moves are less than half the long-run norm, even as Treasury yields are swinging almost exactly in line with their historical rhythm. Bloomberg’s Market Impact Monitor also shows a tighter FX response recently to major economic releases compared to Treasuries.

There are still some sporadic intraday price spikes — like the big moves seen during April’s tariff turmoil and around central bank meetings — but the market now more quickly returns to a sleepier status quo due to the changing makeup of the dominant players, according to XTX Markets Ltd.

“A lot of that is down to the rise of pod shops and so many competing systematic strategies,” said Jeremy Smart, head of distribution at the firm. “It is possible to see a world where non banks look at FX and go: ‘the returns just aren’t really that valuable versus other asset classes’.”

That’s turned betting against volatility into a key strategy in currency markets. In the past, asset managers would use such an environment as a chance to snap up cheap hedges against the next flare-up, but such events are becoming rarer.

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“A few years ago, we would have a flash crash every so often. That hasn’t happened,” said Schroders’ Noonan, arguing that specialist currency traders may no longer even be needed. “The market is now incredibly efficient in how they look at risk and price it.”

Yet the recent slump in swings has been perplexing for some, who see it as being at odds with the macro backdrop. Explanations at the TradeTech FX conference in Barcelona ranged from the lack of emotion in having machines replace human traders to a dwindling number of players making big directional bets.

Some argued the lack of volatility is justified as interest rates have been declining in tandem across many developed markets, particularly now that the Federal Reserve has rejoined that trend with its decision to ease US policy on Wednesday.

“As central banks converge on their policy, obviously that’s gonna be a deflater of FX vol,” said John Rothstein, chief operating officer at Optiver. “It is expected, unfortunately. It’s just maybe strange that it looks different than some of the other asset classes.”

Part of the angst for the crowd in Barcelona is coming from a fear that the adoption of similar trading technologies is having a herd-like impact on the market. Some contended that algorithms would move toward almost identical pricing models and strategies.

Still, investing in even more technology remains a priority for currency firms this year, according to a survey by London Stock Exchange Group Plc. That found firms are turning to machines over hiring humans to gain a competitive edge in the increasingly automated market.

“That’s the journey that we’ve been on as industry over the last 20 years — it used to be super manual,” said Torsten Schoeneborn, co-head of G-10 FX trading at Barclays Plc. “Now when you’re a trader in many ways you are working with a machine that’s doing a lot of trading for you and you are just receiving the signals and fine tuning.”

--With assistance from Vassilis Karamanis.

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