Drowning in Liquidity

We’re doomed!

The FX market is becoming more and more automated by the day. While in the past, it was the province of guys (or gals, but mostly guys) who had an instinct for how long or short the market was, what sentiment looked like and who controlled most corporate orders, today it is mathematicians and computer geeks who hold sway.

In this,  the retail market leads the way. Making money has always been tough but it is becoming tougher for the “guy in the basement” to be profitable unless he is building algo’s which are tending to feed off themselves.

This leads us to ask the inevitable question. No, it’s not what the hell were the Bank of England thinking, it’s what happens when the algo’s take over and spreads move out to six decimal places.

Is the day coming where spreads cease to exist and the only way to hit a price is to have the order in the market? Even then this will affect the bids and offers created by the Liquidity providers algo. At that point, do fundamentals make a comeback and the only way to trade is on the effect of U.K. inflation or U.S employment?

That will only work, of course, until we no longer have different currencies once they have been made redundant by Cryptocurrencies and valuation is simply nothing more than true supply and demand.

Analysts? Who are you?

What is the point of an economics degree? Particularly if you are going to work in an investment bank or be involved in the markets in any way?

The other day I was bored, so I look up currency analyst on Linkedin. I took the first twenty names that came up and checked their background.

Seven had been to university. Three had an economics or maths degree, the other four had very useful degrees in subjects like classics or land management. It was, naturally, the other thirteen who interested me most. None work for a bank (that is the province of the three with a genuinely useful qualification). An incredible eight of the thirteen had had at least one job in a retail sales environment; PC World headed the employers with three. The other five had had various jobs in retail, none of which had provided any preparation for advising clients on currency markets, analysing economic events or generally understanding the mechanics of markets and how they are interlinked.

This leads me nicely onto the point of some brokers commentary. It is not informative or even entertaining (like this!) it merely provides an “in” to a client’s inbox which is probably the most outdated form of marketing there is.

So, what were they thinking?

Going back to the Bank of England, did you see Mark Carney’s press conference? He looked as keen to be there as Donald Trump in Compton! Talk about gritted teeth. If I had been a journalist my question would have been simple; “did you really sell your vote to Silvana and Gertjan? To get them to vote hike must have taken some serious horse trading particularly in the case of Vlieghe.

All those ex-PC World and Carphone Warehouse employees got it right since they simply go with the flow on economic argument. They will however have looked a little foolish when the U.S. employment report can out close to 30% below expectations.

Central Banks are in general making a big comeback and there is a whole generation who haven’t seen the influence of monetary policy and interest rate differentials as primary market movers.

Times are changing, and even technical guys are going to have to mark their calendars with the date of the next FOMC or ECB meeting and at least understand the drivers that they use to hike or cut rates.

The only constant is the difficulty of making money constantly.