Tom Arran Tom Arran, Monday 30th March 2020, 2:19 PM CEST
abn amro bank

There has been a substantial uptick in trading by stock-focused platforms, spread betters, and FX brokers after the volatility caused as a result of the coronavirus. This has seen all reporting that volumes have been improved since the beginning of 2020 and is expected to see strong first quarter financial reports and ultimately, the year as a whole.

In addition, many brokers have seen the share price growing in the last several weeks as it has not been impacted by the outbreak of Covid-19 and the lockdowns that have followed. This leads many to that brokers are already pricing in operational metrics but that makes some question if the outlook of positivity is actually warranted or if stocks offered by trading brokers remain a bargain?

While there is little doubt that the impact Covid-19 has taken so far on the world is devastating, the disruption to the economy resultant from the virus will not, in the long run, have the same impact historically as downturns have caused. Therefore, the uncertainty towards recent growth patterns should be seen with caution as it questions about how it will impact pullbacks in terms of brokers fortunes and their respective volumes, but it should not be a big enough concern to cause panic.

Risk sentiment and volatility and risk sentiment changes

If one were to look at the crisis from 2008 and the historic precedents that shows that when markets are stressed, it impacts FX market liquidity. However, when factoring in the impact of post-crisis regulatory change, it often results in FX Traders suffering consequences relating to activity. History has shown that when there is an increase in FX volatility that is affected by sharp swings tends to see traders reduce their positions so as to avoid any large risks during the downside.

FX Traders

Based on one recent BIS report, the clear increase in FX turnover in the weeks before the crisis that was fueled by high appetite for risk and low volatility. These combined factors were reversed several month later after traders became adverse to risk and higher market volatility. The current pattern we are seeing at the moment saw an increased turnover in FX that many determined was a ‘hot potato’ effect, where those trading were more intent on passing on any risk as fast as possible, a fact that was evident after investors liquidated most assets for cash, including even those seen as safe such as the yen and gold, which resulted in the US dollar being driven up.

In terms of the regulatory front, many have sought regulators to impose stringent reactions, which in the case of ABN Amro Bank, it stated that it anticipates it will incur significant “incidental” loss relating to one of its American clients as result of the coronavirus scenario. ABN Amro Bank is the first major bank to be hit hard by losses resulting from the Covid-19 crisis due to its clearing division not being able to meet a margin call on a loan.

In addition, most popular online platforms saw outages that sparked an increase in anxiety from investors as they could not trade on certain markets that had the largest rallies but also the largest drops. One of those was RobinHood, who had major downtime issues and resulted in many clients harshly criticizing the company and others who intent to file civil litigation against the company.

As a result, in part, it drew the attention of regulators which may result in additional restrictions. The reality is, the cost of the Covid-19 crisis may see legislative reactions that will restrict speculative behavior and risky products. Combine that with multiple other slowdown factors that impacted the pre-Corona environment that has been characterized in the OTC space by regulation creep, increased cost of market making, currency rigging scandals and that will result in skewered aversion attitudes.

Fundamental outlook uncertain and dictates caution

The hope is that in the next few months that higher volumes will follow, even though there is concerns how the virus will impact economic growth, policy makers are advising investors that it is expected that the downturn will not remain for long. This comes amid a massive drop in stock markets and the increase concerns relating to a global recession that has seen interest rates being cut by most central banks, which is bring back memories of the financial crisis in 2008 that was resultant from the US and their deeply rooted housing problems. While this is not the current situation that is the result of an external economic situation that is similar in nature to a natural disaster.

The reality is post-corona that world may be impacted by central banks acting in together and moving in unison until they determine how the economic recovery progresses, and as a result, it makes it difficult for FX traders to determine if their a strong reason to bet on a particular currency or to avoid it altogether.

Tom Arran

Author: Tom Arran

Tom has over 10 years experience on crypto currencies, first mining bitcoin on an old university computer for 20 cents a coin to now day trading bitcoin in between helping to start whichbroker.com. Tom has previously held roles at a leading EU brokerage and provided insight and consultancy work for number of UK banks in Crypto. Tom Arran can be contacted at [email protected], View all posts by Tom Arran

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