Market-making, liquidity and stop-losses (from SNB peg day)

Author: Mike Paterson | Category: Education

The post-SNB moves reminded this old soldier of his market-making days when a main art of pricing was not getting hit


There was many a time on USDDEM and USDCHF when I’d find myself quoting 5, 10, 50, 100 maybe 200+ pips below/above the “supposed” market in an attempt to not get loaded with someone else’s position.  Being wrong on your own views was one thing but the mantra was always  ” don’t run other people’s positions” and so if you did get hit you’d be lobbing out or buying back at speed in order to minimize your loss or preserve a prevailing correct position

And it wasn’t a question of widening the price around Spot but more shading it to the side you felt was the weaker and/or second guessing the asker’s intentions, often leaving clear daylight for arbitrage if quick enough. But beware if you weren’t

This could be the scenario on many occasions either due to exceptional data, events, or quoting in large size. The other day I pithily said to a good mate of mine ” The best monies I ever made were the losses I never had”  referring to all the prices I made over my career that didn’t get hit, but at times like this never a truer word was  spoken in jest.

Stop losses were either filled once the price was a) hit or b) bid/offered depending on room policy and/or client preference and to this day the vagaries continue.  As an interbank trader/market maker I was often committed to wearing a loss (incredibly sometimes from my own colleagues at one bank) after being committed to a price for execution only to find the next bid or offer 10, 50, maybe 100 pips away. Is it any wonder some stops are front-run in these circumstances? Would you want your book exposed to a large loss not of your own making? And as a retail trader now can anyone justify to me the reasons for not having a guaranteed stop loss in place on this pair particularly?

So at this time of immediate reflection and nursing wounds for both retail and interbank traders/brokers it’s worth considering how these sharp moves escalate into free fall. There is also talk of fat fingers on EBS selling EURCHF at 0.0015 and 0.7030 adding to the confusion but the consensus seems to be a low of 0.8500 which dealt 5 times according to sources. 

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