Heavy hands to do the hardwork
Those that read my daily pieces would have heard me mention the concept of “heavy hands” previously. I’ve used this term generically to ascribe market behaviour to a group of participants with very, very deep pockets and enough size to influence sustained periods of control over market behaviour and price action. Akin in sorts to the Phantom, the ghost who walks (if you got the reference, kudos, if not, Google it) these heavy hands (HH) take various forms but in short generally reference characters such as the BIS, real money, tier 1 investment shops (you know who you are Lloyd) and the top end of the hedge fund town. I suppose given the level of global financial collusion these days, HH can be any or all, of these characters simultaneously or independently. Of greater significance is their existence and the nature of influence they hold over the market.
By virtue of who they are or at least purport to be, the BIS has always struck me as one of the more interesting characters within this menagerie of players. The dichotomy of their behaviour makes the BIS a study in paradox. We all know they are known as the central bankers, banker. With this the usual smoke and mirrors price action we’ve seen in recent times comes of course. When you’re executing on behalf of the likes of Ben and Mario you’re a force to be reckoned with and well you should be. In the execution of such business come many nuances including the ever present temptation to front run natural flow and orders and quite frankly it would be rude not to (more on this later). On the flipside of all of this you, as the BIS, are also meant to be holier than thou, beyond reproach and almost angelic if you’re being trusted with this information and type of clientele. So in an effort to maintain the mask of propriety you claim fierce independence and produce research reports, annual declarative publications, and white papers with stern constructive critiques about the state of global financial markets and systems. Included are examples of 2 such reports issued by the BIS. The first of which is a white paper the about the nature of transactions in the FX markets and the participants perpetuating such behaviour, interestingly if perhaps not a little ironically titled “Information flows in Dark Markets: Dissecting customer Currency Trades” http://www.bis.org/publ/work405.pdf I warn you now however that interspersed with very interesting titbits of information are multiple pages of empirical evidence and statistics that will make your eyes bleed. So read it completely at your own peril, unless of course that’s how you get your kicks. What I will say however is that the first three or so pages of the introduction tell you pretty much everything you need to know. In short, those with the order flow and task of executing “the” business are the very same who have an overwhelming asymmetric informational and tactical advantage over the rest of the market.
Because the BIS is one of the biggest culprits in this carousel.
The second paper is equally interesting http://onlinelibrary.wiley.com/doi/10.1111/jofi.12053/pdf, while taking a slightly different angle on the same issue. The rocket scientists (plaudit rather than sarcastic derision) that have written this work have dug the through the first paper and done a good chunk of the hard work for you (and let’s face it, me too). They have studied and dissected all of the statistics as well as other variables featured and, unsurprisingly come to a similar conclusion. Over and above this in tackling the thesis from the perspective of liquidity in FX markets they have driven home the point that it is indeed the participation of HH in the market that warps and erodes any attempt at efficiency in the pricing of assets or in this case FX crosses.
Front running I hear your shout!? But of course folks, as I said it would be rude not to. Front running is a tried and tested and much relied upon method of making cash out of order flow. Basically you take positions ahead of the business/orders you’ve been tasked with executing. There isn’t a single half decent shop out there that doesn’t do it and as I spoke of earlier, the BIS while being different to so many other shops in so many other ways, do not in any way differ in this particular instance. And when you think about the magnitude of the flow and orders they see… well I think you get the picture.
Going forward its certainly worth baring in mind when you hear an instance of the BIS or for that matter HH getting involved that the bid or offer they’re defending is worth taking note of if not for the sheer size behind it. Sadly though a massive chunk of the retail market is either unaware of the above or simply don’t buy into it and thus place orders and trades in some of the more inopportune places in the market and are left aghast when they’re taken out or claim a rigged market. I for one, to a degree at least, agree with the notion of a rigged market but only so far as, if you know what side of the ledger the HH are sat on, then you have a slightly better chance of navigating the murky waters of this “efficient” market.