Unusually predictable trading patterns in the foreign exchange trading markets – specifically, around the 4pm London so-called 'Fix' (the WM/Reuters spot FX rate) – have been highlighted by researchers.

The report, 'New Trading Patterns Around the WM/R Fix', by Pragma Securities, uncovered the patterns, which it says are due to recent changes to the calculation of the WM/Reuters spot FX rate as well as a shift in how banks handle client orders.

The 'Fix' window was expanded from one to five minutes in February 2015 and this research provides the first look at how spot FX trading activity has changed since then.

Pragma states that the unusual spot FX trading patterns consist of:

• Predictable rate momentum and reversion. As orders are now split evenly across the five-minute window, rate changes have consistent momentum throughout the full period, and reversion afterward. This means that by watching the first minutes, traders can know what to expect later in the window and just after.
• Predictable spikes in volume and volatility. Volume and volatility step up as the window opens, then revert back to pre-window levels as soon as it ends.

Pragma explains that a root cause for the emergence of these patterns is asset managers’ heavy reliance on trades pegged to the Fix, which concentrates demand imbalances into a short period of time.

Pragma's CEO, David Mechner, says: “Buy-side firms trade the Fix to minimise tracking error against indices, but they are paying a significant price in market impact. Meanwhile, the FX markets are continuously changing, and the buy-side is being forced to take an increasingly assertive approach to understanding and directly controlling its trading.”

According to Pragma, in response to this change, as well as to criticism around FX rate scandals, major banks have segregated Fix trading from their spot desks and trading client Fix orders using a straightforward “time-slicing” approach that divides and executes orders evenly over the five-minute window.

The report is available at www.pragmatrading.com