By Chelsey Dulaney
Scott Schultz won't be making any social plans for this Thursday
evening. The co-head of foreign-exchange trading at Brown Brothers
Harriman & Co. will be in the bank's New York office deep into
the night, helping with what could be a torrent of currency
trades.
The U.K. votes that day on whether to remain in the European
Union. The uncertainty of what an exit -- or Brexit, as many call
it -- would mean for Britain and the Continent could spark a
surfeit of trade orders and volatility, especially in the pound and
euro.
"It could get pretty crazy," says Mr. Schultz, who hopes to
catch a few hours sleep in a hotel near his office that night
before returning Friday morning to resume trading.
That anticipated burst of activity could test many banks'
ability to process currency transactions at a time when most have
slashed trading staff. Hamstrung by new regulations and a recent
currency-price-rigging scandal, banks have been shifting more
resources into sophisticated electronic trading systems.
Now, days before the vote, these financial firms are scrambling
to get bodies on trading floors around the world to ensure clients'
trades are executed.
The banks' plans illustrate their concern that the electronic
platforms and algorithms that dominate foreign-exchange trading may
have serious limitations during high-volume periods.
Many electronic platforms are designed to shut down when markets
become too volatile and limits on losses or risk are exceeded. The
problem with some of these platforms is that they are programmed to
trade on preset rules and aren't able to recognize or respond to
market-moving events.
In times of market turmoil, human traders have an edge because
they are able to incorporate an event such as a
Brexit into their assessment on pricing.
"This is why I think it's important to never switch completely
to algorithmic trading," said Collin Crownover, head of currency
management at State Street Global Advisors in Boston, which manages
about $2 trillion. Brexit, he added, "is precisely this type of
event that threatens liquidity."
Banks have shrunk trading floors in recent years as postcrisis
regulations have constrained their ability to take on risk, making
foreign-exchange trading less profitable for many.
A price-rigging scandal has also hastened the move to more
electronic trading, which often offers more transparency on
pricing. Some of the world's biggest banks paid about $10 billion
in fines to global regulators in 2014 and 2015 and plead guilty to
conspiring to manipulate currency prices.
The number of foreign-exchange traders employed at major banks
has fallen 22% since 2010, according to London research consultancy
Coalition. At the same time, the proportion of foreign-exchange
volume that is traded electronically has jumped to 76% from 57%,
according to a report from Greenwich Associates.
Banks staffed up and insisted that traders stay overnight for
the 2014 Scottish referendum. They did the same for Y2K, when
people feared computer systems would crash at the turn of the
millennium. These all-nighters passed without major incident,
traders said.
Still, some fear that Brexit could generate the type of
volatility that roiled the market in January 2015, when the Swiss
National Bank abandoned its longstanding cap on the franc. The
currency surged nearly 30% against the euro in the minutes after
the decision, leading to big losses for banks, brokers and
individual investors.
One of those retail brokers was FXCM Inc., which was rescued by
an emergency $300 million lifeline from investment firm Leucadia
National Corp. Many of FXCM's clients had been trading on borrowed
money, exacerbating their losses.
Ahead of the Brexit referendum, FXCM has boosted its margin
requirements for clients invested in the pound, euro and certain
derivatives linked to the U.K.
"We believe there is a chance of disruption and highly illiquid
conditions in the forex markets during the coming weeks due to the
upcoming British referendum," the company said in an email to its
clients.
J.P. Morgan Chase & Co. will have most of its London traders
on the floor to handle orders when polls close before handing over
trading to Asia, said a person familiar with the matter. Morgan
Stanley and Deutsche Bank AG also plan to have extra staff on
trading floors that night, according to people familiar with the
plans.
Brad Bechtel, a managing director at Jefferies Group, plans to
stay up late, along with reinforcements in the bank's London, New
York and Asian offices. He thinks most of his clients will avoid
putting in orders on the night of the referendum, when prices could
be most erratic, but he added. "There will still be clients that
just have to do trades."
Making matters worse that day, polls in the U.K. close at 5 p.m.
New York time, when foreign-exchange desks typically empty out
between the close of New York trading and the open of Asian
session.
"It's probably the most illiquid time of the day," Mr. Schultz
said.
(END) Dow Jones Newswires
June 19, 2016 18:42 ET (22:42 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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