Research by Pragma uncovers predictable trading patterns around WM/Reuters FX rate fix

Pragma Securities, an independent New York-based provider of quantitative trading technology, has produced an analysis which concluded that predictable trading patterns occur around the new WM/Reuters spot FX rate window.

The company considers that recent changes to the calculation of the WM/Reuters spot FX rate, also referred to as the 4pm Fix, coupled with a shift in how banks handle client orders, have created unusually predictable patterns in the FX markets, according to research released today by Pragma Securities. The report, titled “New Trading Patterns Around the WM/R Fix”, also finds that algorithmic traders are well positioned to improve their performance trading in and around the window.

In February this year, new methodology was applied with regard to the means by which the WM/Reuters 4pm spot FX fix is effected. New methodology widened the fixing window from 1 minute (-/+ 30 seconds) to 5 minutes (-/+ 2.5 minutes) and added more data sources. This was a welcome change for traders at banks responsible for matching the closing rate for their customers.

At this year’s Profit and Loss Conference in London in May, the effect of the new rulings was discussed. Jim Cochrane, Director of ITG Analytics gave a comprehensive explanation as to the matters of importance for institutions. “Even with collusion halted and systematic trading sidelined, there are still dozens of large asset managers with a need to match the WM/Reuters Closing Spot Rate with minimal (zero) tracking error. Those trillions of dollars benchmarked to the indices are almost all in the same direction” he said.

In some respects, Mr. Cochrane’s dialog in London recently also bears out the results of Pragma’s analysis: “A change in methodology will ease the stress of trading around the fix, but it will not change the underlying trading behavior of institutional investors managing their currency exposure. In short, without changing the trading behavior of the investing community, institutional investors who do not actively manage the fix will be subject to the risk of large implementation shortfall losses” continued Mr. Cochrane.

Concluding, he stated “The promise of the midrate for the WM/Reuters fix is one of the last vestiges of free risk transfer in the foreign exchange market. And that promise is dying quickly. Banks are now charging a spread for the fixing service in line with Financial Services Board recommendations. Several solutions have been offered to manage this risk directly: a clearing auction, peer-to-peer matching, algorithmic trading or a combination of these three.”

Commenting on the outcome of Pragma’s analysis, David Mechner, CEO of Pragma, said, “In recent months, the huge, efficient spot FX market has become predictable around the 4 pm London Fix. Changes in the Fix methodology and how firms are trading around it has created patterns that can be exploited to improve trading performance.”

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

As a result, spot FX trading activity around the Fix window has become predictable since February, as major banks execute orders in lockstep:


  • 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.

In the research note, 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.

“Buy-side firms trade the Fix to minimize 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,” said Mr Mechner.

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