By Saikat Chatterjee and Dhara Ranasinghe
LONDON (Reuters) – At a time of extraordinary swings on world markets, many traders working from out-of-town offices or in unfamiliar dealing rooms fear that communication problems and technical glitches risk adding to already spiralling volatility.
Banks’ contingency plans to safeguard markets and employees through the coronavirus pandemic could over time transform the trading and investment world, with more staff working from home or in smaller centres rather than being concentrated in expensive locations like London’s Canary Wharf or Manhattan in New York.
For now, though, such “business continuity plans” are proving frustrating for those forced to commute to New Jersey or the London suburb of Northolt, and scary given the potential for disruptions caused by telephone or internet outages.
Banks dismiss these fears: many told Reuters all systems have been replicated across locations, with staff linked by open phone lines and loudspeaker systems. For non-trading employees who can work from home, they have also stumped up for recorded phone lines, faster servers and additional screens.
Yet, for the head of cash equities at a European bank in Hong Kong, unfamiliar offices and equipment carry stresses that only add to what they see on their monitors.
“You not only get nightmares of a fat-finger error by you or one of your team members, but a slew of other things including cyber hacks or a trade not going through due to some error at the back-end operations,” he said.
“Our risk and tech guys have been spending sleepless nights to ensure none of those events take place.”
While trading volumes are holding up well, there are some alarming signs — above all, the occasional struggle to execute orders in the $17 trillion U.S. Treasuries market. There are also episodes such as last Monday’s Australian dollar mini ‘flash crash’, when bid-ask spreads briefly widened nearly eight-fold, suddenly pushing the exchange rate below $0.63 from $0.655.
The same day, option trading on Wall Street’s VIX volatility index seized up for several minutes at the open as market-makers failed to come through with prices.
It was not clear whether remote working caused these episodes but it probably hasn’t helped; JPMorgan notes there is no precedent for the sheer scale of market-making that traders split into different locations.
Cyber hacking, higher transaction costs, poorer liquidity and greater volatility were the sort of “operational risk event” that could ensue, it warned.
JPM noted for instance that roughly two-thirds of the volume in longer-maturity U.S. Treasuries were transacted at a higher spread last week than during past selloffs. Market depth was also affected, it said, citing the average size of the top three bids and offers.
It said that on March 9, 60% of trades in 30-year U.S. Treasuries had been executed at a bid/offer gap of over 0.5 ticks, versus almost none at the end of February.
At Dutch bank ING, which has split up teams around the world, executives acknowledge changed working conditions, with some monitoring fewer screens for instance. But the main focus is on managing existing risk rather than providing liquidity, says Obbe Kok, ING’s head of financial markets in the UK.
“We haven’t experienced exactly this before so we expect there will be an impact for liquidity but we don’t know exactly how much,” Kok said.
(Graphic: AUD flash crash chart – https://fingfx.thomsonreuters.com/gfx/mkt/13/3478/3439/AUD%20flash%20crash%20chart.png)
NOT LIKE BEFORE
The U.S. Federal Reserve and other central banks have moved repeatedly, including on the weekend, to ensure liquidity isn’t a problem, slashing interest rates and pledging billions of dollars in asset purchases.
One G7 central bank official said traders, unable to gather in familiar offices to test strategies, were possibly more wary of executing complex trades, causing some sectors to start “gumming up”.
“There was much less trading and there were big differences between the buyers and sellers,” he said, adding that central bank moves would help markets “un-gum”.
Trading has evolved since the 2008 crisis, with machine-reading algorithms replacing many of the traders who got deals done by barking orders into phones or punching numbers into electronic platforms.
The bank-to-bank Treasury market is dominated by automated, high-frequency traders (HFTs) who work in small sizes but often, using pre-programmed algorithms.
But what has not been tested is these machines’ ability to function for any length of time without backup from traders, risk managers and operational staff who ensure smooth settlement of deals.
Past incidents show however that when volatility spikes, HFTs can turn skittish; split-working, which erodes humans’ ability to intervene quickly, could exacerbate this, JPM noted.
“If that occurs, we believe this particular circuit breaker will not function effectively, which could significantly extend the vicious cycle of higher volatility begetting lower liquidity,” JPM warned.
(Graphic: Italian bond futures – https://fingfx.thomsonreuters.com/gfx/mkt/13/3483/3444/Italian%20bond%20futures.png)
Meanwhile, investors are noticing the difference.
Ross Hutchison, a fund manager at Aberdeen Standard Investments, said contingency measures were “starting to hamper trading”.
“There are simply less traders available than before the virus started.”
While Treasury market seize-ups were probably more down to the dash for safe-havens than to remote working, investors note widening bid-offer spreads across all bond markets.
Mike Riddell, head of UK fixed income at Allianz Global Investors, said bid-offer spreads in the UK government bond markets, one of the world’s most traded, were about five times’ normal levels last Monday.
Trading liquidity on the interest rate futures desk was worse than in 2008, he added.
Others, sent home by their funds, were struggling to work with two screens instead of the normal five or six, which one investment strategist described as “flying blind.”
“My productivity has fallen sharply,” they said.
(This story removes word ‘home’ from first paragraph)
(Reporting by Saikat Chatterjee and Dhara Ranasinghe; Additional reporting by Abhinav Ramnarayan, Swati Pandey in SYDNEY, Sumeet Chatterjee in HONG KONG and Karen Brettel in NEW YORK; Editing by Sujata Rao and Hugh Lawson)