The chief executive of foreign exchange and cryptocurrency exchange operator, LMAX Group, has said that the firm’s introduction of weekend currency trading services for institutional investors could lead to 24/7 spot FX trading within the next five years.
Weekends can be an uneasy time for institutional investors as traders are forced to wait until the next working day to respond to key impactful events that may have taken place.
24/7 news coverage has meant weekends are no longer considered a period of relaxation but are instead met with dread by traders as a period when they are not able to react to market volatility outside of working hours. LMAX Group believes the new Weekend FX service will offer a solution to this problem.
“International trade is 24/7 and there is a lot of cross-border business, so why do foreign exchanges finish at 5pm New York time on a Friday, and open at 5pm New York time on a Sunday night? What happens to the rest of Asia, which is already open?” said the chief executive of LMAX Group David Mercer. “Why do you have to take that risk over the weekend? Why do you have to bite your fingernails while politicians have meetings? I think it is a natural extension of the world we live in today, and I can find no reason why we don’t trade FX at the weekend.”
So why are markets closed to institutional investors while retail investors are left unrestricted? FX markets have historically coincided with banking hours and have therefore been closed during the weekend. This closure allowed market participants to process trades and settle their books. However, these processes have since become obsolete as payment systems are no longer tied to banking hours. The unnecessary closure of markets during the weekend creates the potential for institutional investors to miss out on a crucial period of trading activity.
The new Weekend FX service offered by LMAX Group will be open to clients from the time markets close on Friday at 5:05pm until 5pm on Sundays. Initially, the Weekend FX service will support two currency pairs, Euro\Dollar and Dollar\Yen, which the exchange has said offer more natural liquidity. This offering will eventually, be expanded to cover 90 currency pairs which LMAX already offers during the usual working week.
Mercer said the inspiration for the service came from institutional liquidity providers: “I have institutional liquidity providers putting quotes into my FX exchanges 24\5 and a half. The same liquidity providers started to quote crypto on a 7-day week basis, 24-hours a day. The natural extension was to get them quoting some currency pairs.”
Retail broker IG has also launched a weekend trading service that trades in GBP\USD and its own Crypto 10 index for retail and CFD traders, however, LMAX has a wider institutional client base.
Advances in FinTech coupled with the increasing appeal of being able to trade 24/7 with cryptocurrencies could mean now is the right time to implement weekend trading. Current remote working conditions has also forced the industry to adopt new technologies.
Most companies are looking for new ways to adapt their businesses to social distancing guidelines imposed by the government in response to the COVID-19 pandemic. It is likely that working from home will become more popular even after the UK lockdown measures have been fully lifted, and companies will be eager to operate with a reduced headcount physically present in the office.
This could lead to firms encouraging staff to work more flexible hours and institutional investors using Weekend FX trading as a potential solution to splitting up the working week. “We consider a full move to 24/7 spot FX trading a real possibility within the next five years, with Weekend FX representing a clear step forward in achieving this goal,” said Mercer.
However, while Weekend FX has received support from institutional investors equity markets in Europe have been campaigning for shorter market hours to drive diversity in the industry, and improve the wellbeing of traders. A consultation to proposed shorter market hours, held by the London Stock Exchange (LSE) earlier this year, received widespread support from market participants. Although, a minority argued that market hours should remain unchanged.
Advocates of reduced working hours are clear that all exchanges would have to implement the change unanimously. Others have warned there is potential for additional dislocation, market complexity and fragmentation should one trading venue agree to reduce trading hours independently instead of taking a harmonised approach across Europe.
LMAX’s Mercer said he understood the bid for shorter equity market hours, but highlighted the contrasts and nuances of FX markets compared to equities markets. “The FX market is 15 to 16 times bigger than the equity market and it is running 24 hours, 5 days a week,” Mercer said. “It is very possible that a significant market-moving event can happen after a session close. It is very possible that can also happen at the weekend, and could happen overnight even on a normal working day. What happens to a position you have? Are you supposed to sit on it or scramble around once markets open? Surely markets become more efficient if they are perpetual.”
He insisted that a lot of investors are time-rich during the weekend and it makes sense for them to be able to rebalance their portfolios and hedge or mitigate their risk during this time instead of rushing during working hours.
Market volatility surged during the height of the coronavirus pandemic and the implementation of lockdowns across the globe. Although, despite the unpredictability of markets, Mercer believes that confidence is returning.
“What you saw was extreme volatility in the middle of March, extreme sell-off in equities and panicked markets. But we saw some normality afterwards. Capital markets are good at being resilient, bouncing back and accepting this horrid phrase we now all refer to as the new normal,” Mercer said.
“I think overall when I look at LMAX Group liquidity, I am very pleased with how the liquidity held up. It was a bit nerve-wracking at times during the heights in March, but we came to this normality in April and May where there was a lack of volatility – it was very much a risk- off environment… All of sudden there is this element of fear around the markets that is good long-term but not so good short-term. You had this risk-off environment, only now they’re getting back confidence and re-entering the market again.”
To watch the full interview with LMAX Group’s chief executive, David Mercer, click here.