Quarter-end fixing performance
In this short article we briefly explore the performance at the 4pm London WMR Fix during the first quarter-end under viral lockdown. In the days leading up to quarter-end there was increasing market chatter that the fix could prove to be particularly challenging given the current market conditions.
Analysing the performance of a large sample of fixing trades does indeed confirm that overall slippage to the WMR 4pm benchmark was worse at Q1 quarter-end compared to recent ‘normal’ market conditions. In the chart below we plot the volume weighted average performance versus WMR 4pm for fixing orders traded on the following days:
a) 31st Dec 2019 to compare the previous quarter-end
b) 28th Feb 2020 to compare the previous month-end
c) 24th March 2020 to compare the same day the previous week
d) 31st March 2020
Underperformance to the 4pm Fix was clearly significantly worse than the previous quarter-end and month-end. If we assume that February month-end was the last relatively ‘normal’ month-end, then the difference to the performance seen on 31st March is extreme. We can also see that performance was starting to deteriorate through March, given the slippage observed on the 24th, as market conditions worsened.
However, as with all such macro analysis, the overall results mask the details. When we explore currency pair performance, we actually find that for a number of the majors (including EURUSD, GBPUSD, USDCAD and AUDUSD) performance at Q1 was similar or better than that experienced at Q4 quarter-end. Amongst the majors, USDJPY is a clear exception, where slippage to the 4pm Fix was considerably worse at Q1 quarter-end. It is in the less liquid pairs including Scandis, G10 crosses and Emerging Markets, that we see the more significant underperformance on 31st March, which seems to be in keeping with the anecdotal evidence from the market. The charts below illustrate the % increases in underperformance witnessed at Q1 compared to Q4 for a selection of currency pairs:
It also appears that many investors started the quarter-end roll process a number of days in advance of the 31st, which may have contributed to the relatively orderly market on the day itself, and the fact that performance vs the 4pm benchmark for most of the majors remained in line with previous quarter-ends.
Increased underperformance for fixing trades versus the 4pm London WMR benchmark at the end of Q1 2020 is obviously an expected result. Quantifying the magnitude is of interest, e.g. approx. three times worse than the slippage experienced at year-end, and illustrates just how abnormal current conditions are. It is clearly impossible to predict how conditions will evolve over the next few weeks, and given how many portfolios are mandated to minimise slippage to WMR, one could argue that there isn’t much that such managers can do to mitigate the underperfomance. Given that G10 crosses particularly suffered, it may be an argument to try to manage flow through the liquid traded crosses as much as possible? If there is discretion to move flow to other times of the day, or use other benchmarks, these market conditions, which are likely to persist for some time, may warrant investigating such options.
