Trading at the fix not the best fix, says Russell
The costs of 'trading at the fix’ can be more of an issue for investors than their desire for transparency, Russell Investments has warned.
In its research paper 'Does trading at the fix fix FX?’, Russell sought to find whether using a fixed price for FX transactions provided optimal outcomes for investors.
Investors looked to point-in-time (PIT) strategies as a way around their lack of market trade information to make it easier to value international portfolios for comparison, according to Russell.
Russell Investments head of foreign exchange Michael DuCharme said investors used PIT strategies to gain greater transparency when trading. However, many did not consider the broader risks and implications of the trading process.
“We have found investors focus on minimising tracking error to the point where some of the fundamentals of trading, such as volatility, liquidity and bid-offer spreads, can be overlooked,” he said.
Russell said dealers could offer better or worse prices to try to reduce their risk before trades closed, or manipulate the market through 'banging the close’ - trying to influence the rate through the execution of large trades close to fixing time.
The asset manager also found that popular trading times occurred when currency markets were in a period of declining liquidity and increased volatility.
“As most investment managers trade currencies to fund international security transactions rather than to profit from volatility swings, tolerating the excessive risk is unnecessarily costly,” DuCharme said.
The unpredictable nature of exchange rates meant it was unlikely an investor would observe the best price of the day consistently at particular times, its research found.
Russell said a better strategy involved the use of alternative benchmarks such as a volume-weighted average price.
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