US presidential elections have scope to see volatility spike higher - what five qualities should you look for in your liquidity provider.
The results of the US Presidential election will start to be announced from 7pm Eastern Standard Time on November 3rd – which will be 11am in Sydney on November 4th. This election is expected to be like no other, with very heavy levels of postal voting forecast, possible delays at polling stations owing to staffing shortages, and the real risk that the result could be contested. That said, even if we don’t see the same ‘quick’ result posted as was the case in 2016, as the numbers do come in – and the political tensions likely rise further – markets are set for a volatile ride. What’s more, the early stages of this process will be played out whilst US and European markets are essentially asleep.
So, after a year marked by rampant volatility and the risk of pricing dislocation, more than ever, price takers should be actively checking that their liquidity providers are going to be well placed to provide the highest quality service. We assess five key attributes that your LP should have, if you’re looking to have a successful – and stable – trading period over the forthcoming US election results.
Arguably the most important point is whether your counterparty has a regional office which will be fully staffed throughout. Whilst ‘night dealers’ may prop up desks in London and New York, having access to a comprehensive team who are able to provide immediate support in the event of overt market volatility could have a significant impact on your ability to execute trading strategies profitably.
Liquidity may be in short supply, so ensuring your liquidity provider is in a position to offer you access to consistent prices at good depth should be an important consideration. And one potentially big problem here is those small, prime-of-prime brokers who with limited capital behind them simply end up recycling liquidity. What’s more, the ability for your liquidity provider to incorporate its internal flows whilst also having access to a broad spectrum of primary markets for price referencing purposes are key points to watch. Considerations like this ought to provide reassurance a consistent service can be sustained, even throughout abnormal market conditions.
2020 has been atypical in many ways, including the fact that this year has seen the market being tested yet again. In some instances, some liquidity providers have had to withdraw their ability to continuously quote two-way prices even on the most mainstream assets such as gold. However, the next generation of liquidity provider is being marked out as an institution with the ability to construct prices consistently, even through the most challenging market conditions. They’re drawing from such a wide range of price sources that quotes can invariably be synthesised reliably.
It’s the age-old disclaimer of the wealth manager that past performance should never be taken as an indication of future performance. That said, the rampant bouts of volatility and unexpected market moves which seem to have dominated much of the year give a great insight as to the structural processes and technology protocols in use by brokers. Those who have seen a consistent performance in recent months have likely shown that they have systems which are sufficiently robust enough to cope – sustaining up-time through the peak periods of volatility in March was down to deliberate choice rather than good fortune.
Those who invest heavily in building and maintaining kit are always likely to be better placed in times of uncertainty. An in-house team of programmers have the ability to constantly hone systems for the very best performance, whilst also being there ready to respond should the need arise. That’s a far cry from the broker in a box, reliant on third party, off-shore tech support.
CMC Markets’ API and pricing fared exceptionally well during the unusual year that 2020 has been to date. Many factors – including our connectivity, balance sheet, internal teams, investment in technology and co-location – have all played a role here. As the market faces up to yet another potentially volatile event, now is the time to check with your liquidity providers as to whether they are suitably well placed to provide you – and your clients – with the service you deserve.