Supply and demand in the FX market

A peculiar thing happened on Feb. 17, the Friday before the three-day Presidents’ Day weekend: An enormous supply of euros (EC) was offered on Globex, the electronic trading arm of the Chicago Mercantile Exchange (CME). Rumors began to fly around the spot forex market that someone was offering euro futures in size, by which spot traders meant “in the billions.”

Is the story true? And if it’s true, what does it mean? First, to trade billions on Globex seems kind of silly, at least initially. After all, each contract is worth €100,000, or $119,250 as of the close on Feb. 17. To trade one billion dollars’ worth, you’d need 8,385 contracts — in a market where 100 contracts is a large trade. Why not just trade in the deeper spot market?

One answer might be that a new market impulse does sometimes come from the futures markets precisely because outsized bids or offers are easily noticed. In the spot market, we have to deduce trade size from price, or rely on professional traders to reveal their interest and their customers’ interest. The spot forex market is among the least transparent of all markets, in part because it’s not in the interest of key participants to show their hands. The spot market is private and largely unregulated — which is why, when you want to send a message, Globex is Western Union. The time and sales report on eSignal shows orders went from normal bid-offer amounts such as 150 x 40 (3 a.m.) and 120 x 85 (6:30 a.m.), to 411 x 3003 at 12:45 p.m., and then a few minutes later, 302 x 9009 — an offer that qualifies for billion-dollar status. There also were a number of 3,000- and 6,000-contract offers. It’s difficult to read time and sales because every order is entered by the minute and second, and the report scrolls down hundreds of lines. Still, the massive amount of sell offers was detected within minutes and spread all over the market. The prevailing story was that the seller kept offering huge amounts and then pulling the offer to put in new ones as the price kept rising. Somebody was offering the euro in size after it had fallen from 1.1958 at 10:40 a.m. to 1.1887 at 12:30 p.m., but had bottomed and was rising again. It didn’t work, because the euro recovered to make a new daily high of 1.1966 at 1:20 p.m. before trailing off into a narrow range between 1.1940 and 1.1954 until the market closed. However, the euro did not reach the highest high of two days before (1.1974), let alone the psychologically important round number of 1.2000. The recovery was not accompanied by huge bids in the hundreds and thousands of contracts, either, implying that in the absence of the enormous euro offers, the euro might have built up a head of steam and delivered an upside breakout by the end of the day — a really higher high. In fact, at the time of the greatest number of contracts offered (12:30- 1:30 p.m.), the euro was rising, so the large offers could be viewed as a rear-guard action that (barely) kept the lid on the market.
Who knows what the party doing the offering had in mind? Was he trying to prevent a higher high or a higher close? If so, the effort failed — Friday put in both, and failed to put in a lower low than the day before. That leads to the bigger question: How can we detect real supply and demand for a currency?