A spike in trading in a Euribor spread caused significant losses to several proprietary trading firms in July
London — 21 August An anomaly in trading in the Dec 20/Mar 21 Euribor spread on ICE has resulted in a number of proprietary trading firms reporting significant losses in July, the latest Acuiti Derivatives Insight Report found.
Exactly what was behind the flash rally in Euribor on ICE at 18:35 on 24 July remains subject to speculation and conjecture but during a quiet day in the markets, the Dec 20/Mar 21 spread traded nine ticks higher, peaking at 18:37 before returning to where it started by 18:42.
This caused havoc with several strategies with the Fly of Flys (the strategy in which a trader sells the 1st butterfly spread, buys the middle butterfly and sells the 3rd) moving 500 basis points without a move in the yield curve.
After the spike there was a rush or sell orders as traders scrambled to get out of their positions, which left several firms nursing heavy losses.
The impact of this was reflected in the August Acuiti Derivatives Insight Report, released to members of the Acuiti network today, which found that several proprietary trading firms reported significantly lower revenues in July.
“There remain many questions about exactly what caused the Euribor spread to move in the way it did last month with ICE adamant it was not a fat finger trade. But what is clear is that the incident needs to be examined and fully understood in order to enable firms to safeguard against future losses,” said Will Mitting, managing director of Acuiti.
“The irony is that it was firms that took a pro-active approach to risk management and sought to quickly get out of the positions to stem the losses that took the hardest hit as the market returned to previous levels minutes later. However, the practice of leaving orders in the book exposes firms to risk when incidents like this occur.”
Other key findings of the August Acuiti Derivatives Insight Report:
- Several proprietary trading firms report significant losses in July
- Revenue growth down across all regions as volumes fall
- Brokerages continue revenue improvement
Globally month-on-month revenues were weak in July with 32% of respondents reporting weaker revenues compared with 17% in June and bringing to an end the two-month rally in performance.
All regions reported slower revenue growth with emerging markets performing the weakest overall while the UK experienced the sharpest drops in revenues.
The one bright spot was in European equity and equity indices where several participants reported significantly higher revenues in July compared with the previous month.
“July was a quiet month for derivatives markets across most major financial centres but the surge of volatility from August 1 is likely to bring better fortunes to derivatives traders,” said Mitting.
The Derivatives Insight Report is published monthly by Acuiti, the management intelligence platform for senior executives in the derivatives market.
The report is compiled by data submitted anonymously by members of Acuiti’s global network. Acuiti was launched in February 2019 and to date over 500 senior executives in the derivatives market have joined the platform.
To apply to join the Acuiti network and get the opportunity to take part in and receive next month’s Acuiti Derivatives Insight Report, visit acuiti.io
For more information, contact Will Mitting
Tel.: +44 (0) 203 998 9190
Acuiti is a new management intelligence platform designed to provide senior executives with unparalleled insight into business operations and industry-wide performance. Acuiti helps identify market trends, enhance decision-making and benchmark company performance. The platform anonymises and aggregates information from its exclusive network of senior industry figures to provide insightful in-depth analysis.