ASIC released the preliminary findings of an investigation into unusual trading patterns in the Australian dollar before the release of the RBA monetary policy announcements in February, March and April this year.
On each occasion the currency moved in the “right” direction prior to the RBA announcement. The movements, particularly after being correct three months in a row, has the market asking questions.
Is there a leak, or is something less sinister to blame?
According to ASIC, it’s the latter. Here’s what they had to say:
“Preliminary findings reveal moves in the Australian dollar ahead of the announcement to be as a result of normal market operations in an environment of lower liquidity immediately ahead of the RBA announcement. The reduction in liquidity providers is a usual occurrence prior to announcement in all markets. Much of the trading reviewed to date was linked to position unwinds by automated trading accounts linked to risk management logic and not misconduct.
“In particular, ASIC has observed liquidity being withdrawn from the market at the same moment as participants already positioned were considering their risk exposure too large ahead of the announcement and reducing their position. This lack of liquidity distorted the execution logic in the algorithms of some participant systems. This, along with a fall in trading volumes leading up to the release of key market data, means trades may have had a more pronounced impact on the price than they otherwise would”.
In other words, the movements in the Aussie prior to the RBA’s announcements were due to small orders placed by automated trading robots amplifying market movements amidst low levels of market liquidity.
While ASIC are correct that low levels of liquidity before major data releases have the potential to see small trades create substantial moves across markets, the crux of their finding doesn’t address the main question markets want answered – why was the currency movement correct three times in a row?
Was is luck or, as the price action might suggest, do some market participants have the decision before the rest of the market?
Here’s a look at the Aussie charts before the each RBA policy decision so far in 2015:
On each occasion the currency moved sharply, and correctly, in the minute before the RBA decision’s release. That’s unusual in itself, putting aside the fact that the outcome was seen as line-ball on each occasion.
While ASIC’s assessment may be proven correct, should we see a similar correct move before the RBA’s May policy announcement tomorrow afternoon, the talk surrounding a potential leak leading to front-running from some market participants will continue build within the markets.