In the last years and in particular this year, the London FIX has been on the front page of mainstream media but not for the good reasons. Trials and allegations involving various big banks is under developing right now as they are accused of artificially fixing currency rates and rigging the FX market.

This growing scandal suggests that no matter how big is the size of the FX market the fact that the market is controlled by a small group of traders at a handful of large banks it makes the FX market prone to manipulations.

Lack of regulation is one of the other reason why FX wrongdoing is possible and what makes FX market the most opaque market of all financial markets.

Before going any further we must address some serious questions like: What is the fix?; Who uses the fix? How is the fix manipulated?; and the most important question is: How can we make money of the fix?

Although there is no doubt the London Fix has been manipulated, by answering the above questions and knowing the mechanism behind London Fix we can create a profitable strategy from a risk to reward stand point of view. It's like in Poker, if you have the possibility to know your opponent cards you know which cards to play and which one to fold, the same goes with the London FIX strategy which it's not about anticipating what will happen but more to be proactive to what is happening.

  • What is the London FIX?
The London FIX is predefined time of day when orders from both side of the market are aggregated together where banks guarantee investors a certain rate for their currency trades. The benchmark price is determined on the basis of this actual buy and sell transactions that happens during a 1 minute window (30 seconds either side of 4 PM London time). In Figure 1 you can see with different time zone when the London FIX happens, I've market with blue rectangle the DST time as currently London time is GMT+1 and that's the time you are using during the summer time period.


Figure 1. London FIX time. (Different time zone)
The most popular fixing is the London fixing at 16:00 GMT. But investors and hedge fund managers place their orders with a bank in advance of time, so the trader from the bank knows already how much he has to buy/sell and from here comes his "edge" as he can front run those orders ahead of the fixing time on the expense of his client. We're going to discuss this in more details by going through an actual example which will show how even you can profit from this action and your edge will comes from knowing which way the market is leaning at the fixing. You don't have to have that information of order flow, not that it won't help you, but by just monitoring the action around London FIX you can find a tradable pattern.

Last thing the WM/Reuters publish the benchmark price after monitoring the transactions that occur around the 16:00 GMT time and sets the rate at their discretion. One more thing I'll want to add is that there is another London FIX at 11:00 GMT but it's not having the same importance as the 16:00 GMT FIX.

  • Who uses the FIX?
The price set at the London FIX is used by large banks, big hedge funds, pension funds and most central banks. The London FIX is also used by big investors who are regularly buying or selling currencies, because it removes the need to try and time the market for that particular day.

  • How is the FIX manipulated?
As I said earlier I'm going to go through some hypothetical examples to see how this thing can work and how we can profit from this actions. Let's assume a dealer from a big bank receives an order at 3:30PM GMT from a Japan multinational company who want to sell $1 Billion USD/JPY to hedge some of their exposure in the market, at the 16:00 GMT FIX. The exchange rate at 3:30PM is 102.00 USD/JPY.

Having access to such information of an such a big order that is a market mover can give you an edge, and the dealer from the bank can use this information to his own advantage and front run the client's order. Therefore he sells for his own account $100 millions USD/JPY at current market price 102.00. Next thing he wants more traders from other banks to join him and sell more to force the market lower ahead of the 16:00 GMT time, so he spreads the rumor that he has a large client order to sell USD/JPY at London FIX.

By the time we're near to London FIX the market has already spiked down 30 pips at an exchange rate of 101.70 USD/JPY and all he has to do now is to buy back his $100 million short USD/JPY position at a cool profit of $300K profits, and he liquidate his position into his client order who is selling at a worse price if it weren't for this manipulation. This artificially FIX ended up costing the Japan company almost $3 Millions.


Figure 2. London FIX manipulation Example. (Click on figure to enlarge)

In Figure 2 I was trying to represent on a graph the whole action how it would have look on a price chart.

As everyone was selling into the FIX, as we were moving closer to the 16:00 GMT the liquidity above market price has been consumed and is now very thin and it leaves a vacuum above current market price although some latent interest may be building behind this move usually the supply is very thin. At the London FIX everyone, who matters, from the big banks are now buying back their position adding more demand to the liquidity already available at that price combined with the vacuum above current market price it makes price to spike up, despite the $1 Billion sell order.

When everyone who wanted to sell has already sold and there are no sellers to push the market down the market turns around and from here we have those spike moves that are easily fade away, like in Figure 2.

Time is as important as price and many retail traders ignore this one aspect when trading, I hope by now I've got your attention on how different time of the day can affect the market price and definitely the 16:00 GMT London FIX is an important time of the day as is the opening of any other major Exchange.

Although this can be a fictive example it's not far from reality however I want to bring to your attention a true case that is currently under investigation from gold price manipulation scandal you can read more here: Manipulating Gold

  • The London FIX Strategy Rules
I'm going to outline few rules to guide you on how to trade the 16:00 GMT London FIX:
  1. First thing you have to look for suspicious activity ahead of London FIX, like sudden and quick movements.
  2. Wait until the 16:00 GMT time is hit, before fading any movement, for more confirmation wait 1 minute more after we hit the London FIX.
  3. Always trade the London FIX in combination with some technical levels, like support/resistance, swing high/low or some fib levels
  4. Do not fade the moves into the FIX if you don't have confirmations from some technical levels.
  5. Usually this moves are either false breakouts or moves into previous support/resistance levels that's the reason we fade them.
  6. Treat this move as a scalp trade.

Figure 3. EUR/USD behavior around London FIX.

If you're not convinced by the "power" of London FIX time let's look how EUR/USD behaved over the past several trading sessions. We're not going to choose some random dates jut to fit my criteria but I'm going to show you session by session how applying the above rules you can have an edge (see Figure 3). Throughout the last 14 trading sessions you could have trade EUR/USD around London Fix 6 times and making on average 16.5 pips/trade and with a trade size of at least 10 standard lots you could have made $1650/trade.

I hope this simple strategy will help you step up your game and improve your trading from here on.

Best Regards,
Daytrader21
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