CMC Markets Connect's Andrew Wood Talks How Volatility Indicator Helps Institutional Clients
Over the last eighteen months, interest in trading amongst retail audiences globally has soared. An uptick in working from home, more free time and bouts of often exaggerated volatility have created perfect conditions for brokerages of all sizes to engage with a new cohort of traders, whilst reactivating old leads, too. However, as lifestyles and economic conditions begin to normalise – and volatility risks slipping away – brokers are left facing a challenge as to how they can maintain this momentum.
To help address this, CMC Markets Connect is launching a new volatility indicator for institutional clients, using its own wealth of data to highlight where the pockets of volatility lie, allowing retail customers to be notified in a timely manner. We spoke to Andrew Wood, Head of Institutional Sales APAC at CMC Markets Connect, to learn more about this new initiative.
Q: How does this initiative work?
A: As a data-intensive business, we are receiving as many as two billion price updates on any given day. Our quant team are already analysing these on a constant basis, allowing the business to fine tune our hedging and liquidity strategies. As an extension of this they have the flexibility to run other projects so have implemented additional screening for the benefit of institutional clients. By comparing standard deviations in asset prices, we can see what is trending in terms of volatility and ensure this valuable information is passed on. Whilst we're keen to keep communications channels open, I think it's important to ensure that we're always offering genuine value to counterparties – something that this data certainly achieves.
Q: How do you calculate these volatility metrics?
A: We're taking our NextGen CFD pricing as the data source, then using this to derive the annualised standard deviation of intraday returns. When referencing cash instruments, prices are derived from the most liquid futures price available at the time, but it's worth bearing in mind that what we have achieved here is a method of continuously monitoring for those upticks in volatility. It's spikes within an asset class that warrant a second look – we're not suggesting taking a single view of the entire tradable universe here.
Q: How do your institutional clients access the information?
A: We're sending out an e-mail note on a frequent basis to existing clients and leads alike, as we see this as being useful information for the entire market. It's an extension of the popular monthly quants report which we have been posting on LinkedIn and also helps showcase the wide range of instruments we have on offer – the number now sits at just over 11,000. If client-facing institutions aren't already receiving this data and want to, they should drop me a note on a.wood@cmcmarkets.com.
Q: Can you give us some recent examples of when this has been useful?
A: Absolutely. We've seen a run of activity in recent months across soft commodities. It's a product suite that we have offered for years, but as volatility has disappeared from equities and precious metals, these instruments have taken on added significance. With that in mind, being able to highlight erratic price movements as they occur – we've seen this happen with coffee as worse than usual frosts hit Brazil and also with lumbar which suffered from supply shortages as economies rebounded in the wake of COVID lockdowns – means that our institutional customers can pass this information onto their trading clients. After all, we know that there's big demand from many traders who are focused on getting exposure to the volatility, rather than worrying primarily about the asset they are trading.
It also provides a useful reference point when instruments slip from favour. Silver saw a somewhat abstract run earlier in the year, but being able to qualify its fall from interest amongst the day trading community with hard data like this again provides a valuable message, even if that is a case of there's nothing see here – move along…
Q: How would you suggest that clients make use of CMC's volatility data?
A: With over 11,000 instruments on offer, it's very difficult for our institutional clients to keep abreast of where the price action is being seen at any given point in time. Even when a topic or asset is grabbing the headlines in mainstream media, that doesn't necessarily translate into to volatility, but this new dataset offers cut through. It's something that brokers can use to re-engage not only with momentum traders, but spikes in volatility are also seen as triggering better opportunities when using technical indicators, in turn providing real value to another cohort.
Q: What about cryptos?
A: We cover digital currencies in the analysis too, reflecting both our global audience and the instrument schedule we offer. Obviously these can't be traded by retail clients in the UK and EU, but it certainly offers up some interesting data, both in terms of observing the overall trend for the asset class, along with which coins are seeing the most volatility at any one time. Although it's typically the newer "alt-coins" which see the greater price action, that's not always the case.
Q: Does this work universally?
A: Largely yes, but we've found that the analysis doesn't translate across asset classes. Specifically, single stock CFDs are constrained by some technical factors which manifest themselves in terms of pricing. Corporate actions have an undue effect here, whilst the propensity for share prices to gap overnight also exaggerates the volatility. We still get volatility metrics but trends are far harder to identify – something which isn't the case when you're working with continuous markets and even less so when we're making the price.
Q: Where do you see the benefit in the future?
A: Consensus is that we could be approaching an interesting phase as far as capital markets are concerned, where a return to a more "normal" environment looming. The key driver here will be shifts in monetary policy by the central banks – it seems likely that the Federal Reserve will act first, but the Bank of England may not be all that far behind either. Better returns on cash have the potential drive down equity prices, but any revisions of monetary policy will at the same time lead to increased volatility in currency and bond pricing. Ensuring our institutional clients are best placed to discuss these changing conditions with their own clients could be critical in helping them maintain engagement.
About CMC Markets Connect
CMC Markets Connect provides sculpted liquidity to a global institutional client base of banks, brokerages, funds and dealing desks. Its continuous innovation and investment in trading technology means that the company is able to respond consistently to changing markets. Through a single connection, its clients have access to multiple asset classes worldwide allowing them to seamlessly execute their chosen strategy and increase revenue potential.
CMC Markets is regulated in multiple jurisdictions, under the Financial Conduct Authority (FCA) in the UK, the Australian Securities and Investment Commission (ASIC) in Australia and the Monetary Authority of Singapore (MAS) in Singapore.
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