An extraordinary event in Japan
Japanese markets are traditionally slow at the end of this month and beginning of May, as the Golden Week holiday forces the country's financial markets to close. However, this year the situation is quite different and retail brokers must take into account some additional risks to the financial markets which will be caused by an exceptional event.
The Japanese financial market will be closed for a full 10 days, due to the transition of Imperial Japan on May 1. This event will be the longest closing of the market since World War II.
With the event widely anticipated, companies are preparing for it well in advance. However, an increased focus on poor liquidity conditions during the Asian session between April 27 and May 6 should be taken for granted by everyone.
flash crash scenarios
On January 2nd and the first holiday for Japan this year, the international forex markets collapsed, driven by the lack of liquidity in the JPY crosses. The flash crash incident caused financial damage to some of the largest forex brokers in Japan, as many clients encountered Margin Calls and many positions closed with negative balances.
Two of the field's most important experts, Demetrius Zambolo and Jeff Wilkins of IS Risk Analytics explain the next 10 day gap. By highlighting the challenges that brokers will face.
Jeff Wilkins, managing director at IS Risk Analytics, said:
“The next 10-day holiday in Japan could create liquidity problems in the global market, especially during 5pm EST.”
With his extensive experience in the risk management sector of the industry, Wilkins emphasized that brokers should be wary after the events of January of this year:
“I have been very strict with brokers in making sure that their risk protocols, trading and liquidity systems are ready to handle this type of event. It is essential for brokers to be prepared for any black swan event in All the times, but if they are not 100% sure about how to deal with any potential issues coming, those 10 days should be an excellent incentive to make the necessary changes to ensure that the company and its customers are protected. “
Liquidity in the forex market
Poor liquidity conditions are also likely to affect the spreads during Asian hours and make it difficult for traders to implement many strategies. For brokers, the main risk is that something like a black swan could happen, which would affect the forex and futures markets globally.
Longtime brokerage industry professional Demetrius Zambolo emphasized that the markets will become less liquid, which translates into larger “spreads” in yen pairs, especially during the rollover period which is the hours prior to the Asian session when there are no Exchanges operate where Demetrius said:
“During these poorly liquid times, demand and supply from market participants will be severely affected, which could lead to temporary trends and potential pricing gaps. On the practical side, brokers should enhance their spread filtering due to the expected slippage in the pricing of JPY pairs and cap spreads to enhance the experience of small traders and not impose unwanted pips due to temporary price widening from liquidity providers.”
Regardless of whether the flash crash will happen or not, Japan's 10-day vacation from the financial markets may prolong forex volatility and compound lower trading volumes. Brokers have been particularly concerned over the past three months, as the increasingly narrow ranges in major pairs have pushed traders away from the market.