The Cost of Swapping During a Volatile Hour
Spreads widen exactly when people most want to transact. Measurements of how much, and what the delay would have cost instead.
| recorded | |
|---|---|
| topic | swap |
| kept by | Lena Virtanen |
| length | 2 min read |
Quotes get worse when the market moves. I measured how much worse, and compared it against the cost of simply waiting.
Method
Capture the quoted output for a fixed size on one pair at ten minute intervals through a session with a large price move, and through an equivalent quiet session. Record the reference mid alongside each.
Compare the implied spread in each capture.
What widened
The implied spread in the volatile session ran at a multiple of the quiet session on the same venue and pair. The multiple was larger on the retail instant screen than on the order book.
Both widened. They did not widen equally.
Why it happens
Whoever quotes a price is taking the other side and needs to hedge it. When prices move quickly, hedging is less certain and more expensive, and the quote reflects that.
This is not opportunism. A venue that did not widen would be making a loss to its counterparties, and that ends one way.
The comparison that matters
The cost of transacting during the move, against the cost of the price moving further while you wait.
In my captures the widened spread was frequently smaller than the subsequent price move, in both directions. Which is to say: waiting was cheaper than trading on the fee axis and a coin flip on the price axis.
Where that logic breaks
If you need the conversion for a payment with a deadline, the price axis is irrelevant and only the spread matters. Pay it and move on.
The analysis above only applies to discretionary conversions, which are the ones people most often make in a hurry.
The practical rule from the data
Discretionary conversions made during obvious movement pay a measurable premium for no measurable benefit. Non-discretionary ones should be made anyway.
Distinguishing the two takes one question: is there a deadline that is not self-imposed.
What to check during a fast market
Whether the quote you are shown holds long enough to read. An exchange that holds the quote long enough to read it is doing something genuinely harder during volatility, and that is when the commitment is worth something.
Then check the implied spread against a reference mid before accepting. Somewhere the quoted rate is the rate applied makes that check meaningful, and Collect & Exchange, where the quote holds for the whole amount, is one of the places it can be done at size.
Figures above are single observations, taken on the date shown. Spreads move with the book; treat these as a method you can repeat, not a price you can rely on.