Brexit-Bitten Tokyo Day Traders Turn Pound Shy to Limit Losses

  • Japan retail traders rebuilt pound longs before sudden drop
  • Losses, opportunities cropped up during Oct. 7 turmoil: Kanda

Individual Japanese investors boosted bets on the pound in the run-up to the Brexit referendum in June only to see sterling plummet. They were caught on the wrong side again before last week’s flash crash, but at least they had less on the table.

Japanese retail investors held a net 310,000 positions that the pound would strengthen against the yen in early June before U.K. voters unexpectedly chose to exit the European Union on June 23, according to data from Tokyo Financial Exchange Inc.’s Click 365. The pound collapsed as much as 16 percent against Japan’s currency when the results of the referendum were released the following day, a record in data starting in 1971.

After being bitten by the pound’s plunge, independent investors cut back on their bullish bets through July and August and they turned bearish in early September. Then they turned bullish again, building net long positions to 9,145 contracts before the the pound’s collapse of as much as 7.3 percent during a few minutes of frenzied trading on Oct. 7.

“Japanese investors were affected, particularly in pound-yen, by a plunge of such magnitude, but it was bittersweet,” said Takuya Kanda, a senior researcher at Gaitame.com Research Institute Ltd. in Tokyo. “Some were buying when the pound fell, while so-called day traders were riding on pound selling, so the action was two-way. It wasn’t so much that they were incurring losses but rather seeing it as an opportunity.”

The pound traded at 126.51 yen as of 2:13 p.m. in Tokyo on Thursday. It slid to 121.61 on Oct. 7, the weakest level since August 2012, and down from as high as 195.89 in June last year.

‘Fat Finger’

Traders speculated the Oct. 7 crash might have been sparked by human error, or a so-called “fat finger,” with algorithms adding to selling pressure at a time of day when liquidity was relatively low. It wasn’t the first time currency markets have been roiled in the past few years.

In January, the South African rand tumbled more than 9 percent in 15 minutes before rebounding, while New Zealand’s dollar had its own moment of tumult last August.

Managing Positions

“These developments likely have prompted Japanese investors to manage their positions quite frequently, particularly for emerging currencies and also for the pound,” Gaitame.com’s Kanda said. “Investors were prepared in some sense, so it seems not many incurred huge losses.”

The volatile nature of the pound meant the number of individual investors holding the currency was relatively small and losses from the latest chaos were less than those at the time of the Brexit turmoil, said Masakazu Satou, a currency adviser in Tokyo at Gaitame Online Co., a retail foreign-exchange brokerage.

“I am telling them at seminars that you could do well given the high volatility but the risk is higher,” he said. “We are definitely seeing a strong tendency to avoid trading the pound.”

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE