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Trading Viewpoints: Turkish Twist
Our embedded traders work alongside portfolio managers and analysts to constantly assess market structures, liquidity and execution. These functions seek to help enable operational alpha by reducing risks, minimizing transaction costs and taking advantage of price differentials. To support our analysis, we gather and evaluate uniquely curated datasets. Below is the outcome of one such analysis:
The rise of electronic trading in liquid foreign exchange (FX) markets has delivered significant advantages to asset managers, with enhanced price transparency being one of the most notable. Greater transparency helps improve price discovery, enabling more accurate measurement of transaction costs and allowing asset managers to better attribute those costs to specific market events. A recent example of this is the detention of a prominent political opposition leader in Turkey on March 19, 2025, which triggered volatility in the Turkish lira. This event serves as a timely case study of how political shocks can impact transaction costs in the FX market.
While transaction costs can be evaluated in various ways, one of the most commonly used metrics is the bid/offer spread. Each day, we collect over 300 million unique, executable FX quotes across a broad array of currency pairs, tenors, and trade sizes. To assess the impact of the Turkish political crisis on liquidity, we focused on USDTRY spot trades under $2 million. We sorted these quotes by date and hour to analyze pricing behavior in the month leading up to the event, on the day of the event (March 19th), and the day after (March 20th).
On March 19th —the day a prominent opposition leader in Turkey was detained — USD/TRY electronic quotes were absent from 1:00 AM through 7:00 AM EDT—a notable gap compared to the consistent quoting activity observed during the same hours in the preceding month and on March 20th. The political news, which broke around 12:30 AM EDT and triggered a sharp sell-off in the currency, likely led to the temporary withdrawal of electronic liquidity as market participants reacted to the uncertainty. Electronic trading activity resumed after 7:00 AM EDT but bid/offer spreads had widened significantly. Between 7:00 AM and 8:00 AM EDT, the average spread spiked to 32 basis points, compared to less than 1 basis point during that same hour over the prior month. Elevated spreads continued through the London session, ranging from 10bps to 30bps or about 7 to 15 times their typical levels of the previous month. To put this in perspective, the bid/offer spread in the US high yield market was 31bps on December 31, 2024 and averaged 29bps throughout the year. This shows that even on volatile days in emerging markets, transaction costs have remained relatively low.
By March 20th, conditions had begun to normalize. Electronic quotes during Turkish market hours appeared more consistent, with bid/offer spreads narrowing to 10bp, or about four times their usual size by 4:00 AM EDT (11:00 AM TRT), and approaching closer to normal levels of roughly 1bp by 7:00 AM EDT (2:00 PM TRT) when New York investors typically start trading. However, spreads widened once again after 5:00 PM TRT, likely due to reduced participation from local market players at the end of the trading day.
The case of the Turkish political crisis illustrates how swiftly foreign exchange liquidity responds to unexpected events, and how spreads can expand dramatically during periods of uncertainty. For asset managers, we believe understanding these dynamics is essential for cost-effective execution. By leveraging data and monitoring transaction costs, traders and portfolio managers can better navigate volatile environments, optimize their execution decisions and potentially improve performance outcomes.
Disclosure:
Trading example provided for illustrative purposes only. The information contained herein represents a simplified presentation of a complex process. Our investment process is subject to change and may differ materially from what is stated herein.
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