FX Expiry Price Moves, Binary Option Hedging, and OTC Quote Depth
Summary
The document asks whether sharp foreign exchange price moves around short binary option expiries reflect trades or misleading posted bids, and where traders can inspect FX order depth. The answer attributes many such moves to market makers hedging binary option exposure: selling a binary can leave the dealer short gamma, with especially strong sensitivity near the strike or barrier as expiry approaches. Delta hedge adjustments and unwinds can therefore generate actual trades and price movement.
It describes Bloomberg as aggregating quotes from banks and other liquidity providers, with a customizable quote ladder, while noting that most FX activity is over the counter and exchange volume is much smaller. The answer offers a rough estimate for the scale of trading needed to move EUR/USD by a stated pip range, but does not provide supporting data or a generalizable market impact model. It also does not answer the Reuters feed question or establish a universal minimum order size.
Key ideas
- Binary option dealers may hedge short gamma exposure as expiry approaches, contributing to price moves near strikes or barriers.
- The answer attributes these moves to actual hedging trades rather than solely to posted quotes.
- Bloomberg quote ladders can display aggregated FX quotes and can be filtered by counterparty.
- Most FX price action occurs in the OTC market, while exchange volumes are comparatively smaller.
- The estimate of trade size needed to move EUR/USD is informal and should not be treated as a universal threshold.
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Full text
# Where can I see the bid stack for FX? # Where can I see the bid stack for FX? In trading FX binary options on brief tenors like 1 hour, I frequently see the FX price bounce right on the expiry boundary, like hourly or 20 minute boundaries. I would like to figure out if these bounces represent actual trades or just manipulation of the FX price by market makers submitting short spurious bids. However I don't know where FX prices "come from" (e.g. Reuters feed, Bloomberg). Are there any visible FX exchanges where I can easily see the current bid/ask price stack of open orders for FX and see what has actually been traded versus what is just a posted offer? Also, what is the minimum lot size of an order needed to move the Reuters feed for EUR/USD for example? I.e. if a market maker is moving the underlying price, how much risk do they take on when putting a bid in the stack? ## Answer by Ramanujam Narayanan (score 2, accepted) https://quant.stackexchange.com/a/37161 The FX price bounce you see near expiration is generally because market makers are continually hedging their positions. When a market maker sells a binary option, she is left with a short gamma position. This short gamma is very high near the barrier level, especially close to expiry. The additional delta hedging or the delta hedge unwind is what causes these jumps. To answer your question, these jumps are a result of actual trades, the size of which is usually a function of how short or long the barrier/ strike the market(banks/ market makers) is. I am not sure about Reuters, but Bloomberg aggregates quotes from multiple brokers(banks and other liquidity providers). This ladder is observable on a Bloomberg terminal. You can also customize it to show only ladders from selected counter-parties. This is especially useful when you are executing via the Bloomberg terminal. But FX being the most traded, the spreads are quite tight and ladders are quite similar across different brokers. Exchange volumes are much lower compared to the OTC volume, which drives most of the price action. Having traded fx, a guesstimate is that you would have to trade in billions to move a currency like EURUSD by 10-15 pips.
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