What Is the London Fix and How Does It Affect FX Volatility

What Is the London Fix

The London Fix (also known as the WM/Reuters Fix or the 4 PM Fix) is a daily benchmark rate used by institutional investors worldwide to value their foreign currency holdings. It occurs at 4:00 PM London time (11:00 AM ET) and is one of the most significant recurring events in the forex market.

Understanding the London Fix is essential for forex traders because it creates predictable patterns of volatility and order flow that can be anticipated and traded.

How the Fix Works

The mechanics of the London Fix involve massive institutional flows that must be executed at specific times.

Key Participants

• Pension funds: Need to value international holdings and rebalance portfolios
• Asset managers: Must mark portfolios to market using the fix rate
• Corporates: Use fix rates for international transactions and hedging
• Central banks: May execute currency operations at the fix
• Index funds: Rebalance holdings when index compositions change

Order Flow Dynamics

The fix creates concentrated order flow:

• Pre-fix positioning: Banks accumulate orders before the fix window
• Imbalanced flows: Often more buying than selling (or vice versa) in specific pairs
• Execution pressure: Large volumes must be executed in a short timeframe
• Post-fix reversal: Prices often reverse after the fix as pressure subsides

The Fix Calculation

The WM/Reuters rate is calculated as follows:

1. Collect all trades during the 5-minute window
2. Calculate the median rate (not average, to reduce manipulation)
3. This becomes the official benchmark rate for that currency pair
4. Published immediately after the window closes

Impact on Volatility

The London Fix creates distinct volatility patterns that traders can observe and potentially exploit.

Pre-Fix Volatility

In the 30-60 minutes before the fix:

• Directional moves: Prices often trend in one direction as order imbalances become apparent
• Increased volume: Trading activity picks up as the fix approaches
• Spread widening: Market makers may widen spreads anticipating volatility
• Momentum building: Moves can accelerate into the fix window

Fix Window Volatility

During the actual fix window:

• Price spikes: Sudden sharp moves as large orders hit the market
• Liquidity stress: Available liquidity may be overwhelmed by order size
• Volatile whipsaws: Prices may spike then reverse rapidly

Post-Fix Behavior

After the fix completes:

• Mean reversion: Prices often reverse toward pre-fix levels
• Volatility decline: Trading activity typically calms
• Spread normalization: Spreads return to normal levels
• New equilibrium: Markets find a new trading range

Trading Implications

The London Fix has several practical implications for forex traders.

End-of-Month Fixes

Month-end fixes are particularly significant:

• Portfolio rebalancing: Funds adjust currency exposure for month-end valuations
• Larger flows: Order imbalances tend to be more pronounced
• Predictable patterns: Equity market performance often predicts fix direction
• Increased volatility: Moves can be 2-3x larger than typical daily fixes

Quarter-End Effects

Quarter-end fixes see even larger flows:

• Major rebalancing: Quarterly portfolio adjustments are substantial
• Window dressing: Funds may adjust positions for reporting purposes
• Amplified moves: Quarter-end fixes can move markets significantly

Pairs Most Affected

• EUR/USD: Most liquid pair, sees large institutional flows
• GBP/USD: Significant flows due to London's role as financial center
• USD/JPY: Important for Asian-US portfolio rebalancing
• Commodity currencies: AUD, CAD, NZD see flows related to resource investments

Trading Strategies

Several strategies can be employed around the London Fix.

Strategy 1: Trade the Pre-Fix Move

Position for anticipated fix flows:

1. Analyze equity flows: Determine likely rebalancing direction
2. Enter early: Position 30-60 minutes before the fix
3. Ride the flow: Hold through the pre-fix momentum
4. Exit before fix: Close before the volatile fix window

Strategy 2: Fade the Fix

Trade the post-fix reversal:

1. Wait for the fix: Let the fix window complete
2. Identify extremes: Look for price spikes during the fix
3. Enter counter-trend: Trade against the fix move after it completes
4. Target mean reversion: Aim for prices to return toward pre-fix levels

Strategy 3: Avoid the Fix

Sometimes the best strategy is simply to stay out:

• Close positions: Exit trades before 3:30 PM London if holding would create risk
• Widen stops: If holding through, account for increased volatility
• Wait it out: Resume trading after the fix-related volatility subsides

Risk Management Around the Fix

• Reduce position sizes during the fix window
• Use wider stops to account for volatility spikes
• Be aware of wider spreads potentially triggering stops
• Consider the fix timing when planning trade entries and exits

Key Takeaways

• The London Fix occurs at 4:00 PM London time (11:00 AM ET) daily
• It's a benchmark rate used by institutions to value currency holdings
• The fix is calculated from trades during a 5-minute window
• Large institutional flows create predictable volatility patterns
• Pre-fix moves often telegraph the direction of order imbalances
• Post-fix reversals are common as pressure subsides
• Month-end and quarter-end fixes see larger, more pronounced moves
• Equity market performance often predicts rebalancing flow direction
• Can trade the pre-fix move, fade the post-fix, or simply avoid the volatility
• Always account for increased volatility and wider spreads around the fix