The ‘six degrees of separation’ theory posits that people are never more than six social connections away from each other – even if they are complete strangers and move in very different circles. The theory has been popularised via the game Six Degrees of Kevin Bacon, in which players are challenged to connect any given actor to the eponymous movie star in six steps or less.
Similar daisy-chain relationships exist in foreign exchange markets – but it can be a costly game to play.
When a dealer is axed to trade a particular side of a currency, it may skew its pricing – that is, move either the bid or the offer closer to the market’s mid – to make it more appealing. This information is potentially valuable to other market participants, allowing them to infer the dealer’s position and trading intent, and some algorithms are designed specifically to exploit…
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