Scale of Market Quakes (SMQ) - The Olsenscale

The idea of the Scale of Market Quakes (SMQ) was born through the absence of a tool to objectively measure the impact of political and economic events on the financial markets. The development of the SMQ was inspired by the Richter Scale which measures the intensity of earthquakes. Financial markets are subject to seismic shocks caused by political, economic and other events. The SMQ which is computed on a tick by tick basis, measures the price impact of these events. It provides a clear metric of the relevance of events and contributes to reducing uncertainty of decision makers. The SMQ service that has been developed for the currency markets is part of a comprehensive global information system that Olsen is currently building.The SMQ is dedicated to Jorgen L. Olsen; the father of Richard Olsen, founder of Olsen Ltd. Jorgen was a physics professor at the ETH Zurich, who worked at the Olsen office on a part time basis after his retirement. He made a feasibility study for a first version of the SMQ in 1996 which was instrumental for the subsquent development of the SMQ and lead to a first publication.

Richard Olsen & Olsen Ltd

Richard Olsen was born and brought up in Zurich, Switzerland in a family of bankers and physicists. His main interest lay in studying Economics but his family members did not consider it a real science and encouraged him to study Law. Heeding their advice he acquired his Licentiate in Law from the University of Zurich in 1979 and then a year later his Bachelors from the University of Oxford in Philosophy, Politics and Economics. In 1980 he obtained his Ph.D. in Law from the University of Zurich. Later, while working at a bank Richard made a proposal to found a research company. At first he was encouraged to write a business plan but before submitting the plan the project was dropped. This was incentive enough for Richard to create his own company and pursue his plans on his own resulting in the birth of Olsen Ltd (formerly known as Olsen and Associates) in 1985.

From Olsen & Associates there evolved several companies; Olsen Ltd, Olsen Financial Technologies (co-founded with Rakhal Dave) and OANDA (co-founded with Michael Stumm). He is genuinely appreciative of the multifariousness and creativity of his work, which ranges from management and sales to research and writing; from teacher to philosopher.

Olsen Ltd; is a research and investment manager based in Zurich, Switzerland. Olsen Ltd provides managed accounts and third-party products, investing in currencies as a separate asset class or as an overlay to an existing currency exposure. They specialize in a branch of investing known as high-frequency finance where trading decisions are based on detailed observation and analysis of price evolution. Olsen Financial Technologies provides financial institutions and researchers with access to one of the world's largest databases of tick-by-tick prices. The company also offers comprehensive software tools to filter, store, and analyze market data. OANDA, on the other hand is an online 24/7 market maker for currencies offering a broad array of auxiliary services. The Scale of Market Quakes (SMQ) is Olsen Ltd's latest contribution to the financial world. It is an initial part of the Olsen Information System that the Olsen team is currently researching and working on.

According to Richard, the financial world is the nervous system of the global economy . He believes that the system has failed miserably and is sending out the wrong signals We have to overhaul the system and transform the markets into a functional nervous system that contributes to an efficient allocation of resources . With Olsen he looks forward to creating a sustainable society through social investment and risk management. Richard anticipates that In a year from now, governments will negotiate, how they can digitalize the financial markets, i.e. introduce real time settlement with second by second interest rate payments and introduce a programming language to fully digitalize contracts and financial instruments, including their collateral. The digitalization of contracts and financial securities is pre-condition for transforming the financial markets into a functional nervous system of the global economy .

The Scale of Market Quakes (SMQ) measures price displacement on a tick-by-tick basis over a 2 hour time frame, thus quantifying the impact of political and economic events and other events, such as large orders; cascades of liquidations; and ubiquitous unbalances between buyers and sellers.

Markets are composed of traders living at different places around the world with varying risk appetites and expectations. We define market impact as a sum of excess price moves over a set of 100 price move thresholds ranging from 0.05 % to 5 %. See 'The Scale of Market Quakes' for a technical explanation.
 
The scaling laws reported in our research paper 'An extensive set of scaling laws and the FX coastline' provide the metric to objectively relate the price moves and measure the impact of events.

Because of the fractal nature of markets, the impact of events cannot be determined by measuring the absolute price move, but has to take into account the full price trajectory. With the SMQ a straight price is recorded to have a smaller impact than a zigzagging price move of equal size occurring within the same time period. A slow price move has a smaller SMQ value than a fast move of the same amplitude. We show below examples of the SMQ action at major news releases.
 
Typically, the SMQ oscillates from 0 to a maximum of around 6. The SMQ has been calibrated with historical price data across a wide range of currency pairs providing consistent values across instruments.

The Scale of Market Quakes: View page explanation

In the “View” page, all information on the SMQ is shown for a given period of time. SMQ data is computed for 24 currency pairs from December 2004 to date. You can explore the SMQ data by selecting date and time and by focusing on a general view or on a single currency.


At any given moment, the “View” page will display the SMQ data for a given date and time, as presented at the top of the page. By clicking the "Change Time Zone" button a local time zone or GMT can be chosen.


 
For any given event the impact across currency pairs may differ, which is reflected in substantially different SMQ values. On every page, SMQ radars and charts of all currencies or alternatively of all multiple pairs of the selected currency are shown.
 

SMQ Chart

The blue area shows the value of the SMQ on a scale between 0 and 6. In the general view, the SMQ plotted is an average of all underlying crosses, and the standard deviation is plotted as well (only the upper side is shown).
The SMQ value is plotted alongside the spot price. Implicit in the specification of the SMQ is a two-hour time delay in measuring the impact of events. For this reason, we have enhanced the SMQ with a short-term indicator, which predicts the indicator value within an hour's time. Short-term values, where available, are plotted in a lighter colour at the very end of the chart.
On the right side of every chart, the magnitude of the SMQ at the selected date and time (the green stripe), and an indication of the maximum value over the time plotted (the area of the right box) are included. Additionally the dot or arrow shown to the right of the SMQ value depicts the direction of change in the next hour, where a dot means that the value stays at its level.
To change the selected date and time, you can click on any part of the SMQ chart area.
News events are tagged on the chart with an alphabet, whose correspondence is reported on the right side of the page. If the current date and time corresponds to a news event time then the tag point will be shown coloured in blue.
 

SMQ Radar

These radar charts give a quick overview of the market activity for a given period of time. The centre of the chart relates to a master currency whereas its legs are associated with the other currencies. The SMQ value of a particular currency pair is reported as a leg per chart. Together they make up an area.
By clicking on any given currency name on the radar, the View page will focus on that currency.
 
This part of the page shows a selection of news categories. If the current time and date correspond to a news announcement then the corresponding categories will be highlighted in red.
Categories are presented in the form of a tag-cloud, where categories with the biggest impact are displayed with a bigger font in comparison to the categories with a smaller impact on markets.
By clicking on any given category, the category will be added on the Compare Page.
 
Lastly, a selection of news events with the biggest SMQ magnitudes is reported. Clicking on any of those will cause the current time and date to switch to the corresponding selection.
 
Tips to use the View page:
  • click on the date field to enter the date manually;
  • choose your time zone in the upper right hand corner;
  • use an individually configured RSS feed to be informed about the latest SMQ values, subscribe to the news alert or follow interesting topics on Twitter;

The Scale of Market Quakes: Compare page explanation

In the “Compare” page, different time observations can be compared together. The selection is made through the View page, or by the shortcuts provided in the home page.

It is possible to add selections in two ways, by:

  • selecting the exact time and date in the View page and then clicking the Add to Compare page button;
  • clicking on any part of the site where news categories are shown. It will be automatically added to the Compare page where various matching observations of the selected category will be displayed.

 
Every item is organized in 4 columns. Every column shows the SMQ chart or radar related to a currency or currency pair. The type of chart or radar can be changed by clicking on the header of the column.


 

 

Please visit the About section to get more information about the scale and we welcome any feedback via the use of our contact form.