There are many reasons given for the perceived decline in liquidity conditions in FX markets in recent years and all do play a role according to a new white paper published by the BIS. But have liquidity conditions changed that much? Hasn't it always been the case that when events happen markets gap and thin out?
If I am correct in this assessment then the real problem facing the FX industry is not deteriorating conditions – it's a sense of entitlement.
ACI’s explicit support for the FX Global Code helps plug an important gap in the Code's reach – for it moves its influence beyond the developed and major emerging markets and into some real local markets.
It is important that the Code reaches all market participants, so there are other gaps to be filled, not least the small private trading firms. Can we repeat the example of ACI to help reach these firms, as well as others that should be more aware of their responsibilities?
If the feedback to Monday’s column is anything to go by, I can confirm that last look remains a highly emotive issue in the foreign exchange industry. It will help though, if not only some people “take a chill pill” to calm what is a highly emotive debate, but also if they read the Global Code properly and, more pertinently, understand that market making is not a charity and often the client’s own execution style can contribute to market impact.
So my sources tell me the “fatal flaw” draft of the Global Code of Conduct is now complete and that the work is nearing its completion – only of course it is not, for as was explicitly stated at the start of the effort, the Code will be a living breathing thing that will continue evolve over time.
Which is good because as I understand it, there are still contradictions within the text, not least around the subject of (deep breath) last look and pre-hedging.
Monday’s column touched a nerve with its criticism of market makers that quote ridiculously large spreads. Of course, we should also question the quality of controls at a participant that allows someone (or something) to hit a big 35 big figures below the last price.
Going back to market makers though, perhaps we need, using the execution quality analytics now available, to start naming and shaming the worst offenders? I personally have no problem with this and I think I would have quite a bit of support.
Patchy liquidity and the lack of pre-positioning cannot alone account for why we get some wild moves in markets – sometimes the liquidity providers should wear some of the blame. How else do we explain spreads in Cable that are almost as wide as the entire range this decade?
The lack of incentive to take any risk doesn't help, but what justification can a market maker have for quoting 50 big figures wide? At that spread, they might as well pull out of the market altogether.
The scenario sounds familiar. A front page in the next day's UK press is released showing a Brexit-related story (in this case a second Scottish independence referendum) which is negative for the pound. Sterling starts selling off just after 10am Australian time and actually starts to sell off quite aggressively as the story spreads.
A story about October 7 and the sterling flash crash? Absolutely not. It happened this morning and would have prompted a few hearts to beat faster than usual on FX trading desks.
It’s not often one can turn to Italian philosopher George Santayana to offer some direction for the foreign exchange market, but I feel on this occasion it is justified, because George nailed it.
There is so much noise at the moment around currency manipulation (of the “official” kind I hasten to add, not the “private” that has provided so much grief for the FX industry over the past four years) that anyone might think it's a relatively new phenomenon. It’s not.
As part of the public service duty of this column (and especially as a warning to any stag parties thinking of going there dressed as Robin Hood and his Merry Men), I feel the need to point out that a law exists in York, England, that says it is legal to murder a Scotsman within the ancient city walls, but only if said Scot is carrying a bow and arrow.
Clearly this is a law that has no basis in reality and is backward looking – however it is only slightly worse than MiFID2 when viewed through the prism of the FX market.
Last week’s diatribe following the FXCM fine and banning in the US triggered a fair amount of feedback – thankfully all of it supportive – and I think it is fair to say that the consensus is that if people continue to deal with the firm then they should be warned now they will have no recompense if things go wrong. This week I would like to look deeper into a worrying aspect of this episode - the broader FX industry's failure to heed the warning given three years prior.