Nothing says “tick box society” to me more
than the world’s obsession with data and being able to quantify, and therefore
justify, everything. We have finally reached the point where we have stopped
doing the right thing by people because it may leave a couple of boxes un-ticked.
As a recent and insightful example of this,
I spoke this week with a buy side firm who was trying to execute a decent
ticket last week using a bank’s algo. When the customer apparently asked to
switch strategies the response was they couldn’t because “they hadn’t signed
the right documentation”. There was no discernable change to how the provider
and customer were interacting – apparently the customer wanted to go to a
strategy that incorporated internalised liquidity as well as external.
It’s hard to blame whoever delivered that
message to the client because the odds are pretty small that they were behind
the refusal – they were merely doing their job and what they were told (and I
did mention to the client that I know of several providers who will let you
switch “on the fly”, or at least I hope they do!)
I find this example – and I hear of plenty
of others that highlight the same or similar issues – directly explains what is
wrong with our industry at the moment. People are just too scared to even think
differently. They’re either under pressure because their institution has been
fined heavily for misconduct and will accept no breaches of the letter of the
law (even though one doesn’t, technically, exist); or because markets are just
so quiet they don’t want to give the firm an excuse to get rid of them.
Rarely do I hear of someone who refuses
something because it’s the wrong thing to do – the vast majority of clients now
seem to understand that banks cannot operate the same way they did before. All
we have to do is get to the few customers who do not realise, or will not
accept, this evolution.
Increasingly over the past few months I
have seen the industry’s psychological scars deepen, which is something of a
surprise given most dismissals have occurred and fines appear to have been
levied. Perhaps it is a toxic blend of previous wounds being opened wider by
This deepening of the industry’s scars
merely accentuates the importance of the Global Code of Conduct – assuming it
strikes that right balance. I was interested reading Chris Salmon’s speech last
week to ACI UK members that he was optimistic over the adherence piece, because
to me that is – and always has been – the vital area.
One suggestion raised by Salmon – that has
clearly been discussed by the BIS Working Group – is for a Kite Mark, an idea I
really like. We can all attest to a set of standards but sadly history shows it
is all too easy to let those standards slip. I accept there is a degree of the
box ticking I so detest in this idea but as I have (very grudgingly) accepted,
there are times when a benchmark helps.
I think it is especially important that
this concept – or the adherence piece in general – is really forced onto buy
side firms, too many of whom in my direct experience, still believe they are
only loosely associated with the Code’s requirements. If buy side firms, indeed
if all participants in the industry (including platform providers and other
service-orientated firms) fail to gain a Kite Mark they should be penalised.
This could be in higher collateral requirements with their custodians or prime
brokers, or even wider prices via a built in “penalty spread”.
Conversely the buy side can follow the
central banks’ lead on this issue and refuse to deal with a liquidity provider
who doesn’t have a Kite Mark. The provider can also be subject to higher
capital rules on their FX business if they cannot prove they adhere.
The challenge for this, as I see it, is
twofold. Firstly, and most pertinently, participants can get a Kite Mark and
immediately let their standards slip, only to raise them again at the next
check. This is yet another manifestation of former British Prime Minister
Stanley Baldwin’s statement in the 1930s, when discussing air raid defences,
that “the bomber will always get through”.
This is an almost impossible problem to
solve, but at least the necessary standards will (hopefully) be adopted by
everybody at some time which gives us a starting point. The FX industry is very
good at self-regulation and the environment this structure would create would
make it easier to “out” badly behaving participants.
The second challenge is that the very
concept of a Kite Mark suggests official approval, a path most authorities
around the world are unhappy to pursue. Whilst accepting this could lead to yet
another rules-based process with boxes to be ticked, I would argue that just as
it has shown leadership in developing the Code, so the Working Group should do
so by actually stating what it believes the standards should be and how they
can be assessed and monitored when granting a Kite Mark.
Just as the Code itself is driven by
high-level principles, so too can the granting of a Kite Mark. The firm can be
judged on the number of red flags raised, misconduct cases brought, or sundry
other factors, but there does not necessarily have to be detail.
Why do I believe this would reduce the fear
factor in FX? Well I would point readers to something I raised after one of the
FX trader tribunal judgements, when I stressed how the judge found that once
dealers were given clear and explicit instructions over information sharing,
there were no further breaches of policy.
People in this industry are grown ups, they
understand right and wrong and, mainly, if they are told this is what you can
and cannot do, they will find a way to do their job within those rules.
Having certainty about how you operate
breeds confidence and, as Guy Debelle, chair of the Working Group has
repeatedly noted, confidence can free up jammed market mechanisms.
So if we all adhere, especially those
customers on the margins, and a reasonable framework is put in place, and,
crucially, the banks actually let their people do what they’re good at, peoples’
confidence will return.
A big challenge will be that no matter what
we try, the profitability of years gone by is unlikely to be attainable.
Competition and market structure changes mean there will be a degree at least
of survival of the fittest (or richest) in FX markets. But if expectations are
properly managed (banks are good at managing bonus expectations so should
easily be able to handle the news that they may not make as much money as
previously – it’s called reverse engineering), this should only be a short term
Generally speaking I think we overlook
psychology too much due to our obsession with data and ticking the right boxes.
For just as I think central bankers have got it wrong recently with repeated
interest rate cuts (which merely reinforce the atmosphere of crisis among
citizens who know it is “abnormal”, thus leading them to spend even less) we
need to make sure the FX market provides the right framework for psychological
scars to heal.
That can only come through an effective
adherence piece in the Code of Conduct and a general acceptance that in terms
of conduct at least, there is a benchmark we should all seek to meet, if not surpass.