Let’s start 2018 on a positive note – happy new year everyone, I wish you health, wealth and happiness. Now…let usual service resume.
A persistent problem in foreign exchange circles for the past decade has been the inability of the oversight function to keep up with technological advances – chat rooms were inadequately monitored, some prime brokers were running tremendous operational risks and some participants were using technological excellence for what some would describe as nefarious purposes.
I don’t know what happened exactly on December 25 when 99.9% of the FX market was shut down, but whatever it was, we probably need to do something about it, because I can’t see how it can be a good thing when the world’s most liquid currency pair decides to spend four hours trading (very occasionally I am told) some 350 points below where it closed.
It doesn’t bother me that a news service decided to make an issue of it, more I am concerned that plenty of people were in the dark about whether or not the trades were legitimate. I don’t mean in the sense of did they happen – apparently they did on a few peripheral retail-orientated sites as well as on an institutional venue – more people were concerned as to whether this constitutes a legitimate high/low meaning option barriers and orders could be triggered?
As I understand it – and information is thin on the ground – the amounts involved were not large enough to trigger the rules around highs and lows, but I still think it is worth asking the question, what were these people (computers actually) doing even trading during a time when no major market centre and no major market participants were operational?
This is an issue for cryptocurrency markets now that we have two major exchanges offering bitcoin products but I don’t see it as being as important in those “buyer beware” markets where, quite frankly, crazy is the norm.
In FX markets, however, where a lot rides on the price, I don’t believe we can allow markets to trade outside what are widely-accepted hours. I understand fully that if there is no news out and EURUSD closes on Friday in New York at, say, 1.1800, but trades to 1.1400 over the weekend, then the institutional players will probably ignore the weekend trading and open at 1.1800 – meaning whoever sold it down has done their boots (technical market term).
But what if they were selling it down to hit stops or trigger a barrier? Are the legals sufficiently strong to mean they cannot do that?
It’s one thing dealing with flash crashes when the market is open, albeit thin, but at least there are – at face value – respectable market participants to police the activity and to help trigger a quick reversal. At weekends these players are not about and as such we are at the mercy of the lowest common denominator in terms of ethics.
It is just too easy to push a market to a certain level and only needs a few of these episodes for whoever is playing around with the markets to have made enough money to walk off into the sunset. Surely then, it’s best to try to avert the issue now by establishing firm market opening hours?
People can trade outside of those hours but they have to know that any trades registered will not be part of the calculation of the high/low and as such stops cannot be triggered until Monday morning in Australasia, when the institutional players can assess any price inputs from news over the weekend and set the opening price accordingly.
FX has always done a really good job of self-regulating – albeit slowly in response to the chat room saga, so clearly, to me, this should be something for the Global FXC to consider adding to the FX Global Code.
All it needs is a discussion around what is considered a “true” market (I would suggest 7am Sydney on Monday to 5pm New York on Friday but that’s just my view) and then a line in the Global Code document. From there, if your service provider has not signed the Statement of Commitment or doesn’t explicitly state what hours it considers the market open and therefore orders and margin calls in play, then you can’t say you haven’t been warned.
It bothers me that we have to have such discussions because historically issues such as these were viewed very differently – there was a tacit understanding about what was right and wrong and what considered an “open” market. In the litigious age in which we now live, however, I am not sure this is enough of a defence mechanism in case of yet another “new” event in FX markets.
Given how I – and most in the industry – believe it is important that FX remains largely unregulated, the easiest course is for the broadly-adopted Global Code to make recommendations that people can adhere to. Either way, things need to be clarified around when the FX market is considered “open” so that not only can customers be protected from a deliberate attempt to move the price out of normal hours but also so service providers can adopt clear guidelines, share them with their customers and thus, hopefully, avoid the threat of yet more legal action.