I garnered further evidence that banks are over-reliant on their customers when, amazingly to me, a bank FX trader complained that the action in sterling this week had been “the wrong kind of volatility”.

Aside from reminding me of the classic British Rail excuse for snow-induced chaos on the trains “It was the wrong type of snow”, I can’t help but feel you just can’t please some people. We regularly hear that volatility is too low and opportunities are thin on the ground, but when something happens it’s too busy? It’s ridiculous and I can only think that by “opportunities” people are thinking nicking a sub-pip or two (legally I haste to add) from customer business. This isn’t trading, it’s broking.

In defence of the traders, they are hamstrung by their employers because over the years the role has shifted from risk-taker to broker, but I still can’t handle the moaning when something does happen. This event is a (endless) “known-unknown” which means if you want to take a risk then you know the parameters and if you don’t – and too many employers now don’t want you to – you can sit square. 

If it is the latter, however, I would prefer not to hearing the whining after the event about how much money could have been made – there are those out there that, how can I put it? – took a risk! Not only that, they accepted the outcome, positive or negative.

Of course it is easy with hindsight, but did anyone really think that the UK parliament, with its recent history, would really vote for a Brexit deal that was a slight change only? I accept that some people bought sterling because they think this narrows down the options to delayed or no Brexit (and I think they have a much too high regard for the politicians’ collective wisdom by the way), and equally that there are those that got caught short by the rally (and a few that were caught long on the reversal) – what I can’t accept is people complaining that it was too difficult to trade. That is what a trader is paid for – or is supposed to be paid for at least – and this week Cable alone has moved some 10 big figures cumulatively, that’s decent price action (and if you’re really worried you could just take a position, go home and wait for it to go right – the market’s all over the place!). 

Too many banks believe their traders are here just to be brokers and facilitate tickets that are too hard for the machine, however they are expected to behave in exactly the same way as that machine and manage the risk out as soon as possible for a marginal profit.

This makes this (yet another) cultural issue in an industry segment that is being suffocated by compliance regimes that do not understand how markets work, the role of banks in the foreign exchange market and the values of actually taking risk. I am not suggesting that the reins are dropped totally, however they should be loosened. The FX Global Code was promoted in its early days as a way to unblock what had become a jammed mechanism in terms of market information transfer to customers and I now wonder whether it should also be promoted as the backbone of a structure that would allow banks to take more risk in FX.

Certainly the traders want more freedom to act and I suspect, if they understood the potential benefits, so would senior management. Most importantly, I would argue that clients broadly would also welcome such an approach for they are starting to understand that with a lack of risk absorption comes market impact – and they don’t like it. 

We should not be obsessed with how much money banks are making out of their client business – with spreads and competition where it is the opportunity to “spread” business is minimal to non-existent. Rather we should be looking at the negative impact of the “broker” approach and seek to restore a fair balance, wherein bank traders can take and hold risk with only the fear of making a loss, not with the fear that a tenuous charge will be brought against them because they happened to make money out of as client trade or with a position that went against client flow.


Twitter @lamboPnL

Twitter @Profit_and_Loss

Colin Lambert

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