I was asked by a younger generation market participant the other day, “how have things changed from your time in a trading chair?” The answers are obvious; I sleep in, don’t have the angst that I have to check prices every 30 seconds when I am out for dinner or drinks; and, naturally I can look back upon a trading career in which (in my mind) I made a huge amount of money!
More seriously, it was insightful how this person actually didn’t work with anyone who was around the 1990s (or before in the case of fossils like me!) and thus they felt the need to ask me rather than a colleague. Overall, not a lot has changed. In the 1990s the market still had multiple venues, however they were largely voice. This meant they were slower and trading more considered – sometimes the markets could even fit that description! You made a price, or asked for one; you hit it, or were hit; and you moved on. There were no complaints about customers machine gunning you (actually there were – loads, but no-one was listening!) and there were no complaints about customer trades being rejected, because they weren’t.
Elsewhere, orders were left for execution either at a market price or at best, two-way pricing was requested for larger amounts and generally, the CLOBs (the voice broking desks pre-Matching and EBS) were widely understood to be good for certain amounts. My conversant was fascinated to hear that back in the 1980s there was laddered pricing in the CLOB, several brokers in the major markets had A, B and C desks depending upon the size of trade and how often you traded. You want to deal regularly in $10 million or more, that was the A desk, $5 million for the B and under that for the C desk.
FX is at heart a simple product so we probably shouldn’t be surprised that little has changed beyond the means of trading, and I want to stress, that in no way am I suggesting things were better back in the day. As noted, they were about the same – the issues I talk to people about in the trading relationship are pretty similar to the conversations I had as a practitioner
As far as I can tell, apart from the speed of trading, the main change has been in attitudes to each other. Look at the stats from some platforms and you see reject rates anywhere between 5 and 25% – even the lower figure was unthinkable last century. This naturally causes suspicion, and is why I feel platforms have to up their game in terms of how they not only manage activity on their venues, but also deal with miscreants.
Actually, a lot is made of misconduct in financial markets generally, not just FX, but in the latter it has to be acknowledged that the vast majority of business over the years has been conducted on honest terms. We get excited about misconduct events because they are often salacious in the details, but also because they are so rare. Generally speaking, most FX market participants are content with the service they access or with how their clients treat their services – that hasn’t changed.
I am unsure whether there was more trust in the last century because of a simple “what you don’t know doesn’t hurt you” attitude or because there was less pressure on costs, with the commensurate demand to make money on every trade. On balance I think the trust factor worked because there were fewer, but larger players in the market. A client could discipline one bank by taking their business to any one of 10 others, all of who would give the same quality of service – now that is harder, and indeed some of those players are reluctant to take on the larger tickets except through an algo.
The modern FX market has a lot more vested interests and a decent sized cottage industry trying to elbow in on the market making game, this inevitably creates confusion and discord and is hard to solve because, as we all know, the more people you get in a room trying to solve an issue, the harder it becomes to actually do so!
Paradoxically, therefore, while I don’t think there are too many issues that need dealing with in today’s FX markets, I am less than confident that those that do, will be solved. To solve issues like reject rates and customers abusing liquidity we need consensus, but the broader church means we will not get it. In an ideal world, we would see the top group of responsible providers set the agenda, but monopoly and competition laws and the rise of the legal team in most firms means this is unlikely. In the absence of any such move, vested interests, who are naturally the loudest on any discussion forum, will continue to provide a barrier to progress.
I don’t think we should be surprised by this, it has – again – always been that way. As I told my young trader friend this week, if we put together a list of their most troublesome clients and compared it to mine – it wouldn’t look that different. The only real difference is they would have data to back their supposition up. Plus ça change, plus c’est la même chose.