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And Finally…

So another fix is in the spotlight, this time the Gold Fix, with a Barclays trader dismissed for poor practice. That the “offence” seemed to take place just days after the Libor affair came to a head does not reflect well on the trader’s intelligence or humility, but that’s just the way it is.

My issue is that yet again, a flawed process has been allowed to continue in spite of it being open to abuse.

I have to say I don’t hold with some reports that argue it was easy for the dealer to push the price down. Yes, Barclays was a big player and had some influence but there was always a chance that a big buy order could have popped in and ruined the trader’s day (pity it didn’t). As it was he got away with it but thankfully he was that transparent that the customer became suspicious and checked things out with Barclays…cue exit stage left of another idiot who thought he was king of the world.

In the case of the gold fix, the trader concerned put in orders under the market to push it lower. Unlike in Libor, there was an opportunity for someone to “call him” and pay the offer. In FX the dealers are handling real customer orders at the Fix and so, like in the gold market, a larger order the other way can dilute or destroy attempts to move the market.

In the case of the gold market it would have been interesting to see if the dealer would have had the courage to back these phantom offers up with real money. My instinct is he would, as long as the overall position did not get so large that the potential profit from a lower fix was wiped out by losses associated with having to buy the outsized position back.

So this is again a different issue to the FX and Libor fixes, however there are a couple of common themes. Firstly, the dealer did not want to make a loss – this is a worrying trend in financial markets and one that can be blamed, a little, on the hiring institutions.

In banking for example, more and more I hear how people analyse customer flow on how much they make on a trade-by-trade basis. This is a short-sighted approach, as I have argued before, but it also engenders a culture within which people do not want to take a loss on anything.

I have to apologise for I cannot remember the interviewee concerned, but in Steve Drobny’s excellent book Inside the House of Money, which I reviewed years ago (and would be able to reference properly if I were not in an airport lounge!) I seem to recall the interviewee stating – and I may be paraphrasing slightly – “all great traders have scar tissue”.

In other words, all great traders know what it feels like to lose money. Have we now got the stage wherein people are afraid to do this? I fear we may have. Partly this is because the machines handle so much risk and partly because of the fear factor.

The other common denominator in these issues is the need for a benchmark. I don’t wish to go over old ground, so suffice to say the day people can get back to measuring core performance over a reasonable time horizon we may be rid of this archaic and discredited function.

Part of the reason people are obsessed with benchmark is that same fear factor – the panic associated with missing the mark, even if you have out-performed. Until we can better measure our performance, in a reasonable but not necessarily exact fashion, we may be able to move on as financial markets.

The problem is, how are we going to lose that fear factor when so much seems to be going wrong?

colin_lambert@profit-loss.com   Twitter @lamboPnL

Profit & Loss

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