The bank-client relationship is often a touchy one, especially when the client is a professional trader. In my experience the service banks offer in providing liquidity is often under-rated by professional traders on the buy side. Indeed there was much heated debate about spreads quoted during recent weeks at Profit & Loss’s Forex Network Chicago conference when a buy side trader complained that they were simply too wide.
My opinion now is exactly as I stated at the time the comment was made – “if you don’t like the spread, go inside it or put your own rate in.” However on further reflection, the complaint illustrates the basic lack of trust between professional traders on the buy side and their banking brethren.
As you might guess, on the subject of spreads I am nearly always with the market maker (unless a market maker is reneging on an agreement to quote certain spreads come what may). On this occasion, I thought the banks concerned were being treated harshly and were worthy of my support, which I gave publicly.
Last week, talking with a professional trader on the buy side, I was “treated” to the other side of the equation. Stop loss orders will always be a contentious subject (my personal favourite story is the bank that tried to pass on 150 points slippage in a USD/JPY order because the dealer had written the order down in the wrong place – it was a short discussion) which means there is a need for professional conduct of the highest possible standard, especially in current market conditions.
The buy side trader concerned demonstrated to me that a string of stop loss orders were filled by one particular bank, and on each order, the bank had probably taken one or two pips for itself. The availability of tick data on most markets means that re-constructing a market move is actually a pretty easy task – and on this occasion the trader, who operates systematically and therefore buys market data, was able to “prove” that the bank concerned had either regularly missed two or more offers between the order level and the execution level – or had executed at the right level and chosen to take the one or two pips for themselves.
When challenged, the bank trader apparently suggested it was the responsibility of the salesperson and the salesperson suggested they were passing on a fill from the trader. Either way, responsibility lies with the institution and the matter has been escalated – at which point we leave the story to its natural conclusion.
But that does not ignore the fact that just as I find it hard to sympathise with anyone complaining about a spread (especially when that person has the ability to make a rate or at least put a bid or offer in), I find it reprehensible that anyone should seek to nick a couple of points out of a customer stop loss order.
Probably more so than at any time since the early 1990s there needs to be trust in the relationship between traders – therefore surely we should encourage people to act in the highest professional manner possible? Potentially destroying a relationship for the sake of a couple of pips is nonsensical – but more worryingly, should such activities become more commonplace the destruction could be at a more fundamental level – the basic trust that holds our financial markets together.