We speak a lot about disruption in FX markets, but more often than not we focus on the trading piece of the puzzle. It is not only there that traditional models and values are being challenged, however, as was highlighted early in the Asian trading day today when news of three resignations from the UK government was reported.
It is not a new phenomenon, but this morning offered a dramatic and, for the incumbents, disturbing insight into the future when the Twitter-sphere had the news out well in advance of the traditional news wires – to the degree that while all three were on Twitter early, the departure of junior Brexit minister Steven Baker was confirmed on Reutersmore than one hour after it was out on Twitter.
It is important to point out that Reuters has extremely high journalistic standards and requires two sources to publish a story, but the news was, as far as I could tell, broken by the UK’s Daily Telegraph, again a reputable source. You don’t need me to tell you that an hour is an absolute age in FX trading, but this episode highlights the challenges facing the traditional newswires (AP was also behind on the news) in the modern world.
Historically institutional traders have had a distinct advantage when it comes to information in FX markets, thanks mainly to the heavy outlay on the traditional news services. This left the retail trader in the dark for a few crucial seconds when news did hit. Now, as long as people are following the right people/organisations on Twitter the imbalance has been reduced.
This is not to say that it doesn’t exist, retail FX traders still largely rely upon second or third hand liquidity and while they now often see the news as quickly as their institutional brethren, by the time the pricing has got to their level (and been last looked a few times!) their first opportunity to trade is still 30 or more points away.
The underlying issue for the traditional news sources is how do they continue to get people to pay for the content (or in the case of Bloomberg the terminal) when markets have already reacted thanks to other, occasionally less reliable sources?
The likelihood is they can’t. Trading has been disrupted by technology, and the shift to shorter time horizons has meant that the delivery of data has also had an impact. In traditional news terms it needs to be remembered that what we are witnessing in the Twitter age is nothing new, we have always had “sell the rumour, buy the fact” markets, but what is different is that social media gives a trader access to many more reliable news sources.
The answer for a firm like Reuters or AP is not simply to make sure their own Twitter streams have the news in good time because the same journalistic standards apply on Twitter. The only way they can match other news sources on Twitter is to drop their standards – is this a good thing for markets? Well, taking into account that the traditional news providers in FX have made some unfortunate errors recently, it is still not a good thing that the delivery of the news may be subject to a race to the bottom in terms of standards, but the reality is that so many of the alternative sources are themselves media organisations of long standing.
One option for the traditional providers could be to give their journalists more leeway when it comes to their Twitter accounts, perhaps they could be allowed to tweet what their sources are saying, stressing it is unconfirmed? That could occasionally mean, however, giving away what may be a scoop – a unique story – something that is anathema in the world of news.
Either way, there is no easy answer to this latest challenge to the traditional market structure, but that does not mean that an answer cannot be found. It needs to be if these organisations are not to change a core tenet of their business model.
As a small disgression, while this morning presented a stark indication of the challenge for the traditional providers, as I noted, the gap between the news breaking and being reported was enormous, it also meant a nervous few minutes for traders. Why? Well because the news broke in the hours before Asia opened, when Australasia was the only centre open, and in case you still haven’t twigged, it was at the same time of day as the flash crash of October 2016 – which itself was initially linked to Brexit-related news.
It could be that the market has learnt a good lesson from the flash crash and people were careful – it could be that they didn’t think the news was that important (although something that could still trigger the downfall of a Prime Minister seems quite serious to me).
Notwithstanding that, while one element of the industry showed it has reacted positively to the influence of technology (specifically around how it can control it), another was given an indication of the scale of the challenge it faces from the same source.
We have seen the democratisation of the trading hierarchy (to a degree) in financial markets, this was accompanied by, or actually triggered, a flattening of the liquidity landscape for customers; what we are now seeing is the next stage of the evolution, the democratisation of news.
Yes, this may lead to instances of “fake news” as the resident of 1600 Pennsylvania Avenue likes to bang on about, moving markets, but evidence seems to suggest that if a Twitter stream is carefully curated such spurious content can be filtered out. It may also lead to unscrupulous traders seeking to influence markets by tweeting unsubstantiated rumours and that in turn will be a challenge the markets have to face up to and overcome (the sources of such tweets are going to be easier to identify if a government agency needs to, of course).
Just as we have had to do in other areas such as non-bank LPs and the blurring of the institutional/retail line, however, the industry will need to come to terms with the new way of doing things. Twitter was initially used by FX traders in the retail space to compensate for their lack of access to news sources but now (assuming the banks relax their rules on accessing social media within the institution’s walls) it is a must-have for all traders – and that is worrying news for the incumbents in this space.