Regular readers will know that I volunteer to help run the ACI Australia Dealing Simulation Course around the world – I actually met a good number of you for the first time at that forum. In the last year the course has been looked at in terms of the FX Global Code and one or two new processes introduced, but last week in Denmark was the first chance I got to put some new ideas into action – and the results highlighted how easy it is to get confused by some aspects of market interaction, and also why the buy side needs to get onside.
I need to stress that the delegates on the course are fairly early in their careers, but the first surprise was how few said at the start of the week that they had actually read the Global Code. Few had done any serious client-facing or external tasks, but I would have thought that their banks would have raised the profile of the Code more than seemed to be the case.
In fairness, the question was asked on the first day of the course when they were still a little shy, so the real answer may have been more positive, however the good news from last week is that when the banks do finally talk to these people about the Code, they will be leaning on an open door because it was very clear to me and the other managers of the course that they take conduct seriously. Not only did they engage on conduct issues, but at the end of the course, when part of the examination process is a question on a (randomly-selected) aspect of the Code, it was clear that they knew the right thing to do in the two situations we put in front of them.
Interestingly, if anything, I would say there was a zero tolerance on the part of the delegates to anything suspicious, highlighted in how all stressed they would escalate the issue to compliance in spite of the misgivings of this approach on the part of one or two managers (who felt it could be dealt with effectively at desk or business level without unnecessarily involving the compliance function).
What was good for me, was how one of the Code-related scenarios we created, using our chat system, highlighted the challenge of principal versus agency, especially when a trader has to wear both hats.
One of the several conduct scenarios we introduced involved us providing market orders on a different basis and it became clear that when placing orders the clarity of language is vitally important. At the start of trading sessions, teams are allowed to notify the customers they will manage their orders on a principal basis, if they do not, they will have to act as agents.
Aside from the odd challenge when markets gapped and bids or offers were too slow into the market, the orders were handled well, until it came to a team acting as a principal receiving an “at best” order from the client. Then, things became a little more challenging.
More than one team, acting as a principal, received an “at best” order and immediately put a price on the ticket. The problem was, while the spread may have acceptable if the customer asked for a two-way price, the customer had given the direction (for example in one case, buying) and felt that the team should either execute it at the offer in the market (in spite of it being larger than the standard market amount) or actually gone into the market as an agent and then passed the fill onto the customer.
In many ways this is a question for the individual parties to the trade, some clients will accept an all-in rate for immediate execution, others prefer to take the market risk and have it executed for them – it’s why banks like Barclays and Deutsche Bank have added “at best” type algos to the product suite. The problem is, can the team in question act in this fashion?
The Code provides some guidance on this, but the problem could be that only one party is actually adhering to it – the customer may not have signed because they consider it insufficiently important or they have several other projects ahead of implementation in the queue.
Either way, while trying to provide some clarity to the youngsters starting their career in markets (and I would very much like to hear from people how they think it should be handled), this provided some clarity to me as to why we need to get the buy side onboard for the Code.
When placing orders, there is no doubt that some clients have, in the past perhaps, been deliberately vague when leaving orders. We placed orders using various different strengths of language (and English was not the first language of the vast majority on the course) and the outcomes were highly correlated – the vaguer the language, the more confusion there was.
It highlighted how there needs to be a clear emphasis on the client to be more specific in their order placement. That alone is a good reason why the buy side should sign up for the Code, it would take out ambiguities and be fairer for all parties.
Whether this will happen is anyone’s guess, but the good news is, to end on an optimistic note, that there are now 40 people starting out in the markets that clearly see the need for everyone to be on the same level when it comes to conduct.