As can often be the case when writing an opinion column, I have been taken to task by the readership over the past couple of days over my criticism of “full amount” trading. To be fair to all parties, there is a big caveat, however, and that is that for this method to work my critics stressed that there needed to be a big element of trust involved between the parties concerned and it was acknowledged that this sometimes can be missing. Indeed, one supporter of my view was quick to point out that on a lot of occasions the impact of the flow is not even understood by the consumer and therefore their LPs could be skewing to their detriment and they would never know!
Of course, highlighting the ethos of this column, “sometimes right, sometimes wrong…always certain” I am not ready to roll over just yet, but it will be a weak defence!
There were some very cogent arguments made, including by participants who use this method and who are very happy with it, as, they claim, are their LPs. I am not at all surprised the LPs are happy with the arrangement, they would struggle to lose money over a period of time trading via such a mechanism, but I do acknowledge when there is a good relationship between the customer and a limited number of LPs, all of whom understand how things work, then such an arrangement can work well for the end user as well.
There is a case to argue, as one correspondent did, that my concern, which, it was noted, should not be easily dismissed, is the result of the environment in which we exist in the world of foreign exchange – one of fear of the lowest common denominator when it comes to conduct. In other words, while my concerns are not shared by players at the top end of the industry, there are likely to be others, on the periphery perhaps, from where the problems I highlighted may emerge.
I find this slightly depressing, not only because I think it is right, but also because it highlights the depths to which we have sunk when the first thought on hearing something slightly different is how it can be abused! This could be viewed as part of a risk assessment process, but I have made the point several times in these columns that the overly-cautious approach taken by players has served to stifle innovation, and I now seem to have fallen victim to it.
Perhaps then, a slight shift in focus from Thursday’s column is in order. I understand that “full amount” trading is probably the best alternative to sweeping the book and getting a name as a predatory customer, but I would like to feel assured that the right controls and, more importantly, monitoring processes are in place. If the data is used – and it has to be used, not just filed away – to monitor execution quality and LP behaviour, then knock yourself out. If it is not, then whichever party is less than engaged needs to be encouraged by the other to become so.
I mentioned on Thursday that this may be an area on which the Global FX Committee (which meets this week of course) may consider providing more clarity. I understand there are business practice guidelines, not least understanding how LPs are using your flow, but perhaps as elements such as “full amount” trading come more into the market’s lexicon then more detailed examples need to be provided?
It is a sad fact of life that in spite of the majority doing the right thing in this industry, ever since it hit the headlines for the wrong reasons, everyone is at the mercy of the minority that do not in their search for an edge and an extra dollar. That will never go away, but, as we are seeing with the latest round of fines over the chatroom issue neither will unwanted media attention on something that has, largely, been dealt with.