I know I should leave it but I can’t resist – is it only me that sees the irony in a bunch of managers driving home a class action lawsuit over alleged manipulation just one day before we had a great example of how things may actually be worse than they were before?
The April month end London 4pm Fix was a bit of a debacle, but, and this is another example of the FX industry’s long and proud history of learning lessons quickly, May was nowhere near so bad. EUR/USD and USD/JPY were pretty steady in the lead up to, and during, the window, as was AUD/USD. There were some fun and games in a couple of EM currency pairs, while Cable managed a 40 point move during the window and, interestingly, USD/CAD had its shenanigans in the lead up.
I did look at the events around the Fix with a wry smile, however, because the day before, a group of investors managed to knock back most of an attempt by a group of banks to have a manipulation lawsuit dismissed. In what was a decision all about the technicalities of US law (manoeuvring through which is akin to navigating a minefield with a blindfold on as far as I am concerned), a few claims were dismissed, but the gist of the class action – that there was manipulation of the Fix and collusion over the establishing of spreads was allowed through.
I think we have all been through these manipulation cases enough to know the arguments, as I see it the only real difference with this one is that these plaintiffs declined to take part in a previous (and settled) action because they see more money than was on offer in that former action. They are claiming the manipulation went on longer than the earlier cases claimed (from 2003) and they wanted (and were denied) the ability to add the cost of trades with non-defendant banks to the bill. They also were claiming (and have again been knocked back by the judge) that because of their manipulation, the automated prices they were receiving were also subject to collusive action.
Most readers that have been with me through this whole sorry saga will know I have no doubt that collusion took place – but also that I equally have little doubt that the banks’ senior management condoned, sometimes actively encouraged, this action. How much it actually cost those clients, however, it what is really at stake – and that’s where my sense of irony is at its highest.
I took a look back at the UK Financial Conduct Authority’s findings against the banks in late 2014 that led to the latter being fined billions of dollars and what I found there was an aspect of this whole business that I think has been overlooked.
I think we can all agree that when demonstrating why it is sanctioning a bank with a fine, a regulator is going to pick out the worst examples of the bad behaviour? I read the findings against five banks and, for the ECB Fix (which has now been changed I have to point – but the Tokyo one hasn’t!) the highlighted moves in the market thanks to the traders’ collusion was three and four pips.
In a WMR example in EUR/USD, the market moved a whole 3 pips as well. I should point out in the interests of balance, that there was a Cable example where the “building” and collusion led to the market dropping 43 pips in the run up to what was still a one-minute window, and then another 20 during that period.
My rough notes from Friday – and these are based upon quoted rates not traded so will not be as accurate – indicate that EUR/USD entered the five window at around 1.1124 and exited around 1.1118. USD/JPY entered at 107.67 and left at 107.73. And Cable? Yes, that dropped from 1.2382 to 1.2344 and then continued immediately afterwards to the 1.2320 level.
I think it valid, therefore, to ask the question, what has actually changed? Aside from the fact that we have better controls around conduct – and the current generation of FX traders knows explicitly what it can and cannot do around fixes – are the outcomes any different? I understand that one is a month end example, the other is unknown because the specific dates of the manipulation were not published by the authorities, but the anecdotal evidence from the data would appear to say ‘no’.
Indeed, if you look at the April month end, in fact most month ends, you are probably going to find that the outcomes for the end investor are significantly worse than they were back in the days before the manipulation claims became public.
I need to reiterate, I am in no way suggesting that we return to that methodology of handling orders, nor have I changed my mind that the behaviours of individuals and institutions were reprehensible. The fact is though, the behaviour of those handling the orders is, largely, no longer questionable, but the outcomes are worse, so who is to blame for this? It’s really hard to look further than the oversight functions of investment managers and asset owners frankly – there is more than enough data to suggest that something needs to change but this group doesn’t seem interested. I have to say, talking to asset managers closer to the front line, most seem to accept the assessment that things need looking at, but their hands are tied by the aforementioned oversight.
I wonder what would happen if, while their class actions against the banks continue, investors start looking at this oversight function’s failure to heed warnings and to effectively monitor the outcomes of their FX hedging programmes and bring their own action?