To channel my inner Shakespeare, “to re-paper or not re-paper – that is the question”. I could continue with something like, “whether ‘tis nobler in the mind to stand by the price and wear the loss, or run crying to the authorities and try to get it cancelled” but that kind of loses poetic effect. Anyway, what I want to say is why do markets let people get away with rank stupidity and lack of operational discipline by letting them re-paper trades?
I know I have floated ideas around this issue before, but do we need to do more about that hour after the New York close than just talk about it? Flash events are starting to occur a little too frequently in FX markets for some peoples’ liking, so what can we do about it? Actually I think we can do quite a lot – or at least it would be a lot if all the noise around data capabilities isn’t just that – noise.
I have always been someone who has, in FX trading at least, looked at certain firms’ desperation to shave another millisecond off round trip times with some despair and no little disdain. Obviously trading has got faster, that is inevitable in such a technologically-innovative era, but I have always looked at the speed issue single dimensionally – it was about people with a technology advantage exploiting it. I wonder, though, whether circumstances are pointing in the direction of a new effort to shave time off the trading process?
What is it that infected so many of the banks’ FX businesses at the end of 2013 that led to so many bad decisions being made? Was it a lack of focus, courage, or even sheer panic that underpinned the decision to roll over on legal actions brought by customers, but at the same time stand firm and fight unfair dismissal cases brought about by their own staff?
The question emerges because the stakes have been raised when it comes to unfair dismissals thanks to the awarding of £1.2 million to former RBC FX trader John Banerjee to compensate him for loss of earnings.
The survey published last week by JP Morgan had liquidity as its customers’ number one concern, which, as P&L’s editor Galen Stops and I observe in this week’s podcast, kind of gives lie to the regular protestations from speakers at events that FX liquidity is plentiful. Some of the reasons for liquidity thinning out, people trying to jump on a trend for example, are understandable, but there is one that interests me - and that is the impact of best execution policies.
Aside from what one news service decided was the headline – more like click bait – “FX Volumes Slump Globally” (guess what, yes, there was a dip from April, but on a more considered year-on-year basis FX turnover is up 8.9% at the third highest mark ever), there were actually a few interesting snippets in this week’s FX committee surveys. The two that stood out for me were the surge in RMB trading and a quite remarkable resurgence for the voice brokers in the UK.
The communications channels have been buzzing following Thursday's column about banks taking more risk in their FICC businesses - especially FX - and some really good points were made by correspondents. But while there was general agreement that more risk-takers would benefit the broader industry, my correspondents and I diverged on a key point. To me this is not about spreads or the advantage of man over machine (or vice versa), it is about the risk taking role adding something different.
The early signs from US bank reporting season is that FICC divisions haven't done well at all and the admission from one bank that the decline in earnings was due to clients being reluctant to enter markets signals to me that the FICC business model has to change. Just as news outlets can't have hundreds of reporters sitting around waiting for the Titanic to sink again, so banks need a better balanced FICC business - and that means more traders proactively taking risk.
Thursday’s column provided a steady stream of comments and feedback with one question over-riding all others – what can be done to avert more flash events, especially in the Australasian window before the mainland Asia open?
I actually think the question should be, ‘what, if anything, should be done?’ because I remain unconvinced that what happened last week requires a radical rethink of how the FX market operates. This may come as a surprise to long-standing readers who may recall me advocating for the use of central bank volatility bands post-sterling flash crash, but the two events are different.
There is nothing like a flash event to get people excited and for news outlets to dust off and update the old “blame the algos” stories for publication. Equally, there are members of our industry of a (ahem) certain generation who are quick to jump on the bandwagon with the rejoinder “it wasn’t like that before the machines”.
As a member of that “certain” generation I can assure readers that it is utter nonsense and that last week's flash event was triggered by a human.