Last month I wrote about the challenges of regulating machine learning, but will AI highlight the different market structure between equities and FX – something that is a long running theme of this column? The value of AI is unarguable, but it strikes me that it will be put to different uses in FX than, for example, equities - and that is because of the different market structures of each instrument. One use is revolutionary, the other? Well we're kind of used to it...
In spite of spending a night at the back end of a 747 I am in a strangely optimistic mood this morning - and even more surprisingly I am so after reading through the New York Department of Financial Services' report on its investigation into Credit Suisse’s FX business. I have also read through the GFXC release that highlights the progress being made on last look, however and that, allied with a few voices of dissension recorded in the pages of the DFS report have brightened my mood.
There is a chance later this week that we will know the decision of the GFXC feedback process on the possible rewording of Principle 17 , so I won’t go into the arguments put forward by Norges Bank Investment Management over last look in any detail. Instead I want to look at its observations around the use of algos and price verification and then to add to my growing list of foes in the analytical/academic space by pointing out why they are wrong!
My virtual mailbag tells me I shouldn’t but I will digress from the current hot topics of the aftermath of the Mark Johnson trial and the impending guidance on last look today by talking about CME’s launch of Bitcoin futures. Before I do, however, I feel I ought to repeat one observation from a piece I wrote earlier this week – isn’t it strange that the majority of people against changing the language on last look in Principle 17 provided their feedback anonymously?
I will leave that for you to ponder, because I want to look at the potential impact of CME’s launch of Bitcoin futures.
Pre-hedging is a hot topic at the moment, not least because of the Mark Johnson trial and the possible ramifications of the jury’s guilty verdict, but what happens when pre-hedging goes wrong? This was one of several interesting questions raised during our Insights call on Thursday last week and is something I’d like to go into in more depth here. What do we do with price improvement as a result of pre-hedging, and more pertinently, what do we do with a loss?
While I read Friday's Bank of England Staff Working Paper on the sterling flash crash with interest, I still find myself wondering why we continue to ignore the events of the minute before the crash? Someone was a motivated seller, wouldn't it be nice to know why that was the case? The paper also highlights one of the more troublesome issues in FX today - liquidity recycling - and that is something that needs a lot more analysis than currently available.
There are, predictably, plenty of headlines about nervous foreign exchange traders in the wake of the Mark Johnson verdict, many of them are justified because it could have deep ramifications for the industry.
We need to see the details of the conviction, however – specifically, was it based upon a lack of honesty with the client or does it reflect the US legal system’s view that pre-hedging is front running? Without that vitally important detail, we can’t judge the impact.
For years now certain interests have been trying to impose an equity market structure on FX – look at MiFID II – and the reason it hasn’t happened is simple. That structure is inferior to the one that already exists in FX. It may suit equities – I’m not sure it does – but it doesn’t suit FX. It's 30 years since the "Crash of '87" which first highlighted the issue to me, and, three decades on, I don't think much has changed.
Plenty of things surprise me in life; West Ham, the New York Giants and the Montreal Canadiens actually winning; Cable going up; the people we elect as our leaders – the list is endless.
One line on the list continues to puzzle and intrigue me in equal measure – why have we still to make significant progress on automating the trading of FX swaps? Am I the only one who sees the time for CLOB in FX swaps as being now?
George Bernard Shaw is widely attributed with the comment that the English and Americans are two peoples separated by a common language, but the fact is language can very easily take on a different meaning in print than was originally intended when it was spoken or typed. The FX industry has not been taking enough care over the language it uses in communications and that is bait for underperforming clients trying to make a few extra bucks and lawyers sensing an easy kill.