The problems around OTC market benchmarks are well-established, but it's not just limited to these markets - there are suspicions and claims about collusion and attempted manipulation in listed markets as well. The latest lawsuit against FX banks has a very interesting paragraph in it which highlights the Plaintiffs' belief that the Fix is open to manipulation, which begs the question, "Why use it?"
So is it time for a rational and genuine discussion about the use of these benchmarks? I think it is.
We all know the traditional description of spoofing – placing bids and offers down the stack, with no actual interest in trading. But what about an FX trader using last look? Spoofing is about intention to deal, but does someone deliberately using last look in the wrong fashion have that intention? I would suggest they do not and the Foreign exchange industry might want to look at how it monitors last look if it is not to attract the unwanted attention of the authorities.
A couple of months ago I wrote a piece highlighting what I suggested was the first signal of a real shift away from anonymous trading toward disclosed. The column received, as is usual I should point out, a mixed response, with several of you pointing out that without the anonymous pools of liquidity price discovery would be severely hampered and liquidity would dry up. Back then, I used FX Committee data for the basis of my argument, but now it looks as though the platforms are providing the ammunition.
Shortly after we published the news that Richard Usher, Rohan Ramchandani and Chris Ashton, the three members of the now notorious “Cartel” chat room, were found not guilty of FX market manipulation by a New York court last Friday, my phone started buzzing.
Lots of the activity was WhatsApp messages and phone calls from various industry sources wanting to chime in regarding the decision, and one thing that has been interesting in the intervening time is that my sources seem to be split about whether they’re surprised regarding the outcome of the case.
“I know that they only release choice bits of the chat room transcripts to the public, but what came out looked pretty damning to me. I’m surprised that they’ve been able to get out of this one,” opines one market source.
I think it is important that the foreign exchange industry gets one message out at this time and gets it out loud and clear. The type of behaviour exhibited by the members of the Cartel around the start of this decade is not, and will not, be tolerated today or in the future.
To be fair, the members of the Cartel probably understand that today the FX industry is, in conduct terms, a very different place to what it was five years ago.
I absolutely get the value in data – more importantly, I absolutely get the potential for data in our markets. However (and who didn't know that was coming?) it should not become the only driver of analysis. This week's research paper on the 4pm Benchmark Fix does a great job of empirically analysing the changes and their impact on the mechanism, but, to my mind, fails to take into account how the changes corrected an existing imbalance that needed redressing for the overall wellbeing of the market.
Regular readers will know I have what I believe to be a healthy level of scepticism over the use of AI and machine learning in trading.
What will give me more confidence is the better embracing of adversarial AI, for only by imbuing an algo with a certain amount of cynicism will we empower it to trade effectively in markets because, and this is a point I have made before in these pages, it is quite easy to spoof an algo.
It was 10 years ago yesterday that one of the more higher profile ventures of recent years in the FX space shut its doors in that October 17 2008 was the last day of trading for FXMarketSpace.
There have been times in the past five years when people in the industry – and I have to stress they did not work for FXMS at any time – have told me they thought the centrally-cleared, anonymous model would have been ideal for the current environment.
Information leakage is the new “issue” in foreign exchange markets for many players (actually its just signalling risk renamed surely), and for several participants it is a question of their past catching up with them in how the LPs are not willing to help them anymore. For others, however, it is a genuine issue, but I am not sure how easy it is to solve given how everything we do online leaves a digital signature – and trading in no different.
More than a few people have told me in recent weeks that they see the trial (which is now at the appeal stage) of Mark Johnson, and that of the Cartel threesome – which started this week in New York – as being inextricably linked. You all know what’s coming…I don't agree. In fact I would argue there are some fundamental differences that mean this week’s trial – complex as it is – cannot be seen through the same lens.