The FX industry is advancing how it deals with certain issues, but the pipeline of areas in need of clarification and further debate shows little sign of slowing down. Two areas that concern me at the moment are exactly how platform operators are enforcing their rulebooks - are they being fair and balanced to both LPs and LCs? - and exactly what constitutes "full amount" trading? An open and data-backed discussion will solve the latter, but I wonder if we need an industry ombudsman for the former?
This is a pretty horrible time for CTAs, not only because of the sector's very visible performance issues, but because it's even worse than the numbers suggest. After all, the big selling point for CTAs has always been they are a good hedge in falling equity markets - but they clearly have not been this year. It may not be all doom and gloom, however, for using new technologies and techniques they have the opportunity to re-engineer their models to meet the challenges of the modern market structure.
Today’s column has a problem with complacency and worries about the chances of future generations forgetting the principles of the FX Global Code the way they did previous best practice documents. Luckily, being a “solutions based” forum, it has an idea that some may find controversial to help ensure that doesn't happen.
Why is it controversial? How does employing members of the Cartel and other chat rooms – people who have either faced potential jail time or admitted guilt to the authorities – grab you?
On Monday I called for a radical re-think around the FX industry’s use of benchmarks – and this elicited (and continues to do so) considerable feedback. Re-reading the latest class action over activities around fixes, however, made me realise this case could also end up revolving around pre-hedging – and if it does, then not only do certain industry bodies face a real challenge, but more broadly we have to discuss much more than restructuring one small piece of the market.
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.