Sometimes you just hear things that make you shake your head. More specifically, the sheer arrogance of some people that loudly proclaim to be in the client service business but who are wantonly and deliberately acting against their clients’ best interest is staggering. It appals and angers me that these people still exist in the FX industry – and that some jurisdictions seemingly are content to let them operate within their borders. We should all be worried though because, sadly, the industry is broadly judged by the standards of the lowest.
I am probably not the only person nervously awaiting the outcome of next week’s US election, although I suspect many have much different – and to them much more important – reasons.
My concern is that in spite of it being a "known-unknown" the FX market is facing a major event - and this is on a global scale not the relatively local affair of Brexit - and its recent form when it comes to handling a massive surge of business is not great.
This week's Bundesbank paper on HFT in bund and equity markets caused a stir - as anything on this subject does of course - and it highlights to me again, how FX is in front of other markets in being inclusive and functional. It is significant that while some regulators want FX to be equities-like in market structure, more are looking to an FX solution - the speed bump - to save equity market problems.
I am not sure we should be talking about speed bumps for the real issue is the dysfunctional liquidity stream.
Apparently people are struggling to make money in foreign exchange markets this year - as I heard for the thousandth time earlier this week! Mean reversion is playing a role, without doubt, but there is something, more basic, at the heart of participants' struggles and one person's experience from Brexit night is illustrative. How can it be that people have missed out on making money on a well-signalled, prolonged move in FX markets? Here is one possible answer - and it goes back to the roots of trading methodology
It’s fairly obvious that, to use a buzzword of the moment, the FX market has operated asymmetrically for most of its history – banks have held sway and, until the advent of the non-bank high frequency market maker, had little competition. It took that challenge, allied to a few conduct issues, to redress the imbalance, but I am wondering if the pendulum – as happens so often in this business – is swinging too far the other way? And if it is swinging, what is driving it?
There seems to be general acceptance that last week’s flash crash in sterling merely highlighted what we have known for so long – there is a growing structural problem in FX markets.
Identifying a problem and solving it are, however, two entirely different things and in spite of the spirit of innovation reawakening in foreign exchange markets, my sense is that whilst the solution I propose here is unpalatable to some in authority it may help central banks better understand markets and curb flash events
Where to start? Well I will get to those industry “experts” who have been arguing with me for the past two weeks (actually months) that liquidity is great in FX later, for now let’s kick off by getting to the crux of the issue. This is not necessarily about whether algos ran wild, or someone ran an option barrier, this is about a(nother) fundamental breakdown of the FX market structure.
The time has come to accept that what happened Friday morning in Asia is a mess of our own making; to take our heads out of the sand and at least acknowledge there is a problem with liquidity in FX markets.
For the lovers of total transparency among my readers there is good news on the horizon as I am told that the FastMatch sponsored Tape for FX is “one or two banks short of becoming a reality”. So with the project imminent, it's time to ask, is the Tape a good idea? I understand its value in an environment in which a product is traded across multiple venues in one centre but does the concept work in FX with its global, multi-jurisdictional and equally fragmented framework?
It's not easy being this stupid and naive but someone has to take one for the team. It does seem as I was the only member of the 600+ delegates at Forex Network Chicago last week, plus countless others from the FX industry, who didn't know, to use the US expression, that I was going to be "roasted" on stage. More to the point, who the hell is Satoshi Nakamoto?
The answer to this, and other questions, was swiftly coming.
Nothing says “tick box society” to me more than the world’s obsession with data and being able to quantify, and therefore justify, everything. We have finally reached the point where we have stopped doing the right thing by people because it may leave a couple of boxes un-ticked. There is a lot of attention paid to righting the industry's wrongs but too little attention is paid, in my view, to the psychological impact of reform. The FX industry has psychological scars that need healing.