Difference Cheques

You may be an ambassador to England or France
You may like to gamble, you might like to dance
You may be the heavyweight champion of the world
You may be a socialite with a long string of pearls
But you’re gonna have to serve somebody, yes
Indeed you’re gonna have to serve somebody
Well, it may be the devil or it may be the Lord
But you’re gonna have to serve somebody
Bob Dylan

Difference cheques to “The Cartel”

With three former traders, the self-styled  ”Cartel” from JPMorgan Chase, Barclays and Citigroup appearing in a Manhattan court accused of market rigging and facing hefty fines and possible imprisonment if found guilty, it seems an opportune moment to cast a glance over historical regulation in this area, what has changed in the markets and whether new initiatives such as the BIS code of conduct for Foreign Exchange trading will change attitudes.

From the inception of the Foreign Exchange markets, and indeed the interest rate markets, until the introduction of futures, CFDs and spread betting the participants were a relatively small number of people. In the 80s and 90s there were in excess of 300 banks in the City of London trading through 26 money brokers as well as a handful of the treasury departments at the largest corporates such as BP, Shell and British Airways. The major participants were pretty much the same through every trading centre in the world with the attendant power that this situation endorsed. I was well aware as a young broker that if I upset BNP, for example, in London the repercussions would be felt throughout the world for the broker (RP Martin) who had the misfortune to employ me.

The ways that you could upset a bank dealer were numerous and often bizarre. They ranged from not showing enough respect through to supporting the wrong football team but by far the most serious was not standing by a price that you made. In the brave new world of electronic trading this may be hard to comprehend so a little explanation of how the markets used to function in the days of voice broking follows! Simply a bank would ask me a price in a specific instrument (be it a spot price, CD or deposit) and I would be obliged to make a two way dealing price with an amount specified. In laymans terms we were obliged to quote a buying and selling price to that bank in a specified amount. Not difficult really until you factor in that you had to deal on that price and if you couldn’t, for whatever reason, you were obliged to pay the bank the difference between what you had quoted and what you dealt at. I can still hear dealers shouting “cheque book” before slamming the phone down. Too many difference cheques or a really bad price and the dealer would punish you by “taking the line out” in other words they would simply refuse to answer your calls for a specified time, sometimes a week sometimes months.

If this happened too many times the Bank of England would have a quiet but firm word with the powers that be in the money brokers or as importantly at the offending Bank. We all needed each other to make the market function in an orderly manner. Be assured that to have your knuckles rapped by the Bank of England hurt and not only hurt your pride. All the participants knew their role and “place” even to the point where brokers ran A and B desks and depending on the size and frequency that the banks traded they were graded onto the appropriate desk. By operating this self-regulation, where the Bank of England held sway, the markets were kept honest and very, very few abuses occurred. What abuses there were, were quickly and quietly dealt with. Move on to the opening up of the markets to thousands of participants caused by the introduction of consumer friendly instruments, one could almost say expanding the gambling industries tools, and the world of self-regulation is as arcane as a fax machine.

It is indeed a world which is unrecognisable from 25 years ago both in terms of participants, volumes  and regulation but will the introduction of the BIS voluntary code of conduct in the FX market and regulations such as those in MiFID II really improve the markets and stop abuse? Richard Seaman, industry compliance veteran thinks that the code will go some way to restoring the public’s faith in the foreign exchange markets. He told me “The 55 principles, whilst not designed to replace local laws have been compiled with consultation and input from major participants globally. Central Banks are expecting  much higher ethical standards to become common place although as in any new initiative the ‘tone from the top’ of a firm will be vital in ensuring that the code of conduct is properly adopted and fit for purpose.” He continued “with the MiFID II best execution requirements coming into force at the beginning of 2018, firms will have to change much of their current infrastructure to fully comply.” Interestingly none of the other 6 market participants I asked for quotes could think of any worthwhile changes that these codes and rules will bring. Not finding anything comment worthy is not to say that the changes are not needed or worthwhile but that generally the markets are in pretty good shape but that is not to say that ways round rules will be found! There are however areas that the regulators should be paying much closer attention to such as the mis-selling of Binary options to a gullible public that are a scandal which I will look at more closely in my next column .





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