Note: This commentary is from the
archives, as your OmiCronFX commentator is on holidays. It was first published
in December 2014
According
to Bloomberg, the New York State Department of Financial Services has found
evidence “…that Barclay’s PLC and Deutsche Bank AG may have used algorithms on
their trading platforms to manipulate foreign exchange rates”. This is in the
context of on ongoing investigation into the manipulation of such things as
currency spreads, bank pricing benchmarks and the placing of trades to take
unfair advantage of the settlement process in use for Forex trading that takes
place each day.
These
alleged manipulations wind up overcharging less sophisticated bank customers,
mainly those who need to engage in currency exchange in the course of their
normal businesses, which would not necessarily include Forex trading per se (Forex traders are very sensitive
to spreads and the necessity to have buy and sell orders marched up independently
of the broker, as opposed to being aggregated so that the broker or bank winds
up as the only effective counterparty to such transactions).
Large
fines have been imposed by regulators in a number of jurisdictions on
well-known banking names as a result of such practices.
The
possible use of algorithms to carry out activities of the sort being
investigated is of supreme interest to us, given that OmiCronFX uses such tools
to enable the successful operation of its Forex trading strategies. Anything
that might give algorithms a bad name, no matter in what part of the Forex
supply chain they are abused, is to be deplored. Our response has to be to use
an analogy with the Internet – while there are many people who misuse this
amazing resource, calls for its curtailment on these grounds are irrational and
counterproductive. After all, bad people were using the telephone to further
their nefarious ends shortly after it
was invented.
Rogue traders no longer to blame
As
far as a the regulators are concerned, the use of algorithms for manipulation
constitutes evidence that belies the assertion by the banks concerned that it
is rogue individuals who are responsible for the unfair activities. The
thinking is that the embedding of manipulatory algorithmic routines within the
systems at the banks would require official sanction from the very top of the
management structure, thereby making it a systemic problem. This is a little
ironic, given the quote from a high-ranking member of the UK’s Financial
Conduct Authority (FCA), given here:
“Ultimately, the events of the past few years — from the crisis itself,
to PPI, to Libor — can be laid at the feet of individuals.” From: “Enforcement
and Credible Deterrence in the FCA”, Tracey McDermott, director of enforcement
and financial crime, the Financial Conduct Authority, at the Thomson Reuters
Compliance and Risk Summit, June 18, 2013
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