The Last Look…
Posted by Colin Lambert. Last updated: October 14, 2024
It’s clearly a more complex subject, but there is a whiff of the old hedge fund tactic around information when it comes to the Global FX Committee’s proposals on data transparency.
For those unaware, a regular tactic of certain hedge funds in particular (other clients may also have used it, but I only heard of hedge funds), was to demand information about the order book and flow from their bank relationships, whilst also maintaining that their information be kept secret. In other words, “I want you to tell me what everyone else is doing, but you can’t tell them what I am doing”.
The FX Global Code put an end to most of these shenanigans – and into the bargain highlighted how the document is not, as some on the buy side would have it, “a sell side solution to a sell side problem” – but I couldn’t help think if it when reading the proposed changes put forward by the GCFX’s working group. At least part of it reads like firms don’t want their data shared by TCA and relationship data providers, but then they are likely to use those very same providers to check their execution quality and counterparty performance stats.
I should state clearly, I am all in favour of greater transparency around how orders are handled – I have long argued that what we need in FX is transparency of action, rather than of order, and that is why I am such a fan of the Code – but my reading of this approach to data seems to build ambiguity and, dare I say, hypocrisy, into the process. I may be reading it wrong, but it sounds like the buy side (and I assume this was driven from the buy side) want to use execution data for their pre- (and post-) trade analysis, but don’t want their own trades being used by others? I understand that a simple “that’s OK” on the part of the client solves this issue, but I feel inclined to question the motives of those who think it is not OK.
The proposed changes to the delegated execution make all the sense in the world to me – in such circumstances, time stamps and execution details should be provided, in fact I am surprised, post the standing instruction debacle in the custody world, that currently they are not.
Equally, I would have thought an easier solution to this “problem”, if that is indeed what it is, would be to enforce confidentiality standards on the third parties. I understand that aggregated and anonymising thousands of trades at multi-dealer platform level would slow the process down and add cost, but surely the third-party firms can be leant upon to keep the names out of it?
The proposed changes include the line, “Client interaction data include but are not limited to data on potential or actual FX transactions by clients, including requests for quotes, and other transaction data related to a Client order or trade execution.”
The more you listen to some on the buy side, the more you find yourself thinking, “they want their cake and eat it”
This sounds to me as though, as an example, a client can refuse to allow the executing party on an order to place a resting order in the market? If it did, that data would be public. That’s fair enough, but we should be aware this increases the risk for the executing party. Given the primary venues are the data source for order fills, many dealers prefer just to place the order on one of those venues (iceberged), so they run no risk of conflict if the order is, or isn’t done. If that right is removed, how long before a client accuses someone of not executing an order because the primary venue traded (in one probably!) leading to, “why haven’t I bought my 10?”
Alternatively, what happens if dealer is holding a stop loss and their internal liquidity trades through the level, but the primary doesn’t? Does the client have the right to complain if they haven’t allowed their data to be forwarded to a third-party, or the order to be placed in a venue where that is the likely result? It just breeds uncertainty and distrust into the process – something that, ironically, third-party TCA and relationship data providers were meant to be eradicating!
I personally – and I know I have no skin in this game anymore – don’t see a problem with post-trade data being shared with third parties, and it could be the GFXC doesn’t either, it is merely doing the industry a service by nipping a potential problem in the bud early. The more you listen to some on the buy side, however, the more you find yourself thinking, “they want their cake and eat it”.
The question, “who owns the data?” will become even more prevalent as the market becomes even more reliant upon it for its pricing and risk management, so it is probably a good thing the GFXC has raised the issue. I am not sure, however, that we have a really clear explanation of what is trying to be achieved here – even if it is the aforementioned nipping in the bud of a looming problem.
What I do know, is that when I read something and think “that’s like XXX used to do”, it’s rarely a good sign in this litigious age.
