Yours or Mine?

In the latest Voice of Experience Column, Ted Holloway discusses the growing issue of data ownership, and also takes a look at how regulation has changed the FX market relationship.

I wanted to follow up on the editor’s article of July 16, regarding data and its use, and also take the opportunity to talk about regulation, and how, in my opinion, it is has affected the FX market both pre- and post-implementation, and continues to shape the current market.

Firstly, I want to tackle data, as it is an interesting one. Undoubtedly one of the biggest changes the FX market has seen in the last 20 years is the growth of platforms. This is particularly so in the case of independents (i.e. non-bank) sector. Whilst this has no doubt had the benefit of increasing a client’s ability to source greater avenues of pricing, and potentially previously untapped liquidity, it also starts to throw up some challenges, one of which is data.

As an example, if a client deals with an independent platform, it raises the question the editor originally, asked who owns that data? I am sure this must be covered in the initial documentation when signing up to use the platform, however the situation becomes more complicated when the platform itself is not warehousing risk. By that I mean that a number (not all) of these platforms are supported by single or multiple liquidity providers often via prime brokerage agreements. This then means that the ultimate provider of liquidity has a source of data as well as the platform. Admittedly only the latter will know who the client is, but you can be certain that those providing liquidity will be carefully monitoring how it is treated and act and price accordingly.

Speaking purely from a banking perspective, I know that the protection of data and particularly client data was taken extremely seriously. This was the case pre-regulation and has only become even more stringent post-. Having access to data that tells you what your clients are transacting with you is vital to any business. How else can you successfully benchmark your business, as well as ensuring that you are generating the necessary returns

on capital employed? This is basic business sense and provided comprehensive measures are in place to protect that data and client confidentiality then no regulator is going to have a problem with that.

I must admit that I am unclear where the exact problem on data lies. What I do know, however, is the more links you have in transacting an order/sensitive piece of business, the greater its risk of being broken. Therefore, if it was my business I would want to ensure I was 100% comfortable that any/all parties involved were guaranteeing that. Often chasing a tick here/there comes at a much greater cost.

Changing World

The editor also wanted to me to say a few words about my experiences pre-and post-regulation and how I believe that they have shaped the changes we see in today’s FX market. Firstly, let me start by saying regulation was required. I am not going to go over the past, but as in most cases in history it was a few spoiling it for the many. Reputation takes a long time to build and in some cases five minutes to lose.

As with most things pre-regulation the band was too loose, now one could argue it is too tight. The greatest risk, particularly to banks in the current environment is reputation. This has made certain tasks, that were taken for granted, operationally difficult. A good example would be the simple process of leaving a resting order. Naturally banks have a duty to do the best they can for any client leaving an order, regardless of size. At what point, however, can

that order or indeed any orders help an institution manage its risk? I rather suspect that in today’s market resting orders are seen as potential banana skins, from a regulatory perspective. As a result, banks would rather show a price for the FULL risk transfer.

From a client perspective I am sure this seems somewhat counter intuitive, as the reward for good service has often been the placing of an order, however, if that order has legitimately been used to offset risk, whilst at the same time not having a detrimental effect on the client, it will more often than not need pre approval or in the case of post-trade, compliance will require a clear and compelling reason. All of which is a drain on time and resource.

This is just one example, there are many others some of which I have touched on in previous articles. I am not attempting to garner sympathy for banks, rather just highlight the environment that they now operate in.

I would ask the following questions, however, for those who want to access the FX market to exit non-core risk that your business generates; where do you think your pricing is coming from, and do you believe it is reasonable for those absorbing that risk from you to at least have the opportunity of doing so profitably?

Make no mistake regulation is here to stay. I believe that one of the key positives of its arrival is that it has made most banks take a long hard look on how their capital is deployed to ensure that they are generating at least a minimum bench-mark return. This, combined with the advancement of technology and the cost of remaining relevant in it, has meant that some have chosen not to actively operate in certain areas of the FX market they once did. This in turn means that true market liquidity, and ultimately risk provision, is being concentrated into an ever-decreasing pool, and this, in my opinion, is the greatest risk the FX market faces going forward.