FX trading fines and regulation catch-up

Photo by Ben Rosett on Unsplash
Photo by Ben Rosett on Unsplash

In my last post I mentioned some hefty fines incurred by foreign exchange dealers for trading infractions. The amount keeps climbing.

Yesterday the Financial Times reported that Credit Suisse has just been fined $135m by New York state’s financial regulator for “unsound” conduct between 2008 and 2015. Apparently the traders shared client information with other global banks to manipulate foreign exchange (FX) prices and maximize Credit Suisse profits.

What’s more, the bank was found guilty of front-running (putting your order in just ahead of clients’ orders to take advantage of resulting price movements) between 2010 and 2013.

And (this ties in to my previous post) between 2012 and 2015, traders took advantage of the “last look” feature of their electronic trading platform, which allows dealers to back out of a trade before execution, by applying it to all client trades. To make matters worse, it lied to clients about why trades were rejected.

It’s one thing to use the system to profit your own book over your clients’. It’s quite another to lie about it.

This is one of the reasons for the increasing volume of calls to reform the last look practice. Many traders think it should be banned. Others believe that it should be allowed, but that traders should be honest and upfront with the conditions in which a previously agreed trade would be rejected.

Going back to the Credit Suisse infringements, what blows my mind is that they openly talked about frontrunning and using proprietary information in electronic chat rooms. And get this: one of chat rooms was known as “The Cartel”. It’s not the stupidity that surprises me, it’s the arrogance. If everyone’s doing it, it’s fine, right? Why even try to hide it?

The sentences are coming thick and fast. In September, HSBC was fined $175m by the Federal Reserve for “unsafe and unsound” FX trading practices. In July, the Fed ordered BNP Paribas to pay $246m for charges relating to its FX conduct between 2007 and 2013. These fines follow others of more than $5.7bn levied on a handful of major banks in 2015 by the US Department of Justice, and over $3bn handed down by the US Commodity Futures Trading Commission and the UK’s Financial Conduct Authority in 2014.

While we may be blinded by the volume of fines, we need to put them in context of the overall size of the FX market. The largest market in the world, it trades over $5tn per day. Apart from the massive profits the rogue traders earned for their banks (no doubt largely reflected in handsome bonuses), the fines also reflect the gravity of the infringements. Damage to its reputation and a loss of trust would pose a risk to global commerce and trade.

The high profile of these cases could add momentum to the move towards trading platforms that offer greater transparency to clients and to the regulators.

The FX market, already of systemic importance, is likely to expand as world trade continues to grow. Until recently, large clients didn’t have much of a choice – to get big deals done, you went to the big dealers. Now, however, newcomers with shinier platforms are nibbling away at market share. Increasing compliance adds to costs, and the advantages of largely manual, opaque and relationship-based execution are becoming less apparent. Especially with increasing scrutiny.

The embarrassment for the regulators at the revelations that this was going on for as long as 10 years before anyone noticed will surely give them a good incentive to push for better reporting and greater access to trading records.

So, distributed ledger-based trading platforms in which the regulators have a node that allows them to see in real time what’s going on? Confidentiality issues aside (because they can be solved), it is likely to happen in some form.

Regulators monitoring electronic chat rooms? That’s a different story.