FX industry needs technology innovation not regulation

Participants in the foreign exchange industry must fight back against allegations of market abuse, according to panellists speaking at FX Week USA in New York, adding that innovative technology will provide a better answer than regulation.

Increasing regulatory supervision of the WM/Reuters benchmark and the industry in general is not necessary to improve the way participants execute their orders, say the panellists, who agreed there are already technological solutions available to help people execute more efficiently than at a benchmark price. But, for the market to progress, they said the onus is on customers to change their behaviour.

"Front-running a client order has always been an unacceptable practice, so if it was taking place then those people should be punished. But, as an industry, I think we need to take a step back and fight back against some of the journalism that is being published out there," says David Mercer, chief executive of LMAX Exchange in London.

"The fix itself is an issue," he continued. "There are massive volumes being referenced or traded at one time. We need to go back to the customers and find out how they want to have their orders executed. Maybe now, with the advance of technology, it's a bit outdated, but I think it comes back to educating customers again – how do they really want their huge orders to be executed?"

Yaacov Heidingsfeld, chief executive of TraderTools, agreed with Mercer, saying many of the technological solutions required to execute large orders such as algorithms are already available on many venues. He also hit back at reports that have emerged of the US Department of Justice (DoJ) offering immunity to junior traders in return for information about their superiors.

"The US DoJ asking people to testify against other members of staff suggests to me that they can't actually figure anything out," says Heidingsfeld. "We need to be more proactive and more offensive, rather than sit back and see the industry be painted into a corner. If you put a large order through on a Friday afternoon, you don't have to be fixing the market to know what is going to happen. We need to be able to make as much information as possible available to our customers, and encourage and influence them to take advantage of that technology."

The panellists also highlighted ways in which the investigations are changing how banks are currently operating and interacting with their clients regarding market orders.

"One bank said recently that it is no longer transacting at the fix and traders don't want to quote anymore when a large customer order comes in," says Mercer. "If they take on that customer order, he can't do anything with his proprietary position. Banks have their customers, and they need to talk to them and figure out the best way to execute."

"We've certainly had more requests to actively segregate flows between voice and electronic trading in terms of orders and positions," says John Stead, pre-sales manager at SmartTrade in London. "But we haven't seen all of the things that will come out. Last look could be something that comes out, as well as market-makers skewing prices on the fly against customers. If you re-imagined how FX would work, none of those things sound particularly ideal."