| LONDON, March 18
LONDON, March 18 Work is moving forward on a new
way for the foreign exchange market to set its "fixing"
benchmarks, senior bankers say, after another week of
revelations in the row over alleged market manipulation which
has rocked the industry.
While there are substantial barriers to altering the fixing
system - which is used to price trillions of dollars' worth of
investments and deals - the bankers say it is increasingly clear
that an electronic-based solution is feasible.
This could seek to match off and then resolve automatically
the huge volumes of orders put in around the fixing with minimal
human intervention, making foul play more difficult.
Many also expect the scandal to hasten the demise of
voice-based trading, whose model of dealers and brokers talking
on several phones to multiple clients and banks at once has been
a defining image of the industry for decades.
Participants in the world's largest and least regulated
financial market are scrambling to make trading more transparent
and resistant to wrongdoing.
In response to the perceived role of complicated derivatives
in fuelling the financial crisis, regulators have sought to push
as much of that market's trading as possible onto exchanges.
Banks and others involved in the more straight-forward cash
foreign exchange want to head off any such aggressive push by
regulators in their industry, which they say would bury them in
red tape and push up costs.
By coming up with a solution for the fixing, the industry
hopes it can keep its bespoke, self-regulatory model which it
says is a major factor in a steady fall in costs of currency
trading for business.
However, it also has a worried eye on investigations by
regulators, not expected to conclude until next year, and a G20
working group due to make proposals for reform in November.
The manipulation row, which has seen more than 20 senior
traders suspended or placed on leave, centres around charges
that dealers from a handful of the biggest banks colluded to
move currency rates.
In a market worth $5.2 trillion a day, the "fixes" have long
offered set times of the day when asset managers do a lot of
business to give them an identical daily reference point for
both the value of funds and foreign exchange conducted that day.
That focussed large volumes of transactions around a
particular time of the day. That has been a headache for the
banks, but also may have been an opportunity for a relatively
small number of players executing the biggest fund orders to
work together and share information to establish which way the
market would swing ahead of time.
The question now is how to change that system to eliminate
that exposure to "human" corruption, no easy task in a market
that is conducted in multiple locations, jurisdictions and
Several senior industry figures, either in charge of or with
a past running banks' electronic operations, told Reuters it was
impracticable for currency spot trading to be put on an
exchange. But they say a solution to the fixing itself was less
"There may be a service provider that would provide the
means of doing fixing on a third party venue where people could
put in orders to be matched on an electronic system and whatever
is left over could be executed by an algorithm," said the head
of e-commerce with one of the banks being looked at in the
"There are platforms coming to us and offering us that kind
of service. If they can attract critical mass that would be an
Bankers say that business done at the fixing has already
fallen off, suggesting asset managers themselves may be finding
different ways to do their deals.
The Financial Stability Board's FX Benchmarks Group - led by
Australian central bank markets chief Guy Debelle and the Bank
of England's Paul Fisher - reports back to the G20 in November
on work to make the benchmarks more transparent and reliable.
The forex market has a plethora of platforms acting as
intermediaries between the banks and other major financial firms
and the mass of smaller investors or companies.
Platform managers agree the infrastructure to run the fix on
a more electronic basis exists, although there remains a
structural issue of how orders are lodged and who could know
"We are working towards a system where we can dark-pool
orders so that the element of manual trading during the fixes is
completely taken off," said a senior official at one of the
largest foreign exchange trading platforms.
In stock markets, dark pools keep intended bid and offer
prices invisible and the price at which shares change hands is
revealed after the trade is done.
One big problem is the concept of "slippage", a market term
referring to the movement in market prices a large order,
normally broken up into smaller pieces, will cause as it runs
through. A computer-driven solution to those orders left over
after the fix would face the risk of a big event in markets
changing prices too radically to allow execution of the rest of
the leftover orders at roughly the fixing price.
"I could come up with the necessary technical solution in a
matter of a few weeks," says the head of one London-based
platform. "The key issue for me is where and how the order is
Another problem is the legal fallout. References to fixings
are written into millions of contracts worldwide and those would
need to be changed to reflect any automated solution.
"There have been discussions with clients," says another
senior e-commerce management source with a large bank. "Some say
yes, in theory we can use algos instead of a fixing.
"But then you have a lot more things that need to be dealt
with. Some say, ok but we still have to give a reference price
to subsidiaries around the world."
Market participants say the banks were initially unwilling
to introduce the fix over a decade ago but were forced into the
arrangement by asset managers, some of whom are now among those
saying they may have lost out.
"If the fixing went away, I don't think the trading desks
would be unhappy with that," says the first e-commerce chief.
"It has become so competitive that the margins on the fixing
execution that the banks make is negligible."
Many players believe that the fixing row will accelerate the
move to mechanise most foreign exchange transactions seen over
the past decade and make the voice dealing desks at the heart of
the fixing row a thing of the past.
"Definitely there will be a further shift towards electronic
trading," says the second e-commerce source.
"I don't see any bank closing its spot desks but they will
continue to invest in electronic trading. It is already the case
that everything under a certain size is priced automatically by
an algo under a trader supervision. On euro-dollar that might
well be for anything below about 50 million dollars."
Funds themselves are also thinking twice about whether the
solution proposed by some academics of putting all trading on a
central exchange would be cost effective. Bankers say it simply
is not feasible and would just make transactions more expensive.
"Asset managers need to understand this market is a very
transparent one, where bid/ask rates are very tight and the
electronic platforms do a good job and there is plenty of
competition to provide the best prices," says Howard Jones, a
partner at RMG Wealth Management who is also a former trader.
"They should not leave orders to the last moment for
indexing their portfolios. Through these (regulatory) enquiries,
we stand the risk of overregulation which could dry up
liquidity, reduce activity and lead to more volatility."
The head of another fund managing $50 billion in assets,
asking not to be named, concurred.
"If you push these "fixing" trades towards exchanges there
is a concern that it will genuinely drive up costs of doing
business," he said.
"Asset managers and funds will have to put up collateral
which is mandatory for clearing on exchanges. Imagine a large
Asian central bank having to put up collateral. It will
definitely drive up costs."