As reported last week by Bloomberg, the NY Department of Justice (DOJ) appears to be questioning a number of banks about the practice by sales desks to add ‘hard’ mark-ups to client FX trades.
The article suggests the DOJ is exploring whether the banks have committed fraud by failing to disclose the practice properly to customers.
Indeed, David Woolcock of the ACI is quoted as saying;
“Banks should always be transparent with their clients on pricing mechanisms…… This does not sound like it is consistent with best practice nor ethical behavior.”
What we are talking about here is the possibility that ‘off market rates’ are used for client trade as a result of the timing issues and lack of time & mid-rate stamping of client trade requests when they are received. This could result in differences between the rate at the time the bank received an instruction from a client to execute a trade, the actual rate used by the bank for the trade and the subsequent rate applied to the trade when eventually reported back to the client.
Unlike equities, in FX there are currently no requirements (although that could change as a result of this investigation) to time and mid-rate stamp client FX trades when they are received and then executed. This leaves open the possibility that client trades could be executed by a bank at one rate, and then ‘held back’ to see how the rate moves before reporting the trade back to the client at a different rate.
Of course greater adoption by banks of automated FX execution would reduce these issues, as would greater adoption by the buy-side of electronic trading platforms for FX execution.
In the current climate, it would not surprise me if this new investigation moved us closer towards some form of mandatory time stamping (and possibly mid-rate stamping) of incoming client FX trade requests and the inclusion of prevailing mid-rate (if not actual VWAP) at the time of the client trade request was executed. Sounds almost like the introduction of some form or mandatory TCA in FX? Actually in my view, FX TCA should be used by more banks as part of their SDPs to demonstrate their platforms execution quality to clients. Show the client your mark-up, and use the TCA as a way to differentiate your platform and the quality of execution provided.
On that point, today’s FT (free but you need to register) carries an article talking about how large banks (including Barclay’s and UBS) are;
Accelerating a shift towards automation in FX as they move to slash costs and reduce the risk of further price manipulation scandals.
According to Anthony Jenkins, Barclay’s CEO;
Automation leads to a better client experience, at lower cost, with stronger control.
Barclay’s currently automates around 90% of their FX business, yet they are seeking to minimise still further any human intervention because traditional trading over the phone has come under an intense regulatory scrutiny. Whilst at UBS, around two-thirds of their FX flows are currently executed via their single bank platform NEO.
So, does this automation mean banks will have no need for sales to speak to ‘high-touch’ clients?
I doubt it, but the role of the sales desk will change. Instead of just delivering price discovery and voice execution, sales desks will provide more of an execution advisory role, delivering greater expertise and market color to clients and leaving their single bank platforms to deliver price discovery and execution.
Filed under: FX, Paul Blank, Web trading technology |
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Just like broker’s charge a commission in stocks/bonds for advice, it seems fair that FX corp salespeople should be paid a fee for their expertise and hand holding also. But how do we decide what a fair commission in FX will be? That’s the hard part.
Hi Vicki,
In your example the broker, acting as an agent and not a principal, is rightly charging a commission. There are banks who offer agency execution, and they would as you say charge a fee for the transaction.
However, where the bank is acting as principal and providing a risk transfer pricing to the client, then they are already earning the bid-ask spread instead of fee income, and so we get back to the nub of the question which I guess is ‘what is an appropriate mark-up’ for risk transfer pricing with or without sales desk expertise.
Do we start with some form of ECN based WVAP and add a defined mark-up? As you say, who defines the appropriate mark-up for a client that takes into account the credit worthiness of the client and the bank’s costs etc – it’s not going to work really is it!
Paul