A call for old-fashioned banking?

Over the past few years, buy-side traders have been demanding a levelling of the playing field as they increasingly make markets in foreign exchange like their sell-side peers. So it was surprising, and even refreshing, to hear some calls for old-fashioned banking at this year's FX Invest USA congress in Chicago.

Since 2000, the boom in electronic trading has resulted in the democratisation of the FX markets, with a growing and more diverse pool of buy-side traders gaining easier access to the returns available. The more technologically savvy of these traders have been able to trade on interbank prices, using the credit lines of their prime broking banks to access executable prices on formerly interbank platforms EBS and Reuters.

So huge was the business potential of this fast-developing group of high-frequency traders that a number of platforms emerged, including FXall's Accelor, and Reuters and the Chicago Mercantile Exchange's FXMarketSpace. Both platforms enable trading anonymously, despite the backlash from sell-side traders that at the time were struggling to keep up to speed and were being picked off by latency arbitragers.

Yet, to date, neither of these platforms has really gained traction. This might be a result of the unfortunate timing of launch, which came months before the credit crisis that has made people more reticent or slower to participate on newer initiatives. It might be that the sell side is not supporting the platforms in the same way as they would make markets where relationships are nurtured. Either way, buy-side traders seem to have gravitated towards established platforms, such as EBS and Reuters, where the banks actively make markets.

At the Chicago event, one algorithmic trader that participates on anonymous platforms said he expects his bank to provide tight prices on a 24/6 basis. However, banks only offer a good price if they can find the two halves from good prices to manage that risk. "Banks have to make prices, it doesn't matter to me where you find your subsequent liquidity from... I don't care how many hops a bank has to go through."

But then he also brought up the issue of information leakage and front running. In providing a price to him, he said he understood that a bank has to run reports on his business, and warned that this information could be leaked to the market. In fact, in response to a query by a buy-side trader at the conference about how confidential banks will keep positions, he said: "You are wise and well served to assume that they are shading you."

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