Algo fears spark hunt for neutral checks on FX Code compliance

Concerns about the use of their algorithms as well as their voice footprint in the market is prompting some banks to seek independent verification of their adherence with the FX Global Code of Conduct.

“One of the biggest concerns for me is not that people are doing anything that is intentionally untoward – can’t discount that, can’t say it’s never going to happen,” says a source at a major FX bank.

“But what I’m more concerned about is now that you have all of these different types of activities that are going on in the bank’s name – electronic market-making, voice market-making, client algos that are trading in [our] name into the market – I have no idea if any of these things put together from a market perspective… look like market abuse, unintended or not?” the source adds.

This indicates that two years on from the release of the Code, banks are looking to do more than just sign statements attesting their adherence. Instead, several are scoping out third-party partnerships that can provide quantitative methods for confirming all activities done in their names are aligned with the principles-based document. The move is largely seen as an additional way of providing further protection for the business in the event that regulators come knocking.

FX Week can exclusively report that several of the top 20 banks are currently in talks with Ideal Prediction, an e-surveillance provider, about partnering the firm to build out and adopt its platform, which seeks to standardise the process around a series of best practices that banks can use to guide their surveillance and compliance.

The platform provides a series of checks, definitions and other parameters that supervisors can use to assess their trading desks independently. For terms such as spoofing, which have no clear definition, the platform can be enhanced to include an individual bank’s approach to sniffing them out. It can be used to identify market abuse or disruption across algorithmic and voice operations.

“This is a problem that is facing a lot of banks in that the experience that exists in their FX business is highly specialised, highly technical,” the bank says. “To be able to find an independent set of equally competent resources is difficult.”

Our whole goal is to take a generalised principle and translate it into specific checks

John Crouch, Ideal Prediction

Banks have been providing Ideal with the necessary raw data, which it then translates, normalises and anonymises. That data is then combined with market data sourced elsewhere and used by Ideal, which transforms it into simple analytics and interactive visualisations that can be digested easily by someone with no experience of algorithms.

“We’re going through the principles of the FX Global Code. Our whole goal is to take a generalised principle and translate it into specific checks. So, for market disruption, if you’re hedging on a venue, you’re going to look at spoofing and you’re going to look at layering, flashing,” says John Crouch, founder and chief executive officer of Ideal Prediction.

“Our view is that we should definitely be helping to standardise FX Global Code analytics,” he adds. “Equally important, we should also be trying to help everybody – traders, quants, tech and management – so that we resolve issues, versus simply assigning blame to internal groups.”

More than $5 trillion is traded daily in the FX market, meaning any form of market abuse or disruption can be costly. Banks suspected of colluding to rig currency benchmarks in 2013 have paid out more than $12 billion in regulatory and civil settlements.

As the market becomes more algorithmic, the fear among banks is that a regulator might come in and they would have no way of showing they had made a credible effort to supervise their electronic market-making activities.

“I don’t believe that I could either get the budget or the skill to build a parallel group to supervise e-FX that is sufficiently independent. And there is no industry consensus about where you put them. Do you put them in the first line – Compliance, Risk?” asks the bank source.

“For us, the easiest thing to do was to partner with somebody who could help us explore exactly what it is that we should be thinking about, with respect to our electronic footprint in the market and our voice footprint in the market,” the source adds.