FX CEO: The currency market is open to abuse and regulators aren't listening

Global regulators are "hearing but not listening" to the currency market's calls about how to put a stop to foreign exchange manipulation, according to the CEO of a currency trading platform.

David Mercer, CEO of LMAX Exchange, which trades $10 billion (£7.5 billion) in currency daily after only launching 5 years' ago, told Business Insider that he met with US and UK regulators on plans to improve market transparency.

However, he says that the market has become disillusioned with regulatory initiatives over the last two years.

"We've engaged with the UK's Financial Conduct Authority, the Bank of International Settlements (known as the central banks' central bank), the Bank of England about the Fair and Effective Markets Review (FEMR), and the New York Fed, and they definitely hear but they don't listen. It's disappointing," said Mercer.

"The biggest [area] for abuse in the FX market is 'last look' and the lack of transparency of who is trading with whom since most of of FX is done trading over-the-counter (OTC). The regulators are just papering over the cracks of a broken mechanism that is open to abuse."

"Last look" gives liquidity providers the option to reject a trader's order, even if it matches up with the trader's quoted price. If the order is rejected, the price for the order can "slip," putting the trader at a disadvantage.

How OTC makes the market susceptible abuse

The FX market trades $5.1 trillion (£3.8 trillion) a year and most of this is done over-the-counter. OTC is when a trade happens away from a formal and transparent platform like an exchange.

Mercer said this is what has led to a number of traders abusing the market, such as Christopher Ashton, former global head of the FX spot-trading business at Barclays who was fined in August $1.2 million for his role in the FX fixing syndicate nicknamed "The Cartel."

Barclays was fined £1.5 billion by Britain's Financial Conduct Authority and the New York Department of Financial Services (DFS) in May last year because it had a whole group of traders manipulating the currency markets.

A number of other banks around the world, including UBS, Citi, and RBS, have all been fined for FX fixing too.

In a LMAX Exchange survey of 1,100 FX market participants, it says that "trust has not been restored and transparency is yet to improve" because "65% of respondents said their interests are not sufficiently protected."

The market participants in the survey are

• Banks: dealing and non-dealing banks.
• Non-banks: asset managers, brokers, financial institutions, funds.
• Professionals: proprietary traders.

Other key findings of the report include:

• 52% of respondents said transparency has not improved in the last twelve months.
• 76% of respondents said there was a need for a global code of conduct.
• 66% of respondents said there could be conflict between a global code and local regulation.
• "Last look" topped the list of most unacceptable market practices.
• 76% of respondents preferred to trade without 'last look.'
• 62% of respondents said 'last look' is the most unacceptable market practice.
• 79% of non-bank market participants and 80% of professionals said they would favour the abolition of "last look."
• 77% of respondents believe FX will move to a more rules-based trading environment.

The FX market wants more transparency

The survey shows that "last look" is indeed a prime concern for many people in the market.

However, Mercer told BI that LMAX Exchange's business model is an example how greater transparency works and is shuts down the vulnerability to market abuse.

For example, on the OTC market I may give the price of £650 to a bank but then ask for £700 for the same trade for someone else. But on LMAX Exchange's platform there is one clear transparent price for everyone. 30 banks and 500 non-bank customers from 90 countries are on the platform which trade $10 billion a day after only launching five years ago.

"FX should trade as equities trade and futures trade on listed exchanges with open order books. There is still resistance to that as it would be a big change to the market but there has been a lot of trust lost over the last five years. While I think those kind of 'old boys clubs' like the former Barclays one, have ceased to exist now, there is still a lack of trust in the market and the market is still open to wrongdoing," said Mercer.

"The products are not regulated but people are regulated. There have been steps forward by the regulators but they need to address 'last look,' electronic OTC exchanges."

Mercer hopes to increase the amount traded on LMAX Exchange by "10 fold" and says "it's only a matter of time this will happen. Customers want a more fair and open market and while the speed of change from regulators is frustrating, more people are demanding this transparent market environment."