Three Thursday Rants

Rant 1

UK BoE re housing - Though those concerned about UK house prices cite various reasons as to why current prices are terrible it is leverage that is always the ultimate killer of personal wealth so the capping of mortgage borrowing salary ratios makes absolute sense. But once done, there is still a cry that prices are still too high. If we assume that for those that want to buy or upsize this is the case then for those that wish to downsize it is the reverse. So why the bias? Probably because we have many more trying to upsize a bit bigger but we have fewer downsizing a lot (I'll wager the downsize ratio is always a lot more than the upsize) or liquidating completely on death. Which means that though the total housing market is a zero-sum game, the majority would like small incremental gains at the cost of the minority who would like to see big ones. The simplest solution to all of this is to build more houses where people don't want them. People only want them in already expensive areas (funny that) so best to change the demographic.

Which leads on to the most wanted area - London. However there are some simple solutions to iron out the huge regional disparity seen in London verses the rest of the country.
First let market forces do their work. The cost of living via housing should ultimately push up labour prices to the point that companies relocate to cheaper parts of the country.
Second, stop spending on London infrastructure (which is being done to make things easier for those living there) as it's a vicious circle and only attracts more in. Perhaps implement the reverse to make it less appealing to live in London. The debate over another London runway is a case in point. Don't bother, but expand Manchester instead.

Rant 2

The process of bank castration continues and Barclays, having thought it had already lost most of its testicular function, has found itself back in the rubber band shop over its dark pools. The principle is that these internal markets didn't own up to the fact that there were some sharks under the surface. The holiday brochure instead selling them as exotic tropical beaches. If this goes through then really every travel agent promoting Australian beach holidays should be done also. Once again its the principle of huge face value markets maybe being bent that upsets more than the actual real cost to end users. As we have seen with FX fixing and gold market fixing we only hear from those that may have suffered but not from those that benefitted from a price not being where it perhaps should have been by a zillionth of a percent. We don't know whether the dark pool service was still of net benefit to the client base relative to costs of going through the main exchanges with their associated costs, even after some scumbags where taking a fraction of it. It's basically resting on misselling even if there was no real cost. Either way go long of 'USbankfines'r'us Inc.' as their revenue continues to exceed expectations.

Rant 3

As we are looking at misselling let's tie that together with the current spate of rubbish UK sports performances (Cricket, Football, Rugby to name a few). In the past when these failures occur there is a cry that more must be done to boost the nation's sporting prowess with academies being set up at huge cost, coaching programs funded at every level and a massive drive to increase the intake to each sport. But why? Especially as there is such an outcry against inequality in pay and reward in every other field of life. Sport has to be the worst offender with zero hour contracts for 95+% of the participants. If we assume that there is normally only one winner in any sport then surely it is more efficient to have as few participants in any sport to maximise average earning throughout? The winner and a couple of runners up take nearly everything and the rest are a waste of any investment and of their own time surely? Setting up sport academies to train thousands of young into a sport for there only to be one winner like setting up super-academies to train people in how to fill in lottery tickets to become lottery professionals.

However, if it is the drive and competition that we admire so much then perhaps this could be harnessed more purposefully. Competing to just compete for personal gain should be classed as personal with associated costs born personally. Unlike a company which drives competition to drive ingenuity and production, rewarding the whole strata of employees from the overall income, hot housing thousands of kids in a sport with the hope of maybe winning is an inefficient use of resources and will end up with all but a handful of them as depressed jobless losers whose best hope of earning a living is coaching others selling on the same Ponzi style dream.

Oh hang on.. That's investment banking isn't it?

Finally tying together homes, banking and sport - If animals are so prescient in forecasting World Cup events then surely financial trading houses would be zoos in the real sense rather than the metaphorical.

I Can't Get No Satisfaction - (Bear remix)

Any excuse to play Devo,

Here we have the bear market's "I can't get no..." after yet another bad bit of news (US GDP) joins the long list of others this year in failing to kick the market significantly lower

For Bulls and Bears - Hyperbolic then Hyperhorrid.

And so it is with English football - all but out but not even granted a clean death, instead being offered a 4% chance of surviving. I thought that sort of torture was banned in the Middle Ages. Don't we get a special conciliation penalty shoot out to go out on, just for tradition's sake? So far everything is running to schedule was we teeter at stage 11 of the 20 stages of a World Cup market. Oh well, not to worry, next up is Wimbledon where English players will be far more successful at getting the ball in the net.

I am always half hoping that football should one day receive the wrath and ire that has been reserved for the generic breed called bankers, though I am still unsure as to whom a 'banker' is as most of the folks I know in banks are far from being bankers (cockney rhyming slang excluded). I am sure that the world would have exploded in flash of moral rectitude if banking were regulated by the likes of FIFA and conversely would be delighted if footballer pay was under the same regulation re deferred and capped performance remuneration as bankers.

So on to markets - Also running much on schedule with the psychology of recent events having indeed taken the path of most pain with equities re-approaching recent highs which, judging by the squealing on most commentaries is not consensus. But here is another big spanner of unforeseen consequence of regulatory straight-jacketing - With those inside the industry allowed to comment less and less, if at all, about opinions the commentary world is becoming even more biased to those outside it where 'steady as she goes' does not constitute a headline, a tweet or FB rant. We are left with even more noise at the tails and less sensible fat middle on the normal curve.

For the sake of transparency and not being under the regulatory thumb any more perhaps I should throw in a two pennyworth that combines the boring and a tail.

So here's the view - Equities will keep grinding up boringly, but once past a tipping point, say 2150 on SPX, they will go spectacularly stratospheric in a hyperbolic spike as every Joe piles in on leverage (Zero Hedge rebrands as 'Infinite Hedge'). This happens just at the time that inflation starts to hit which also then careens higher leaving the Fed on the hop, who after trailing the curve for too long will hike dramatically stuffing global markets (includiing EM ) that by then will be fully geared for chasing micro-yield at the expense of risk. The resulting dump then triggers all the uber calamity theories with respect to the values of money, as the walls of state debt fail to withstand this final tsunami crashing into them. Meanwhile, the world will have been further weening itself off the Usd as the only currency in town and political global enforcement of US financial policy will have annoyed enough other countries to make them think twice before wanting to bail out the mothership again. throw in a few uprisings along the way and it's all change in the world.

Is that view enough to alienate me from everyone? The bears and the bulls?

Less Shock of the New.

Shock is wearing thin and markets are putting in some sort of recovery. Shitty stocks have put in the biggest moves judging by my SSI (shitty stocks index derived from the shitty stocks in my portfolio) which points to the day-trader community (for no one else would own these shitty stocks) having pressed the OMG button on their day-trader platforms. And it does seem to be a general 'sell shitty stocks' move as they seem independent of sector eg. shitty UK gas stocks down just when one might have thought that an OMG energy shock via Iraq and exploding Ukrainian gas pipes should have pushed them higher.

So reading between the lines, we have had the knee jerk market move on Iraq and we enter phase two where OMG is tempered with a bit of 'well actually' and the derivative of primary news, namely 'ah but', starts creeping out of the mouths of those who want to sound more intelligent that the OMGers. Hence the market balances.

From the technical side and here I cut through the plethora of homeopathic indicators to some more basic ones, we have had a shake down from 'overbought' and are now just back to 'now what' which is normally indicated by a proliferation of fibonacci levels being quoted in desperation.

In general the level of 'not done this since the last time' type of comments is still high and it is still fun to note that the pre crisis 2007 highs are still being used prolifically as a benchmark for all current performance with no respect to the fact that 2007 levels were stupid to start with on many levels. Highs or lows are always an easy anchor to chain one's own biases to, even if said high or low was, by it's very nature, an aberration.

If we measure the path of most pain as the one that derives the most 'You have got to be joking' and hence 'WTF' comments, I would happily put my money on another rally in stocks resulting in a lot of torn out bear hair on the floor.

Talking of being dulled to shocks, it's pretty clear that the extremists in the Middle East think western forces are not to be feared after the last 10 years exposure to them to the point that short of all out invasion they really don't care. Perhaps it's time to play tag wrestling with respect to Middle East intervention sending in Team China. That should cause an 'Ooo Err missus' from the likes of ISIS.

As for FOMC, It will probably go BoE and revert to mean. In other words no shocks other than a shock that you misinterpreted the last FOMC.

Onwards and upwards..

ISIS Attacks Short Volatility Positions

Low volatility has been the talking point of the markets over the past couple of months as volatility compression has destroyed bank trading revenues, cut macro hedge funds off at the knees and given every bear a reason to trot out charts of how historically low vol leads to higher vol and how that implies price dumps. Which sort of fits, like a badly planned Scalextric track levered together at the last joint, but like trading RSI's as a technical signal, the underlying can keep moving a LONG way against you with only micro moves in the assumed correlation.

This year has seen many a potential macro event pop up with the potential to shake markets down to their roots but like many a Hurricane season of recent years, dire warnings of impending doom have seen each event fizzle out with only moderate breezes rippling the fronds of the market palms.

But here we go again. This time it's the Islamic State in Iraq and Syria (ISIS) attacking the short volatility positions major swathes of Iraq and threatening markets future progress towards Baghdad.  One wonders, having already asked where they get all their weapons from, if these sorts of groups partly fund themselves by front running market moves they know they will create. Manipulation - Go on Mr. Regulator, request a copy of all their communications.

I can hardly add any analysis of forecasting the likely outcome of all this as my own knowledge is only being fed by the same sources as everyone else, but I am more interested in how this will effect market psychology.

We have those that have been desperately fighting the low vol grind and have been short probably taking no action but increasing communictaions whipping up the disaster scenario. We have those that have been squeezed out of shorts reluctantly and are now probably jumping back short not wanting to miss the biggy, we have the twitchy longs who are probably getting flatter, we have the lazy longs who are hoping that this will pan out like all the other shock events of the year (namely only to mean revert 2 weeks later).

The one overriding feeling I have is that this shock has a couple of key elements to it that are more likely to give it legs than others.

- It has come from left field. Not many were expecting a drive south into Iraq from a hither little known group called ISIS. Unexpected is a huge prerequisite for shock effect.

- It ties together all the greatest of Western fears - Islamic extremism, Oil, potential need to throw your own young men into a foreign war and finally a 'whats the point' admission of impotence that you've done all this before and it was to no avail.

On those features this is a psychological biggy. But the psychology doesn't mean that the outcome will be any worse than it would without it. Just as the dread factor of sitting exams rarely has an outcome on the result.

So where do I sit in all this? Scratching my head wondering if this is the biggy, but I have been so preprogrammed by 'that wasn't meant to happen' events in markets over the past 12 months that the first thought is to sit this down move out but buy the dip when news panic is at max volume.

Time to wheel out the armchair generals. David Petraeus must be rubbing his hands together thinking of upcoming consultation and speaking fees.

Two-Speed Regulatory World

The City has always made its buck by arbitraging the regulatory environment. Tax laws keep tax advisors busy, accounting laws keep accountants busy, regulations keep regulators busy and all of it keeps investment banks busy. If rules and regulations are seen as the dams preventing efficient equilibriums in water levels then investment banks are the turbines in those dams taking energy out of the system as they find ways to profit in constructing complex ways to bypass the rules and regulations. However the current and upcoming regulatory overload would appear to be testing even the most creative of institution to find ways around the dam. Flow is drying up and with it the power that it generates. Layoffs are abounding in the City especially in Fixed Income and the currency markets as profits dwindle and banks continue along their path towards 'Post Office' status.

From the outside this would seem like a positive development as it could be said that all the money these institutions are taking out of the system is a tax on the rest of the world. An increase in the application of IQ towards 'proper' jobs rather than nuancing the finest fraction of a basis point from a mythical price makes perfect sense (even for the biggest pricks) but there is a core function that these markets provide for the world on which all the excess froth formed.

As posted recently here, the FX markets are under the regulatory cosh and a concern is that if garrotted to within an inch of their life then the regulatory hurdles become a serious cost and barrier to entry, reducing competition as the few main players become similar to oligopolic utility companies providing the end user with services priced far away from efficiency (energy prices falling, but UK utility bills staying high). Even the user starts to suffer - well someone has to pay for all the changes and restrictions somewhere along the line.

There is a lot in the news at the moment about how BNPParibas' $10bio fine is already testing relationships between friendly states and has brought into question how enforceable or even correct it is for one country's rules and morals to be enforced upon an other (Frank Dodd being another prime example). There may be a case of hypocrisy here where countries refuse to have foreign ways of life imposed upon them, surfacing through nationalistic expectation of immigrants to leave their rules of behaviour behind when they come in, but at the same time imposing their own rules of behaviour on other countries.

It is worth asking if a global homogeny of regulation has to assume a global homogeny in beliefs, values, ethics and historical upbringings as at the moment the world is still very diverse. Shock at the way the cultural differences interface is probably most visible with Western interactions in Afghanistan, Iraq and a plethora of other 'hearts and minds' conquering failures. They are just different and enforcement of foreign ideals in the short term doesn't work. If it is to work it more likely takes generational change coming from cultural morphing probably via social melding internet services. Note to Europe - The English language will probably be the uniforming force in Europe rather than the Euro or any EU Parliament imposed edict.

With a world full of cultural differences, just as with regulation, there are attractions to effectively arbitraging these differences. We have seen companies moving offshore to minimise tax burdens, ship owners register under far off flags to reduce regulatory loads, clothing manufacturers move production to deathtrap sweat shops to reduce labour costs and even FIFA declaring itself super-regional and above the law with respect to corruption, so it may be worth considering how far the regulatory market can squeeze an industry before the market feels enough is enough and packs its bags to set up shop in a new less ethically bound but much more profitable world. How far can you push a market before the path of efficiency is to move to the dark side and stick two fingers up at the world it is leaving behind?

Where would they go? There are plenty of grey states around the world that could develop their own competitive financial markets but let's have some fun and think about what would ideally be needed. You want an unregulated, cheap, empty and undeveloped country that can effectively be bought and start again in. A green field site. Somewhere to build a new financial hub in the European time zone, unsaddled by monstrous debt (US, UK, EU) and irrevocable old laws (Dubai), yours for the moulding. I have had in the back of my mind for many years that a country like Eritrea with a low population, large size and pretty empty, should put itself up for sale to a large consortium of the mega-rich, private and corporate, and build a low tax, regulation free Utopia. The Country motto being 'Caveat Emptor' with the only rule being, in Mad Max style, "Bust a deal, face the wheel".

It would immediately place responsibility solely on the purchaser to do their own due diligence with no crying to rating agencies, regulators, government or personal claim lawyers if they mess-up. The low-cost airline of the financial world. No frills and you know that price is low at the cost of service and guarantees. You want guarantees? Sure you can have them but it will cost you. No doubt a secondary insurance market would naturally evolve (Like CDS's) to cater for those that didn't want to bother with their own due diligence and this would become a reference point for implied risk ( as set by the market) rather than the theoretical risk that rating agencies uselessly peddle. You want regulation? Sure we can offer you a regulated version but it will cost you. It's available but not compulsory and that is the key.

But there is always a concern - Upset the old world enough and they will first impose sanctions and then physically close you down (invasion). Sanctions are only effective, like a siege, if they cut off enough sustenance to cause serious damage. If the new grey world state is big enough and self-supporting enough then sanctions may well not be effective. As for security against invasion? Well, next-door in Somalia are a bunch of easy to rent guys who for the last 20 years have been running rings around all-comers. Job Done..

But on a less tangental level is it not possible to introduce a halfway house of regulation where an institution can offer two versions of a trade - the regulated or the not regulated? It already happens in the electronics stores where you are offered an extra three year warranty at a cost. We know what most people say to that.

20 Stages of a World Cup Market

It's that time again for the World Cup to influence markets so despite various opinions on the effect of markets here is a basic guide to how it will most likely go.


1- The host country doesn't get its act together and everyone sells host nation assets as it comes under the global and hedge fund spotlight who notice what a pig's ear they are making of it.

2- Arrangements for client conferences in host country proliferate hitting the absurd with respect to subject titles such as 'Latvian telecom market and how it is influenced by Brazilian logging conference 2014, Rio'

3- The host country pulls it off at the last minute and speculators buy local assets as reports start coming in from early arriving reporters about how great the hotels they have been put in are and how clean and organised their deliberately sanitised prearranged surroundings are.

4- Volatility is meanwhile sold in all major global markets as there is an assumption that markets will go quiet as all turn to their TVs. Except for US local assets as no one expects the US to understand what's going on with respect to soccer, apart from the Hispanics who tend not to live in Connecticut.

5- Huge traffic increase in Bloomberg IB soccer related chat as this is not covered by FCA / SEC regulatory information transmission codes.

6- Despite the above, a few dealers are suspended for offering bets on the World Cup outcomes (bets are not permitted).

7- Banks spend fortunes on establishing whether office sweepstakes are covered under regulatory guidelines re. insider trading, prop positions or speculation and ultimately decide to ban them.

8- Kick off - Markets are indeed quiet as the world turns to the opening matches. City bars with TVs do a roaring trade and are able to double prices from 'ridiculous' to 'downright offensive'.

9- Armchair football generals pop up in otherwise clueless sell side desks passing on informational irrelevances (involving Goalkeeper's grandmothers) in order to impress clients with their comprehensive knowledge.

10- Research desks get into the mood and provide any 'amusing' correlations they can find between any market and any soccer fact but it is Goldman who outshine with a 300 page research note on it.

11- England are out. David Cameron announces a national day of mourning and the press demand the canonisation all the members of the 1966 winning squad. Cameron acts accordingly. Ed Miliband demands an enquiry and the resignation of the whole of the Government front bench whilst Clegg promises free football coaching at all primary schools.

12- London pubs see a drop off of trade. Clients start sending regrets that they are now busy and can't attend the quarter final canapes and beer evenings in second tier banks' boardrooms arranged and accepted on the assumption that England would be playing.

13- The UK population checks its collective ancestry to see if it can claim allegiance to any surviving country in the competition and then does so.

14- UK Office for National Statistics report this vast increase in claims of overseas origin which reignites UKIP's fervour and causes mass confusion over immigration policy.

15- France is out. French politicians blame the UK.

16- Germany are the last remaining European team in the competition which divides European support along the lines of bail-out status of country of origin.

17- UK have gone back to supporting rugby, cycling, rowing and sailing (cricket having also disappointed) after declaring the whole World Cup corrupt as proven by the Qatari bid for 2022 so London markets are trading normally.

18- Prices in volatility starts to tick up as expectations of a return to a normal market return.

19- A country wins and after that country's economy takes a beer and restaurant based short term economic boost things return to normal.

20- Markets flatline and once again disappoint those long volatility positions and the next excuse for lack of activity is desperately sought.

Regulation Killed the Forex Star.

As video killed the radio star, regulation appears to be killing the FX star. The sight of a baying FX phone jockey bullying and cajoling, buying and selling, ripping and clipping started to fade years ago as communication shifted from phone to screen and pricing shifted from voice broker to e-platform. But the regulator may be putting the final boot in as new regulatory pressures arising from actual, political and reactionary needs does for FX what the window tax did for large houses. Namely start off with an honourable intention but end up creating dark institutions not fit for purpose.

The latest onslaught has gone mainstream, with front pages beginning to cover the issue loving to suggest that a market with over a trillion a day in volume is corrupt, but how can this regulation be made to work fairly in a market that is global and does not run on an exchange? Regulation has already taken its toll on the ability of sell side to offer a client what they have always demanded, namely advice and best execution.

Advice has already been hit by restrictions on what a sell side participant is allowed to say. For the research department, advice that is extreme of view is frowned upon and opinion is being watered down to a mushy mean wrapped in disclaimers and codicils that make them near worthless. If a client has a trade recommended to them and it turns out that the institution is positioned the other way in a different department, then cries of foul appear even if the salesperson recommending it had no clue of the distant position.  If a trader is to suggest that a currency may go up and he is long of it for whatever reason, the trader is now obliged to advise that client should his position change, which being a fast a fluid market can be so unmanageable the trader just won't bother engaging with clients to begin with. An individual on a desk when asked "what do you think?" now has limited upside in expressing an opinion should it by some unfortunate and unexpected link be later attached to something going on elsewhere in his institution he had no knowledge of and he be held for disclosing sensitive information. 

Researchers themselves can no longer give a client an opinion, such as an informal view on EUR/USD over a dinner, if that opinion hasn't previously been expressed in a formal public advice. Advisory may well have to split away completely into a subscription service and indeed has in many cases which has really tested the value of the service in the first place.

Best execution - What exactly is that? Hitting the best market bids at the instance of execution? Or is to encompass market timing and advice on short term direction?  Spoofing a market higher before hitting bids with the intention to actually sell a large tranche was de rigour in the past with much of the motivation being to supply the client with a better price than they would have recieved by "selling clumsily" and just hitting every bid in the market and seeing the price melt only to bounce once bids had time to return.  

This raises an interesting point as to how execution is to be governed in future. If every market trade has to be reported against a client execution then the incentive to finesse an order drops and the client ends up getting a poor but well reported fill rather than 'best execution' in the broader picture. 

With transparency of pricing and a regulatory requirement to provide 'best price' we are immediately at odds with the role of a spot trader whose raison d'etre is to make money, which can be done in a couple of ways.

- Take proprietary positions in the market
- Buy or sell to cover client trades at a better rate than the client receives.

The second statement will already be raising the hackles of both regulator and the 'little man' but in a broader light this is no different from any other business where price of product sold has to be more than purchase price plus costs. As FX stands at the moment a counterpart makes its own price (like any high street shop) and it is up to the client to trade on it or not, which is justifiable. But when it comes to exercising client orders confusion can creep in where the client will expect to be filled when a price trades one tick through his level. So if the bank has executed the trade on this basis and not made any money on the trade (bear in mind the key point that FX is not a commission based business, unlike equities)  the value has to come from somewhere else. This somewhere else has always been generally classified as 'information'. Which begs the question of how this information can be of value.

A clear and public example of this informational value has surfaced through the WMR fix investigations which are showing, allegedly, that banks have colluded in their trading based upon information they have about client orders. Thus this must be market manipulation. Market manipulation is the heinous charge that governs all outrage from Libor fixings right through sport betting scams to goldbugs who are convinced that the world is conspiring to suppress the value of their anti-fiat money doomsday hordes.

So when is trading market manipulation?  In the broadest sense any trade in a market is manipulation as it will have a direct impact on the next subsequent price available. In the regulatory sense manipulation is acting in the market to effect subsequent price for personal gain at the detriment of others (but then any trade's subsequent gain must be at the detriment of others or where did the profit come from?). The well publicised FX Fix fixing is a hard example of collusion and price manipulation which can easily be mended by changing the absurdity of trying to trade upon a hypothetical price. Views on that previously expressed at TMM -

The debate revolves around the WMR fix, which is a strange animal. It isn't
a real exchange rate you can trade on in a centralised exchange, it's one
which is drawn up by a private body and released after its calculation from
published dealable prices over the course of a preceding time frame. Many
asset managers and funds have their portfolios benchmarked against this
number and hence would like to see their execution done as close as possible
to it so as not to have annoying accounting disturbances in their
portfolios. As always, the greatest problem with benchmarks is that people
tend to get more worked up over variance from benchmarks rather than the
actual level of the benchmark itself. This then opens up behavioural risks
in the system due to the divergence of accounting from reality. Oh my word,
haven't we seen that before. As we regularly say - "Benchmarks are Bollocks"

But the expression of market manipulation could be reduced fractal style to include the translation of the 'value of information', mentioned above, with a single small client order into monetary value. If a trader can no longer position his book conditional upon the orders he sees in it because in regulatory eyes it could be seen to be interfering with the best interests of the orders themselves then the original value of information is removed. Which would therefore lead on to asking why the bank would offer such services at all if they couldn't take any value, monetary or otherwise, from the trade.

The answer partly comes from an assumption that bid offer spread can be captured and this is where machines have overtaken men. An institution's e-platforms will execute orders at lightening speed matching buys and sells and taking a hair's breadth of margin from it. But if we think about what these machines are doing, all be it in fast computery way, it is exactly what a trader would do (many and maybe most trading algorithms have been derived from human behaviour). They analyse the orders they have, probe prices with micro amounts and use that information to set the prices they are dealing at and decide their own positions. Is there a difference in ethic? Should the algorithms and their programmers escape the potential jail sentences their human trader counterparts are subjected to?

Perhaps not, because this is where the pincer movement against High Frequency trading comes in. Enough has been said and written about that without having to dwell any further, but if the push is to dehumanise trading on one hand due to errant human ways then we had better watch out that the computers the trading is devolved to haven't also been removed through separate legislation. We have the anti High Frequency groups crying for more human intervention and those that don't trust human trader nature calling for more computerisation. 

So why is this the case with FX and not with every other traded commodity? In many ways it is and the evidence for manipulation in the FX market is minuscule compared to some of the price swing evidence seen in other markets around closes or option fixes, but the key difference is that FX is not traded on an exchange. It is a sum of a myriad of market stalls. Is this different to the bond market? Not in that respect but the bond market has an advantage - it is nowhere near as reliant on credit lines as FX is.

The requirement for credit lines to be established in order to deal with a counterpart not only limits the availability of choice (though the network of prime brokerage agreements that can be established by big players makes their access broad enough to catch most names) but it also affects the transparency of pricing.

Forward pricing already has to take into consideration credit functions as any forward deal carries settlement risk (chance of default at settlement date) against delivery as well as market risk (cost of unwind of the trade if the counterpart collapses before contract date). The chance of default will have to be priced into the forward price and this will be subject to individual credit assessments which will vary across institutions. Without an exchange to standardise and collateralise credit assessment, forward pricing is always going to vary across institutions making it very hard to pin down what the correct reference market price is for a trade.  Where CDS and other tradable credit hedging products are available it is easier to agree credit pricing but for the man on the street it's impossible.

The problem of transparency also occurs in the spot market where a price may be visible on electronic platforms yet untradable as the credit rating of the entity showing the price is so appalling no one has credit lines to deal with the institution showing the price. But the reference agencies won't know that.

Now let's get on to the next can of worms with respect to market manipulation. Options. Hedging of options is calculated mathematically but there is a huge amount of human intervention (otherwise why would a good options trader be a good options trader) and the most intervention occurs close to strikes at maturity or in the case of binary options close to barriers whenever they are close. You don't have to dig deep to hear market chatter of "barriers at xxx" influencing behaviour. If the bloodhound of public and political retribution is on to the WMR it surely won't miss the scent of binary options. Indeed the press are just picking up on it. So far the FT but it wont be long before mainstream lap up the large face values involved and infer that the public is being ripped off to the tune of billions. But
the banks are not alone in the way they defend or attack barriers. Many clients themselves will act with equal aggression leaving this a less clear 'them and us' bank vs rest of world argument with a strong risk that the 'scandal' would engulf 'nice' institutions rather than the already tainted banks and hedge funds.

So let us assume that the regulator and politician get their way in trying to regulate towards a fair and even market. Free from manipulation by computer or human, providing tight pricing in a non volatile way, how are they actually going to do this short of setting up a global exchange?  I really don't know but I am pretty sure that along the way to building their ideal machine they are going to break the current one to such an extent that the provision of both pricing and service to the world's FX clients takes a much greater turn for the worse. Very much like the way a rail company increases prices to pay for improvements whilst reducing services to implement them.

I am very keen to see how this pans out but in the mean time - "We apologise for the late running of your trade and general poor pricing, this is due to suspension of the dealer and regulators on the line"

——

Late addition - Having been asked since writing this how I think the regulator would like to see the market operate I can only point to what I wrote nine months ago somewhat tongue in cheek (but now becoming frighteningly more real) Regulator's Perfect Market Hypothesis. ! 

Bristol pound - If you are currency you need FX regulation.

Could I ask that the regulator doesn't forget during this new crack down on currency market manipulation to include the local gift voucher market known as the Bristol Pound that insists upon calling itself a currency?

 It is promised to be pegged to Sterling at 1:1 but there is a 3% FX charge, local shops may offer discounts if paid in it - trading at a rate other than parity to GBP when its pegged to GBP is pure market manipulation, it has a running cost that has never been disclosed ( though I would guess it is close to 1GBP cost per 1BP in issue), has its success measured solely against circulation numbers (in which case a more successful alternative may be Herpes) rather than any measure of increased Bristolian business with any benefits being assumed and unproven.

Alternatively Bristol Pound could give up its claims to being a true currency and instead have itself listed under  "alternative medicines"  as it is homeopathic money at best.

The BP  is still probably running to this schedule The 19 stages of the Bristol pound