THE VIG--PART II

He Who Knows All Things chimed in today.  I'll give you snippets of what was said

...overall size of the market is interesting, but not necessarily relevant...
...you influence markets at the margin: the segment of the market in which one operates matters...the time of day matters... market depth / liquidity matters...order flow matters...leverage matters...derivatives... etc ...of course, information matters...and, the institutions identified were large enough players in the overall scheme of things to matter in any of the above...
...now, whether any of that really adds up to a systemic, institutional issue as alleged is another matter...
...have the Feds put the perps in jail?...why not?...maybe they are too busy counting the cash?...maybe they've forgotten about deterrence (fines are a cost of doing business, not a deterrence) and are focused on fund raising?...

HWNAT is as usual, for the most part right, but there are still some issues that I still don't understand and which he doesn't cover.  

I cannot believe that things have changed so much even since the Middle Ages when I was involved in this stuff that a continuous order of behavior in a market like the FX market does not go unobserved and hence,  prone to adjustment by other players in the market...and there are a lot of VERY big players in the markets not the least of which are the Central Banks of the western world and our good buddies in Russia.  That might speak to the question as to why mo one has been prosecuted.  You see, Over Here we have in criminal prosecutions this thing called "discovery."  To make it simple the prosecution has to hand over to the defense everything they have to prove its case AND pretty much what the defense asks for where reasonable grounds can be shown for such a request.  For example, "Please produce all correspondence written or oral between the Federal Reserve Bank of New York, the Bank of England and the European Central Bank regarding Foreign Exchange rates, cross rates, rate settings and other such relevant information for the period in question."  

Uh, I don't think we want to go there.

Which may be why everybody is going to skate.  Perhaps they should.  I give you one tale from the past.

The most miserable SOB on the corporate FX side was Ford Motor Company.  No one got a break.  Relationships meant nothing, just the lowest price for them.

A friend encountered them one day on a potential Dollar/Swissy trade.  Back they kept coming looking for a better price.  Now remember, he's making a market; he has no idea if they are a buyer or seller and he knows they are shopping him.  Finally in a fit of frustration he says, "OK 1.825, either side" meaning he is prepared to buy or sell with no spread (the rate is ficticious). "Ok," says Ford, "I buy 100,000,000 Suiss at 1.825."  Not the way to end the day...short Swissy in size.

Now if you are in this game, and you have to set a price at a particular time in the day, if I be thee I would try to get that price somewhere that suits my position lest at 4:00 p.m. the today's equivelant of Ford--like a Hedge Fund geared up to the gills with somebody else's money--decides he wouldn't mind owning a hundred million Swissy spot.

I guess you could get fined for that but I sure would like to know who's watching the Hedgies?  Nobody as far as I can tell.  As to why in this era we need a freekin' set at 4:00 GMT...that's another question for which I wouldn't mind an answer.

BLUE MONDAY

For bloggers anyway.  There's no competing with the Washington follies, so I thought I might just on a few things floating around out there.

The WSJ had an interesting story the other day that prompted more than a few phone call regard the Swiss investigating alleged hanky-panky regarding the "fixes" which are used to establish the rates for various currencies in the foreign exchange market.

Now the fixes can occur at various times in the day but the big one is a 1600 London time as it is the most often used fix to determine the value of a trading portfolio OR of foreign assets for scores of multinational companies.  Now as regular readers know I have been hardly impressed with the so-called LIBOR rate fixing scandal, so a couple of buddies called in to ask whether my view was the same in regard to this latest misstep on the part of the industry (by the by, has anyone noticed that UBS is always mentioned when one of these things goes down)?  My answer; not by a long shot.

Now all I know is what I read in the papers but this is considerably different from what we have seen before in the sense that LIBOR, since it's inception was never thought of nor expected to be an actually state of the market trading rate that you cold post on your machines and do business at the price.  It was a notional rate dreamed up to accommodate syndicated leading where multiple banks fund advances at a single rate at one time during a business day.  That rate was set in London at 1100a.m. and defined as a rate, "at which first class banks would lend to each other in the London market.  "What was a "first class bank?"  Put it this way: when this got started around 1970, it wasn't Japanese.  Probably wasn't French either although the French didn't agree...then again, the French rarely agree with anyone which is what makes them French.  So, if a bank wished to borrow from a bank it was at the lender's rate, not LIBOR.  It was a rate of convenience, not of a market.  And the entire world knew it.  If the rate was a bit high for the next three months. it could be a bit low for the following three months.  Whatever.  Fudging an internal position is another thing but if your controls are in place and good and the watch dogs are watching this sort of thing should be picked up.  The malfeasance tends to be internal, not with clients.

This situation is considerably different.  The set is the market.  A trader could believe that the set was the last trade.  OK, what's the difference?  For an institution that is a big player, J.P Morgan, Citibank, UBS--and FX is a $5 trillion market a day and dealing with huge customer orders, one or two basis points per trade are enormous.  If Sterling, for example is 1.6096 middle and you are long at 1.6088, there's a fortune to be made my son.  The manner in which a situation like this comes about is the subject of this investigation.  It will be interesting.  So much for a dead Monday.