Projecting sinister and conspiratorial motives on banks has been a popular fad these last 3 years, but I don't really see why this is necessary to explain their actions here. There's nothing necessarily sinister about working with people introducing new ways to do your old business. Actually, that's what you want banks to do.
Well, I know of one market where this conspirational explanation is exactly what happened.
Commodity and future exchanges existed, one way or the other, for 5000 years. The modern commodity exchange traces its history at least to 15th century Europe, if not earlier.
If you need to change currency, you go to the bank. You would expect a currency exchange, where buyers and sellers meet to exchange currency, would have existed given that it's much simpler than a stock exchange / commodity exchange to run.
Well, bank stifled the money supply to any such attempt, until they couldn't in the early '2000s -- but they invested and bought the emerging players, to make sure that their lucrative money changing business is not harmed.
Look up who owns currenex, hotspot, EBS, and the other currency exchanges. Also, look up the rules - they favor the banks above other players.
As someone who traded large volumes of commodities, currencies, and their derivatives, this is false. Most trading of these assets happens OTC, between private parties, and never touches an exchange. This is far more de-centralized and efficient than having it happen on exchanges.
The retail money changing business is not so great if you're dealing in change (<$10k), but as someone who negotiated the rate at which he changed his Swiss francs into US Dollars at a JP Morgan Chase branch in New York, it isn't a regulatorily locked market. Having a private banking relationship will lower the threshold for negotiated rates, too.
> As someone who traded large volumes of commodities, currencies, and their derivatives, this is false. Most trading of these assets happens OTC, between private parties, and never touches an exchange.
I was not claiming that it does happen in an exchange. I was claiming that the banks were (successfully, for years) doing everything in their power to stop such an exchange from forming - do you think that is not true?
I was claiming that the big banks own the existing exchanges, currenex, hotspot, EBS, is that not true? (I've been out of the game in the last 3 years, the player names might have changed -- but I'd be surprised)
I have first hand experience of big banks exerting their influence on those (supposedly anonymous) exchanges to kick participants out when their trading style was not compatible with the banks' interest.
> This is far more de-centralized and efficient than having it happen on exchanges.
De-centralized, yes. Efficient? Only for the other party (which is a bank, the vast majority of the time).
If you want to change swiss francs to USD, and I want to change USD to swiss francs, if we had a two sided market ("an exchange") to meet in, we'd find each other, agree on a public, easily discoverable price, and that's it; The one of of us who was smarter (or could wait longer) would earn the spread, the other one would pay it; alternatively we would meet at the mid price, splitting the spread. This happens all the time in exchange traded shares, commodities and futures.
However, the way it works today OTC is that instead you and I both find a big enough player (e.g. JP Morgan, or Goldman, or whoever), who makes a market in the currency - buys at the lower price, sells at the higher price, earning the entire spread, always. Unlike either of us, that player -- by virtue of its size and position -- knows the "buy" and "sell" orders of a lot of the smaller players, and can react accordingly.
> s someone who negotiated the rate at which he changed his Swiss francs into US Dollars at a JP Morgan Chase branch in New York, it isn't a regulatorily locked market. Having a private banking relationship will lower the threshold for negotiated rates, too
That's exactly my point: You would expect an exchange that would make this into a symmetric, competitive, information efficient market because there are hardly any regulatory issues (compared e.g. to running a stock or commodity exchange). The fact that this hasn't happened in 500 years of modern exchanges is a testament to the stronghold that banks have on currency trading.
Note that such exchanges have appeared for everything, from bandwidth to energy to pork bellies - but only in a very limited way for currencies (controlled by the same old boys network), where it is easiest to start such an exchange, and such a market benefits everyone except same old boys.
>if we had a two sided market ("an exchange") to meet in, we'd find each other, agree on a public, easily discoverable price, and that's it
Every trade is a two-sided market. An exchange differs from OTC only in that it is more centralised. The NASDAQ is no more an exchange than the currency markets (both are de-centralised, quote-driven markets).
>by virtue of its size and position
Market makers on traditional exchanges have information from volume that smaller players don't. In fact, the centralisation means the cumulative frequency distribution of market power trails off faster on traditional exchanges versus OTC markets (this is why mom and pop can stick guns to the banks in pink sheets but less so on the NYSE).
>stronghold that banks have on currency trading
You don't have to go through a bank. You can list your currency trade on a currency bulletin board. But they will still have market makers who amass advantage by volume. Most currency hedgers, except the very largest, go through a bank because they get good spreads. FX market making is very competitive (a border between you and your competitor doesn't help) and can always be dis-intermediated. Stock exchanges get a lot of volume from regulatory fiat. If you really want a centralised FX exchange note that currency brokerages internally crosses their orders - you can draw a box around those brokerages and call them exchanges if you'd like.
FX market making fails to make indecent profits save for the effects of insider information, usually from central banks. If there is a "stronghold" we were all playing our cards rather stupidly.
>exchanges have appeared for everything, from bandwidth to energy to pork bellies
Requiring everything be on a quote-driven exchange doesn't make sense - it is stupid to subject to an illiquid market (esoteric derivatives) and stupid to subject to a market that's already nearly perfectly liquid (currencies).
As an aside, I would guide anyone looking at Wall Street to note that the centre of gravity of influence has long since shifted away from the banks and towards proprietary market makers, e.g. GETCO, Knight, and hedge funds, e.g. Bridgewater, SAC. For the time being the new citadels of power are sufficiently de-centralised to be highly competitive with each other and, as a cohort, the banks.
Reading your reply, I see we're discussing two different things.
You are arguing against centralized FX trading (the logic, and viability of). But I'm not arguing for it. When I'm referring to an FX exchange, I'm talking about a symmetric, non-centralized, almost unregulated, two sided open market. An airbnb/uber for currency. What hotspotfx claimed to be, but isn't.
A place where I can come in and say "I have $100, I want to buy 80 euros", and you say "I have 100 euros, I want $130", and we'd find each other. TTBOMK, HotSpotFx and Currenex supposedly offer that, but with great limitations and favoring the bigger players (who own them). And there are no such venues independent from the large banks.
Such a system would eliminate paying (half) the spread, which is where currency market makers make their money -- by letting you trade directly with me, rather than force us to let the bank net with itself and pocket the spread. It works for stocks, it works for futures, it works for commodities. Why can't it work for currencies?
And I know, from working with them, that the big banks actively work against the formation of such a market; and they have the clout to sabotage that.
> If there is a "stronghold" we were all playing our cards rather stupidly.
Again, I'm not saying that the banks know something you don't. They make money on spreads (little on EUR/USD, more on JPY/SEK). The stronghold is on the ability of anyone else to build, say, a "currency ebay".
> Requiring everything be on a quote-driven exchange doesn't make sense - it is stupid to subject to an illiquid market (esoteric derivatives) and stupid to subject to a market that's already nearly perfectly liquid (currencies).
Nothing is required. But doesn't it seem strange to you that currencies, which are at least as liquid as other things which are traded in {symmetric, anonymous, information-equal} venues, aren't -- when the regulation around them makes operating such a venue much easier than, say, a futures exchange?
> For the time being the new citadels of power are sufficiently de-centralised to be highly competitive with each other and versus the banks.
I agree completely, except in FX, which is dominated by the banks. (Disclaimer: Up to date as of 2010. hedge funds were already at the center of gravity).
>A place where I can come in and say "I have $100, I want to buy 80 euros", and you say "I have 100 euros, I want $130", and we'd find each other
Sort of like what you do with an FX trading account? You wouldn't have to pay the spread. Of course the price could slip against you while you wait, which is why most hedgers just pay a market maker (MM) to take that risk.
Or, if you think the spread is so sinister, you can go and make a market on the spread as well. There are upstarts doing this all the time, once again laying waste to the claim of banks having a stranglehold on the FX market.
>...rather than force us to let the bank...pocket the spread. It works for stocks, it works for futures, it works for commodities.
You pay the spread to an MM on all of these. Plus a commission to your broker which includes a commission to the exchange. If you trade a stock on the NYSE you always trade with specialists; on NASDAQ you only mostly trade with MMs.
The reason there isn't a currencies exchange is because there are a number of de-centralised, inter-linked currency trading venues in place. It would be more expensive to trade FX on a stock-exchange model.
>FX, which is dominated by the banks
You seem to have a faith-based conviction on this, so I'm not going to argue it any further. The currency markets are one of the most efficient, i.e. fair, markets on the planet. As a former trader at a multi-trillion dollar Swiss bank I can say with supreme confidence that you're far off the mark in that charge.
P.S. The currency markets work like Craigslist, except where there are tons and tons of Craigslists that are constantly talking to each other and that everyone is always connected to.
Note: there are banks that have a strangle on the FX market. Central banks. And the market still runs away from even them. Trust in the fact that if there was any pinch point in the FX markets the central banks would have found it.
I see where you are coming from: You're from one of those big banks that (IMHO) strangle the innovation, almost without paying attention. But as you seem so much more knowledgable about this, a few answers from you can save me a lot of money - hopefully you'll agree to answer?
> Sort of like what you do with an FX trading account?
Can you name an FX trading account that matches two users (rather than user and market maker?) I'd like to move my money there. Doubleplusgood if it's anonymous like the CME.
> Or, if you think the spread is so sinister, you can go and make a market on the spread as well.
Have you tried that? I have. And got thrown out of multiple FX venues because I was profiting at the owner's expense; all of these venues profit by making markets and netting locally. In a symmetric market, there's no other player who can throw you out when you're smarter than they are. The best they can do is not trade with you (and if the market is anonymous, they can't even do that without stopping trade entirely).
And depending on your strategy, the spread might be very sinister. I can (could, anyway) make money on the super competitive EUR/USD if I'm allowed to make markets. I can break even on the buy side if the spread is <1 bp. I can make more on currencies with larger spread if I'm allowed to make markets. But I'm not.
> You pay the spread to an MM on all of these.
Dude, have you ever traded CME, Eurex, Liffe or almost any exchange other than NYSE and NASDAQ? (or, traded NYSE/NASDAQ these through the old INET or ARCA?) If you paid to an MM when you did, your broker was cheating you. There were no privileged market makers on these exchanges.
> As a former trader at a multi-trillion dollar Swiss bank
Funny. As a former quant whose software traded trillions in notional (not that it says much, given that 3 eur roundtrip could get you >120,000eur notional) I can assure you I know what I'm talking about. And no, it wasn't in the NYSE or NASDAQ. And no, I wasn't paying any MM. And yes, if I had to pay the spread, I wouldn't be able to make any money.
> there are a number of de-centralised, inter-linked currency trading venues in place.
Can you name one that has symmetric anonymous trading, like CME or Eurex or LIFFE does? Because the biggest names that claimed to (Currenex, HotspotFX) didn't - and I know that because I witnessed that first hand.
If you can, I'd be happy to start trading there. Please let me know of one.
