AS IT CUR­RENTLY STANDS, THE FOR­EIGN EX­CHANGE MAR­KET SEEMS TO BE DE­SIGNED TO CRE­ATE OP­POR­TU­NI­TIES FOR BAD BE­HAV­IOUR:

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It is huge – $5.3tr (R63tr) passes through the mar­ket ev­ery sin­gle day. It is ex­tremely opaque – be­cause it is an over-the-counter mar­ket, there is no cen­tralised point where trades are cleared and recorded. What this means is that un­like the share mar­ket, there is no sin­gle point of in­for­ma­tion about how much has been traded and at what price.

It is ex­tremely con­cen­trated. Although mil­lions of peo­ple par­tic­i­pate in the for­eign ex­change mar­ket ev­ery day, only four banks con­trol over half the mar­ket. This ef­fec­tively means that over $2.6tr (R31tr) is traded by a cou­ple of hun­dred peo­ple work­ing for th­ese big in­sti­tu­tions.

It is al­most en­tirely self-reg­u­lated. Although there are many laws which ap­ply in other fi­nan­cial mar­kets such as shares, reg­u­la­tion is al­most en­tirely ab­sent in cur­rency trad­ing. The main body which over­sees the op­er­a­tion of the mar­ket is a panel ap­pointed by the Bank of Eng­land whose membership is com­prised of mainly cur­rency traders.

It is dif­fi­cult to ex­pect that a huge and opaque mar­ket, con­trolled by a small hand­ful of play­ers who self-reg­u­late will pro­duce an­gelic be­hav­iour. To make the mar­ket more strin­gently reg­u­lated, then it is pos­si­ble to re­place weak self-reg­u­la­tion by in­sid­ers with more de­vel­oped reg ula­tion by an in­de­pen­dent body. This would mean there are clear bound­aries be­tween poach­ers and game-keep­ers.

In the UK, the Bank of Eng­land is ref lect­ing on some of th­ese de­sign choices. With its “fair and ef­fec­tive mar­kets re­view”, it is look­ing at the de­sign of FICC (fixed in­come, cur­rency and com­modi­ties) mar­kets. So far this has been mostly en­gaged with by fi­nan­cial firms and their rep­re­sen­ta­tives, and some pol­icy op­tions have al­ready been pushed off the ta­ble. For in­stance, there is lit­tle prospect of a cen­tralised cur­rency ex­change or a Tobin tax on cur­rency trad­ing. [Tobin tax pe­nalises short-term cur­rency spec­u­la­tion by plac­ing a tax on all spot con­ver­sions of cur­rency.]

Many im­por­tant choices re­main to be made, how­ever. One big ques­tion is whether th­ese cru­cial mar­ket de­sign de­ci­sions will be ones that are made by mar­ket in­sid­ers and tech­nocrats, or whether they will in­volve some de­gree of gen­uine demo­cratic de­lib­er­a­tion. This is an im­por­tant ques­tion to ask. As my col­league Emilio Marti has re­cently ar­gued, mak­ing de­ci­sions about t he de­sign of our f i nan­cial mar­kets in a more demo­cratic way will lead to more just out­comes. Keep­ing t he de­ci­sions on how t he big­gest mar­ket in the world is de­signed in the hands of a small num­ber of reg­u­la­tors, econ­o­mists and cur­rency traders may not lead to a fairer mar­ket. An­dré Spicer is pro­fes­sor of or­gan­i­sa­tional be­hav­iour, Cass Busi­ness School at City Uni­ver­sity Lon­don. This ar­ti­cle was f irst pub­lished by The Con­ver­sa­tion Africa and can be down­loaded here: http://the­con­ver­sa­tion.com/if-you-aintcheat­ing-you-aint-try­ing-how-forex-haschanged-42198

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