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