FX probe sparks shift in social trading

By:
Rob Daly
Published on:

Amid litigation fears and calls for greater communication transparency, financial institutions have imposed heavy restrictions on traders’ electronic communications. However, social trading is here to stay and new platforms, such as Saxo Bank’s TradingFloor.com portal, are capitalizing on the gap in the market.

Foreign-exchange traders are operating in a new world, where old behavioural norms no longer apply, including social trading, say experts.

This is irrespective of whether the UK’s Financial Conduct Authority and other national regulators find the smoking gun of a possible WM/Reuters-4pm-fix manipulation in chat sessions dubbed The Bandits Club, The Cartel or other private online chat rooms.

“FX-ibor is going to be larger than Libor and no firm will want to be in the firing line for the punitive fines or reputational fallout likely to occur on the back of it,” says Rebecca Healey, a senior analyst at industry research firm Tabb Group.

The EU recently upped the ante by approving a new directive that requires member states to enact criminal sanctions for those convicted of committing market abuses. EU officials expect to publish the directive in the Official Journal in June. Member states would then have two years to implement it with their own legislation.

This is a prime example of trader behaviour outpacing the advancements in communication and trade surveillance, says Healey. “Gone are the days when you can have a look-back-and-check attitude,” she says. “This is real-time activity.”

Valerie Bogard, a fellow Tabb Group analyst, adds: “Market data providers have bumped up their compliance tools in relation to the chat rooms and show firms that they can have tighter control over what happens in a chat room.”

Although firms have invested in a variety of platforms to monitor phone calls, emails and instant messages, the challenge is integrating them, along with any new electronic communication channel, into a holistic real-time fashion, says Healey.

In the meantime, Goldman Sachs, which runs the Marquee platform, and other firms have banned their traders from using multi-bank chat rooms, Bloomberg reported in December.

“Shutting down chat rooms is a gut reaction to the possibility of punitive fines and increased reputational risk,” says Healey. “It won’t necessarily get to changing a culture or a trader’s behaviour.”

Bogard agrees, saying: “Banks have to make sure that the behaviour of traders is in line whether if it is in a chat room or a new social-media site.”

Saxo Bank officials saw a gap in the market in 2013 as they developed the next-generation of the bank’s multi-asset trading online community TradingFloor.com, and answered questions posed by Danish and EU financial regulators.

Rune Bech, chief digital and communications officer at Saxo Bank
“Most of the questions regarded transparency,” says Rune Bech, chief digital and communications officer at Saxo Bank. The concept of privacy has gone out of the window. “People want to share everything and this has arrived to the world of trading,” he adds.

The bank plans to replace its 120,000-member online community, as of April 29, with a new social-media and multi-asset trading platform, which Saxo Bank launched as a beta site on January 23.

The new platform is a tiered offering where users can navigate through the community just by virtue of registration. Those who wish to trade directly from the platform need to link their site membership with an existing and funded trading account at Saxo Bank.

Trading members who do not fear total transparency can display all of their open and completed trades for feedback and bragging rights.

If a trader decides to share, then it is an all-or-nothing proposition. Community members will see the trader’s open and completed orders, how many calendar days since the trader opened the account and the overall performance of the account across all of the assets traded by Saxo Bank.

Communication on the platform operates such as Twitter, but without the social-media site’s direct-messaging capabilities, explains Bech, adding: “There are no private conversations. Users can write notes to other individual members, but everyone can read them.”

According to Saxo Bank, 329 of the approximately 800 beta users with linked trading accounts decided to share their trading information with fellow community members.

“To be frank, if you asked me a year ago when we started this project whether this many traders would share, I would have been far more conservative in my estimations,” says Bech.

A majority of beta community members are private traders, but there are some institutional traders among them. However, Saxo Bank is preparing a white-label version of the new platform, aimed at the bank’s institutional clients, adds Bech.

Although social-trading has been around for years, the regulatory earthquake in the FX market could prove a game-changer.