The expectations on market-makers have changed over the past 10 years from an expectation of participating in efficient markets to one where market-makers have to be able to demonstrate that they are operating fairly. This means that market-makers need to be transparent with their clients on how they operate and have effective processes in place to identify and manage any conflicts of interest between themselves and their clients and between different clients.
Case Study – FX High and Low
Many FX market-makers will routinely take orders from clients to buy or sell a particular currency when the market reaches a particular level. However, in FX, the price on one platform or trading facility may reach a certain price and then fall back into line, while it does not reach the same price on another platform. In such circumstances, it may be beneficial for some clients to have their orders filled at the particular level, and detrimental to others. Equally, it could be beneficial or detrimental to the market-maker.
We have helped market-makers in this situation to manage these potential conflicts of interest by making sure that they have:
- Made the appropriate disclosures to their clients on how they handle orders
- Developed helpful and effective principles and procedures for their trading and sales staff to handle these situations
- Led training seminars where traders and salespeople openly discuss the challenges of handling such situations and how to apply these principles and procedures to mitigate the conflicts and achieve fair client outcomes
These processes can’t be prescriptive rules as the nature of OTC markets mean that there is no prescribed way that two market participants will interact with each other. We work with our clients following the same approach as the FX Global Code and FMSB standards in developing practitioner led principles that best fit each underlying business and are complemented with interactive scenario based training sessions to ensure that each individual understands what is expected from them.