The chaos caused by the removal of a ceiling on the value of the Swiss franc last month shows that currency markets have become too dependent on electronic models of trading, a leading industry body has told the Bank of England. In a submission to the central bank's Fair and Effective Markets Review ordered by the UK government, dealer group the ACI Financial Markets Association said traditional "voice" trading might have dealt better with such large and unexpected market moves.
The franc surged by as much as 40 percent in a few minutes following the Swiss National Bank's sudden removal of its cap on the currency's value against the euro on January 15. Market participants say that prompted some bank trading systems to cease to quote the currency while others generated prices that for a brief period were not seen as in line with real market rates. For some minutes that drove interbank foreign exchange trading back to a mainly "voice" basis over phone lines.
"Over-reliance on electronic trading, whether mandated by regulation or not, can, in an unexpected market environment, facilitate a liquidity squeeze/abyss," said the submission, seen by Reuters before publication on Friday. "There may be no willingness for market liquidity provision as would have previously existed in a voice-only environment."
The ACI, originally an association for spot voice traders and their bosses, has become one of the forums for banks' powerful heads of electronic trading to discuss the evolution of the technology that accounts for 80-90 percent of trading. The franc trade was among the main talking points at ACI's World Congress in Milan a week ago. Some participants called for more people to be involved in supervision of the trading systems on which a handful of banks including Barclays, Deutsche Bank and Citi have built a dominant share of the $5 trillion a day market.