Norway's $1 trillion sovereign wealth fund, the world's largest, on Friday called for more transparency in global foreign exchange markets to cut the cost of transactions and make them more efficient. Changes in currency trading should seek a more level playing field for clients in order to cut excess profits for dealers and ensure a better risk balance, Norges Bank Investment Management (NBIM), which runs the fund, said.
The reform proposals came in a policy paper that it said could lead to changes in its trading relationships. "We're seeking greater transparency and governance," NBIM's Global Head of Investment Strategies Yazid Sharaiha told Reuters. "It's not a question of taking less market risk, but of cost reduction and efficiency, and of providing even deeper liquidity."
Three elements of currency trading warranted particular attention and should be reformed to reduce the information advantage held by banks and other intermediaries, the fund said. The 'Last Look' function, allowing spot dealers to potentially renege on an earlier price quote, was biased and should be compensated for with tighter spreads and deeper liquidity, it said.
The second element, algorithmic execution strategies, were generally better at protecting the dealer than the client, and better risk controls and transparency should potentially lead to the introduction of third-party algorithms. The third seeks to remove a "disconnect" between dealer quotes and prices in the interdealer market, which makes it hard for clients to know if they get the best possible transaction.
Among the proposals was a call for block-trade solutions along the line of those used in stock markets, such as the Turquoise platform, majority-owned by the London Stock Exchange , that facilitates large trades without moving markets. "There's lots of trade in foreign exchange markets, but much of it comes from an ocean of algorithmic hedge funds that may not be willing to take large positions," Nordea Markets currency analyst Ole Haakon Eek-Nielsen said.
"As a result, NBIM may worry that their trades can move the market due to low liquidity." Sharaiha said the fund was seeking evolutionary change rather than a radical remake of markets, and that the paper intended to highlight issues relevant to a broader set of asset managers.