Before banks returned to innovating this year, senior managers and compliance officers working at them spent much of the past decade responding to regulations designed to make the financial system safer.
Allegations that at least a dozen of the largest currency dealer banks colluded to fix prices over a six-year period, ending around 2013, was another signal to Wall Street that its conduct needed to change. In response, public- and private-sector market participants got together and produced the FX Global Code of Conduct in May 2017. The principles-based document was seen as a last-ditch effort to stave off regulation in a section of the market that largely self-regulates.
Critics argued the document lacked teeth. But the Code presented a challenge that those outside the foreign exchange industry couldn’t appreciate: how does a buy- or sell-side institution evidence the 55 principles to which they are asked to voluntarily attest?
John Crouch, founder and chief executive officer of Ideal Prediction, decided to take on the heavy lifting. The firm was voted the winner of the Best e-surveillance provider of the year category at the 2019 FX Week e-FX Awards.
“Some banks felt like they could address the Global Code internally,” says Crouch. “Once they tried to do it themselves, they realised how hard it was to normalise the data, access all these very refined large datasets, extract intelligence, and do this on an ongoing basis. From a technical perspective, it’s pretty hard.”
Part of the challenge was establishing a standard of what everyone should be testing for, especially in an industry where a single term can mean different things to different participants. From the outset, it was very clear the technical mechanism behind any solution that Ideal would bring to market needed to facilitate a customised user experience.
[Banks] realised how hard it was to normalise the data, access all these very refined large datasets, extract intelligence
John Crouch, Ideal Prediction
Clients of the firm tell FX Week they are pleased with how Ideal has helped them mitigate electronic trading risks by bringing to market an offering that is “incomparable” when it comes to analytics.
“Ideal’s risk analytics are pioneering developments, looking at the market in novel new ways that others are not and extracting actionable recommendations from electronic trading microstructure datasets,” a customer says. “The award will bring deserving industry attention to an elegant solution for improving profitability and reducing operational risk.”
Although Ideal is only four years old, the track record behind its cross-asset solution spans approximately 20 years. Crouch leaned on his experience at large banks and high-frequency trading shops to guide the building of Ideal’s Scope platform, an automated voice and algorithm-monitoring service that includes natural language processing to help banks probe whether humans and machines are behaving as expected.
“Clients wear this risk – sometimes depending on the country they live in, maybe personally – and they may not have algo expertise in their background. So just having an independent firm check the system and make sure it is well sorted is something that is giving senior management a lot of comfort,” Crouch says. “Now, the banks are not as focused on the day-to-day perspective of solely addressing regulatory asks – they are thinking about how to evolve their businesses.”
But, as banks put the regulatory ills behind them, Crouch is also focusing on making headway among the buy side, whom he believes have a role to play in making sure risks are under control and good conduct is promoted in the market. The authors of the FXGlobal Code are still working to get more buy-side buy-in for the document.
“I think much of the buy side hasn’t even started to crack this idea of evidencing adherence. They just sign the letter to say, ‘we believe in this principle’,” Crouch says. “History has shown us that if some principles-based document exists, at some point you will be asked about it by some important group – that may be regulators or somebody even more aggressive. When you are in those discussions, having evidence that you were thoughtful about your decision to sign is really going to be useful several years from now.”