From semaphore to algorithms, market misconduct is an age-old challenge
Misconduct issues in the financial markets can be charted back well over 200 years.
Analyse each case, and the same behavioural patterns recur time and time again.
An early example comes from 1814 when a conspiracy was formed between Charles de Berenger, Sir Thomas Cochrane, and six others to profit from the publication of false information that Napoleon Bonaparte had been killed.
Having accumulated a large position in UK gilts, de Berenger appeared in the port of Dover in Kent, disguised as a Bourbon officer and calling himself Lieutenant Colonel Du Bourg. He reported that Napoleon had been killed by the Prussians and sent a false letter to that effect to the Port Admiral at Deal for transmission to the Admiralty in London by semaphore telegraph.
Co-conspirators paraded across London Bridge in a horse-drawn carriage proclaiming an allied victory. The price of UK gilts rose on the news, and the conspirators sold theirs at a profit — a clear example of misconduct and market manipulation.
Wholesale fixed income, currencies and commodities (FICC) markets are among the oldest and most established in existence. Fast-forward from de Berenger’s antics to the present day, and while the means of communicating market-moving information have changed, the potential for similar misconduct remains.
High-profile market abuse cases show how the uncontrolled use of relatively simple collaboration and communication tools such as chat rooms have created significant new risks.
The FICC Markets Standards Board (FMSB), created in response to Libor abuse and other scandals which blighted the financial services industry in the wake of the economic crisis, brings market participants together on a voluntary basis to root out issues and improve the fairness and effectiveness of the financial system.
In our latest annual report, published today, FMSB sets out the progress it has made to enhance standards of behaviour. A lot has been achieved, but in an ever-changing world, FMSB must continuously scan the horizon to spot new issues that lie ahead.
By working with those companies within the membership, which collectively account for a substantial share of the business conducted in wholesale markets worldwide, FMSB is focused both on developing new standards and good practice, and placing a spotlight on emerging risks.
One of the most significant challenges the industry faces is around the opportunities — and potential hazards —created by new technology. Everyone is tracking the advance of cryptocurrency, artificial intelligence, and more sophisticated use of algorithms and machine learning.
It is too early to foresee the full impact of these developments, but it seems safe to say that it will be immense. The technologies will present significant challenges for both private sector firms and public sector authorities in terms of policy, governance, risk management and operations.
While all of this can seem far-removed from the end users of markets, it matters to all of us. Ultimately, wholesale financial markets have a critical social and economic purpose, and we should never lose sight of that.
These markets exist to support society. They ensure that the overall systems of capital and credit work, and that a broad range of participants can take part in investing, lending, borrowing and hedging in an environment rooted in confidence and trust.
Whether we are talking about information communicated by semaphore telegraph back in 1814 or the potential for machine learning to reshape market practice in the future, ensuring that markets are transparent, fair and effective for all participants remains a critically important task.
Main image credit: Getty