Integral Development Corp., a leader in FX services, will begin publishing second-by-second pricing for major currency pairs on January 15. The prices, verified by algorithms developed at Stanford, will be available at no charge at the end of the business day. They will offer FX market participants a way to see if their provider is giving them a good price.
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State Street and Bank of New York Mellon, two of the largest custodian banks in the country, have been sued by pension funds charging that their pricing was based on prices that hurt the investors numbers.
Reuters reported in 2011 that the Washington State Investment Board had received 11.7 million, the full amount it had requested, from State Street without filing a lawsuit. Some large investment banks have also complained that their FX trades were mispriced.
Harpal Sandhu, CEO of Integral, said some investment firms paid little attention to the FX transactions on their investments until whistleblowers filed suits against the custodians for cheating state-operated funds, where laws allow substantial rewards. They were more than a little embarrassed and some of them have probably settled claims privately, although the issue has not received a lot of attention lately.
In response to one lawsuit in 2011, BNY Mellon said “BNY Mellon executes trades within fully disclosed, daily guaranteed pricing ranges.”
Rick Baert at Pensions & Investments reported last month that FX costs from custodial banks “have been slashed 50 percent or more, a direct result of legal action taken in recent years against the banks on charges they inflated prices.” See his story for a long list of lawsuits against the two banks.
Integral’s FX Benchmark will provide funds with a view of FX pricing at every second during the day for AUD/USD, EUR/USD, GBP/USD, NZD/USD, USD/CAD, USD/CHF and USD/JPY. For most FX participants the key FX benchmark is the WM/Reuters which is available only at 4 p.m. and 8 p.m. GMT.
“Those rates are used to set prices on thousands and thousands of products that have an FX component in them,” said Sandhu. Regulators and law enforcement agencies are investigating charges that traders at major banks manipulated the prices through chat rooms.
Sandhu said the twice a day fixing can be manipulated by banks which know what currencies their customers are going to buy.
“We came up with a mechanism where we can quote the FX price every single second of every single day. Customers can choose any time or combinations of time to arrive at their rate, and that makes it very difficult to manipulate. No one had the capacity to quote that in an academically rigorous way,” he added. “Integral was in a unique position because we have all the data. We collaborated with Stanford to collect and publish it.”
Stanford developed algorithms to ensure the prices are good ones and can’t be manipulated.
“They [Stanford] are interested in research about why things happen in the natural world,” Sandhu said. “In finance they are extremely interested in data, particularly big data, to understand why things happen in a certain way.”
“The Integral FX Benchmark is a perfect example of how Stanford collaborates with the industry to conduct research that helps revolutionize the use of Big Data for the benefit of market participants,” said Stanford’s Kay Giesecke, associate professor of management science and engineering. “Access to accurate information is a key component of market efficiency that drives growth and innovation.”
“If this had existed, Calpers would never have let State Street quote prices so far off the market,” explained Sandhu. “But up until now they didn’t know, because only the high and the low of the day were published. Once people have this level of transparency and data, they can figure out how well they are being treated, through transaction cost analysis (TCA) and tools like that. That will probably have the biggest impact on customers picking and choosing whom they want to engage with. They never knew before.”
He thinks that customers who find out they are poorly treated will turn for Integral for FX because it offers great transparency; the company has been growing 35 percent a year even while the FX market has declined by 15 percent, he said.
“Asset managers are slow to move, but they have started to separate the FX execution from their other custodial services.”
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