Sudden jolts in the currency market might be becoming more frequent, with at least three flash crashes over the course of 14 months. However, there is some hope in finding out their causes more quickly.
Citigroup Inc is investing in a technology that, if widely adopted, could help get to the bottom of sudden market spasms. The world’s largest currency trader is backing Cobalt DL, which aims to use a distributed ledger to create a single trade record that would replace existing fragmented systems.
Best known for the blockchain that tracks bitcoin, distributed ledger technology has been a major focus for financial firms trying to find ways to streamline back office operations.
Like most companies using the technology, Cobalt is primarily trying to cut costs for financial firms. However, a side benefit is its potential to quickly trace and inspect trades.
Flash crashes are a big concern for banks. The UK is still investigating the pound’s 6.1 percent plunge on Oct. 7 — the Bank for International Settlements is expected to provide a report on the event next month.
Citigroup is also under scrutiny, with regulators summoning the bank to discuss its possible role in the incident.
Inspecting foreign exchange is a difficult task: About US$500 billion of daily trading is fragmented across four major electronic platforms, which only account for about 10 percent of the overall market. The rest is accounted for by dealers that run their own trading venues and match many client orders internally.
Distributed ledger technology could be a regulator’s best friend, Cobalt cofounder Andy Coyne said.
“With a shared ledger, as long as you have significant participation, which is clearly the goal, you’re going to have that information to hand,” said Coyne, who previously worked at Citigroup and Deutsche Bank AG.
The idea is that regulators could go to one place, or at least fewer places, to analyze an event.
Existing databases, know as repositories, are made for that purpose. However, those too have to be checked with multiple parties to ensure accuracy.
Cobalt is not the only company looking for ways to apply blockchain to the foreign exchange market.
Goldman Sachs Group Inc has a patent based on the technology, and ICAP PLC, soon to be known as NEX Group, has plans to use distributed ledger technology for spot trades by the end of March.
The currency market is fragmented, but so are banks’ internal systems. Separate departments, such as trading and risk management, might have their own price information.
Companies can waste valuable time during a crisis or flash crash trying to make sure all are focused on the right data, ICAP said.
A single source of data “allows you to act more quickly,” said David Thompson, chief operating officer of Traiana, an ICAP unit. “You’re not double-checking whether your valuation team is looking at the same data as your trading desk.”
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