Join our trading academy and get a 50% of our packages
The market is vast and complex, with trades happening simultaneously across various platforms. However, there are a few key points to consider:
Market Structure: The financial market is fragmented, with different exchanges, trading venues, and electronic communication networks. This makes it difficult to track every trade and identify counterparties.
High-Frequency Trading (HFT): HFT firms execute a massive number of trades at lightning speed, often acting as intermediaries between larger institutional players. This further obscures the direct relationships between banks.
Algorithmic Trading: Many trades are executed by algorithms, which make decisions based on complex mathematical models and market data. These algorithms don't necessarily have a central command or knowledge of who else is trading.
While banks have access to advanced information and technology, they don't always know when they are directly trading against each other, they can certainly infer the presence of opposing positions based on market movements and order flow analysis.
In traditional, exchange-traded markets, counterparty information is typically anonymized to protect market integrity and prevent manipulation. However, in over-the-counter (OTC) markets, where transactions occur directly between parties, there is greater transparency regarding counterparty identity.
Regarding coordinated actions against retail investors, there is no concrete evidence of widespread, systematic collusion among financial institutions. Regulatory oversight and market competition generally discourage such behavior. However, instances of market manipulation, insider trading, and conflicts of interest have occurred, highlighting the importance of robust regulatory frameworks and investor protection measures.
It's essential to note that while individual investors may feel disadvantaged compared to large financial institutions due to information asymmetry and access to resources, the market is designed to be efficient, and over the long term, it tends to reflect underlying economic fundamentals.
***the Volcker Rule
The Volcker Rule is a set of regulations that limit the activities of banking entities, such as proprietary trading and ownership of hedge funds, to protect customers from speculative investments that contributed to the financial crisis of 2007–2008. The rule was developed by five federal financial regulatory agencies, including the Federal Reserve Board, the Commodity Futures Trading Commission, and the Securities and Exchange Commission. The final regulations were published in the Federal Register on January 31, 2014, and became effective on April 1, 2014.
The Volcker Rule prohibits banks from:
Short-term proprietary trading of certain securities, derivatives, commodity futures, and options
Investing in, or having other relationships with, hedge funds or private equity funds
Banks with less than $10 billion in total consolidated assets and less than 5% of total trading assets and liabilities are exempt from the rule.
In August 2019, the U.S. Office of the Comptroller of the Currency (OCC) voted to amend the rule to clarify what securities trading is and is not allowed by banks. In June 2020, the Federal Reserve Board modified the rule further, streamlining the covered funds portion, addressing the treatment of certain foreign funds, and allowing banks to engage in other activities that don't raise concerns.
REFERENCES:
1. FX trade execution: complex and highly fragmented - Bank for International Settlements
1. Getting Up to Speed on High-Frequency Trading | FINRA.org