Welcome to Eureka Street

back to site


The biggest untold story in the history of money

  • 03 May 2024
The cover of Alice, a book by finance writer Stuart Kells, claims it is ‘the biggest untold story in the history of money’. That turns out to be an entirely reasonable claim, although it has to be admitted that it is possible we do not know of bigger untold stories because they are, well, untold. It is an engaging tale about a financial software innovation, dubbed ‘Alice’, that was designed to revolutionise the foreign exchange (forex) markets.

Alice was the brainchild of Ian Shepherd, who started out in the Commonwealth Bank then moved to the management consultancy McKinsey. He left to devise a core system architecture for the forex markets, which he believed should be a ‘public utility run by central banks or government treasury departments on no more than a cost-recovery basis (that is, with no profit margin)’. The system was intended to operate in the interests of end-users, lower systemic risk by limiting extreme losses and allow ‘a range of financial product types and asset classes to be created, administered and settled’.

Shepherd had the backing of National Australia Bank (NAB). There was little doubt that his innovation was exceptional: an electronic trading platform that could, with elegant simplicity, trade, clear, settle and track complex over-the-counter derivatives.

The enemy of Alice became a clearing-house bank model called ‘continuous linked settlement’ (CLS) that had been selected by a consortium of the top private banks dubbed the G20. In attacking Shepherd, they never claimed that there was anything wrong with the invention, though. They just refused to allow it to exist because they were bigger and nastier.

CLS’s management realised that they had contravened several of Shepherd’s patents and they had been indiscreet about what they were doing, publishing details that revealed they had contravened the patents.

There was a five-year arm wrestle between the two parties, with CLS using the usual bullying tactics, including putting pressure on the CEO of NAB and alleging that Shepherd had committed fraud. Shepherd offered a licencing arrangement but this was rejected; this was not about reasonableness and efficiency but power.

In 2007, CLS took Shepherd to court. At stake was a small share of the hundreds of trillions of dollars that are transacted in the foreign exchange markets each year, which for both Shepherd and NAB would have been a bonanza: just 1 per cent of 1 per cent of the CLS turnover would have equated to $US5 million