There has been quite a flutter around the Financial Times story this week about Citi cutting the number of FX platforms it supports; to me – and I’m sorry to blow my own trumpet here, having written about just such a move in a previous column – I was not at all surprised and think it a sensible move.
Fragmentation is becoming a serious pain in the posterior for more and more people, as I wrote in October, and Citi’s move, which I should point out hasn’t been officially confirmed but my sources at platforms back up the FT’s story, demonstrates that. In an age in which so much liquidity is recycled and, more importantly, we can more accurately assess the value of client flow, it makes sense to trim the connectivity and liquidity burden. My sources suggest the benefit could be north of $10 million to Citi in connectivity efficiencies alone – I honestly don’t think that has much to do with anything, although of course there is a benefit there; to me, there are much greater benefits to be had in not having the hassle of quoting via these channels and being able to allocate precious liquidity to the right areas. There may not be a dollar number on that but it is a significant business gain.
My sources predict Citi will end up pricing to around 18-20 FX spot venues – that should be sufficient for anyone, especially clients, to tap into the bank’s liquidity, and of course it has its own single dealer platform in which it has invested heavily, perhaps this is also a play to push more flow that way. The sources also tell me that certain aggregation venues are high up the list of venues to be cut, mainly because of the type of client these channels support. No-one will be surprised to hear that several of the sharper hedge funds, who have become increasingly hard to price now that an LP can accurately assess the value of their flow, use the mechanisms at the top of Citi’s alleged list.
I am also told that several prime-of-prime type venues will be thrown out, this should not be a surprise given Citi’s move in prime brokerage earlier this year.
It is hard to see this as anything other than a trimming of an extended tail, just as Citi and other banks have spent the past five years cutting the client tail, it was inevitable that they would also cut the number of channels – and I expect other LPs to do the same. There is value to be had on a lot of venues, but not all – at some stage you get repetition and multiplication, and it often involves the trickier clients.
Another aspect of this move is, I believe, the challenge of maintaining adequate monitoring of all these channels. Regulators and compliance teams are scanning the business like never before and they are, frankly, either hopelessly under-resourced or under-experienced to do such a thing. As the liquidity matrix becomes ever more complicated, pricing is being sprayed out in all direction, and clients are using an LP’s algos to execute on some of these venues, on too many occasions there are likely to be conflicting flows in the market.
Sadly, as I have noted all too many times before, the FX industry is guilty until proven innocent in the eyes of too many people and it doesn’t take much for these people to see suspicious activity around a client order – even if it is on a peripheral platform. By cleaning up the platform mess, an LP can also make it easy to prove it is operating in the best possible fashion. So much trouble for this industry and the people in it has stemmed from ambiguity – and being connected to a shed load of platforms reinforces that ambiguity.
On the flip-side of that, this will enable the bank to better identify customers trading across multiple venues. They can do that to a degree now, but surely this move would make things easier?
2019 is rapidly becoming the year of Citi making bold moves, following on from its broader reassessment of the PB space and I suppose in fairness we will have to wait to see how they play out. What is different with this move and some others that have taken place in the past is that there is no fanfare around it, this is a quiet move (until a globally read newspaper picked up on it!) intended to position the bank where it thinks it will be best placed.
The other prime brokers continue to quietly express their contentment at Citi’s re-assessment of its PB business – we shall see on that one – but what is interesting to me is already I have senior e-FX trading people expressing their support for this move. If nothing else this tells me that the bank is unlikely to be alone in taking this step. It also tells me that another theme of this column in recent months – platform industry disruption – is starting to play out. All we have to do now is wait to see where the chips lie when everything is done and dusted. I suspect we could be looking at a much cleaner liquidity landscape and that is not a bad thing for anyone.