I have often joked, in a (semi) light-hearted fashion, that you can tell when the FX market is set for a boom in terms of demand or activity because some banks start exiting the business. If there is a true cycle involved, one can’t help but think that some institutions give the perception that they are always chasing the market, never in front of it.
A friend sent me a really interesting article in the Financial Times looking at Morgan Stanley’s move back into the fixed income business since it made deep cuts to FICC in 2015. Of course, the bank never left the market totally, but while its performance after the cut backs, as the FT article highlights, surprised many, it does just look at the financial aspect of the matter. What about customer relationships?
Surely there is a risk that the bank risks becoming seen as something of a yo-yo in terms of its commitment to the FICC business and its clients? When times are good it is in, when things turn tough it cuts deep and hard. This may be good fiscal management but if it happens too often surely customers will be reluctant to return? Morgan Stanley hasn’t had that problem as such, partly because – and this is another banking industry trait – so many of its peers also cut at the same time, thus competition levels fell, providing an opportunity to rebuild. I have spoken to senior buy side people over the years, however, who have become frustrated at what they perceived as a yo-yo strategy by a bank in FX, and dropped them from their panel – never to return.
A bank making deep cuts is signalling it is less convinced of its place in the market hierarchy and that also opens up opportunities for competitors to grab customers, demonstrate their value and, again, for that customer never to return to the original relationship.
It is also important that the right cuts are made. Too many times you talk to insiders at banks that have cut huge swathes of staff and they speak of the intellectual capital and institution know-how that is walking out the door. The broad term for this is juniorisation as a facet of the push for automation, but it can have an impact on those crucial occasions when a client actually needs real help in executing or planning a tricky trade. Sometimes shoving a pre-trade TCA tool in front of people just isn’t enough.
In FX terms it is fair to say that Morgan Stanley is seen more as broker than a bank, and by that I mean it is rightly esteemed for its execution services, less so for the depth of liquidity provision generally. This is not necessarily the negative it may seem at first sight, however, for what Morgan Stanley may have done, perhaps inadvertently, is what several others have done in FX over the years – cut the client tail.
If this is indeed the case then this represents yet another challenge for some in the FX industry because it removes another channel for customers who are perceived as “challenging” to service as a market maker. Personally, I suspect Morgan Stanley was more driven by the numbers than cutting the client tail but that is of little matter, because one results in the other.
Going forward, the better analytics available to service providers generally, but banks in particular, may mean that their use of the revolving door to enter and exit markets may increase in its frequency as they become ever-more data driven. The data too often overlooks the relationship, however, which increases the risks of valuable customers exiting for good. Cuts are part of life when it comes to running a big business, there is always a renewal process going on, but it is important that the message is right when they are made, because as any child can tell you, people get bored of a yo-yo after a while.