A regular subject of conversation over the
past two weeks has been the mood of the FX banking industry – people seem keen
to share their view, if for no more reason than to see if they are in step with
Tapping into the mood of the market is not
that easy of course – and at this point I would point you in the direction of
our new survey
and ask that as many of you as possible fill it out, it’s anonymous, but can also
be filled in by me (or one of my colleagues) over the phone (and other
Generally speaking, how people feel in the
industry depends upon where they sit. If it is in the electronic business there
is a sense of optimism, but the wider FX business seems traumatised.
There are pockets of optimism and
gloominess at one or two institutions that represent an outlier, but overall I
would say cautious optimism is the mood – it will be interesting to see if the
survey disabuses me of this notion!
As far as the bank FX business is concerned
the gloominess continues to emanate from the ongoing legal actions, inherited
conduct issues and what is perceived by some employees to be their firm’s lack
of commitment to the FX business. At the same time, banks’ e-FX teams seem
This shouldn’t come as a surprise (although
it did to some!) because e-FX teams had projects underway that saw them through
the past year. Some also have budget available for the coming year, although I
am a little concerned that these investment dollars will dry up once the
current pipeline is finished.
There is, of course, a very good reason for
e-FX teams to be more optimistic – put simply their work is easily audited. The
current mood is for everything to be monitored, checked and double checked.
Justification is currently everything and
in such an environment the online world has the advantage. It is clear to me,
speaking to people in the industry, that few are happy to build their voice
business because they lack confidence in the institution’s ability to effectively
monitor what goes on.
In some cases there are also grey areas
that simply don’t exist in the online world. Justifying best execution in a
voice world involves accurate time stamps and the ability to show why certain
trades were done. Data is available to provide TCA but inevitably in such a
latent environment there are going to be cases where the voice business under-
or out-performs expectations – and managers do not want to have to deal with
the fallout from what is actually an innocent event.
In the electronic business everything can
be monitored, analysed – often in seconds – and the data can be acquired from
independent sources and delivered direct to the client to prove best execution,
or anything else that needs to be proved.
There is also the case, in the current
environment, that the e-business can, as
I discussed last week, transform itself into a fee-earning, pure agency
So the mood of individual businesses within
the industry is, to my mind, directly correlated to the ease with which they
can justify their actions. This does not necessarily mean the e-teams will
remain optimistic, but even in the worst case scenario – where they have to re-engineer
their systems to be compliant with the new code of conduct – they will have
plenty of work to do!
Away from the banking world, the non-bank
market makers seem happy with life – and why shouldn’t they? The constant
stream of gloom from the banking industry (often emanating from above the
trading and sales business it has to be said) is doing their marketing for
As far as the third party vendor industry
is concerned there is also a mood of optimism, mainly because people need
solutions, connectivity and the technology to justify everything they do (not
to mention an independent third party to deliver it).
When I consider the latter two segments I
do have a degree of concern about the future of the industry if I am being
honest, because the vendor segment especially will need a healthy FX banking
business to maintain a pipeline of business. The same can be said for the
non-bank sector, which needs the banks to supply liquidity, natural interest
and credit – it is in few participant’s interest to see more random, violet
short term volatility.
All of which brings me to the most
important segment – the end user – the corporates, hedge funds and asset managers
of the world. My sense is they are not happy with how things are developing,
because the issues discussed today and over the past few weeks are directly
impacting them – and they are starting to realise the impact on their business
from the reduced risk warehousing/risk transfer function at the banks.
So very much a mixed bag from my
perspective, and hopefully as many of you as possible will complete our survey –
if nothing else to prove me wrong again!
Colin_lambert@profit-loss.com Twitter @lamboPnL