Whilst wishing everyone a very happy holiday season and a tremendously successful 2020, very quickly we come to the final column of the decade and the last Irrational for 2019, my Person/People of the Year. Before I do, however, I have to acknowledge – yet again – the greatness of the readership.

Two weeks ago, in my Headline of the Year, I asked readers for suggestions as to how I could get the word “donkey” into a headline in a P&L story. Several of you came back with ideas, none of which I can, or wish to, actually share in what remains a family publication, but a special shout out to market veteran David Woolcock who is clearly the FX eye that never sleeps. Not only did David provide a headline involving a donkey, but he also sent me the link to the Gulf Times article that used it in January 2019, and so good is the headline it deserves a billing of its own.

Pakistan to Export Donkeys to China to Earn Foreign Exchange

Not only is this a brilliant bit of detective work from someone who clearly has FX in their blood (who else would remember such a line?), but it is also very informative – did you know that Pakistan has the world’s third largest donkey population? Nor me, never let it be said that this column is not informative!

Anyway, with awestruck thanks to David, back to my Person/People of the Year. A few months ago I was thinking this may be an easy one to select, for while I know there are some out there who disagree with me on the issue, I was of the opinion that sense would prevail in the Mark Johnson case and he would be acquitted, thus leaving me with the easy task of selecting either him, or someone heavily involved in the acquittal, in this column.

Sadly, as we all know, the saga continues, on which point I note that the US Appeals Court has issued an amended record to reflect errors in the Government’s case, including, and I find this staggering, changing the line about Cairn being able to reverse or not settle the transaction to one that merely states, “It could have, among other things, sought immediate legal action on the ground that it had been defrauded.”

It’s obviously good for the industry that the bench has acknowledged its first opinion was dangerous and unworkable, but the very fact that this record has been amended illustrates to me a complete lack of understanding on its part as to how the foreign exchange market operates. If that is the case then surely there are grounds to have the appeal heard by a bench, or en banc (the entire appeal bench), because the conviction was upheld based upon incomplete information or knowledge?

That will be for the new year, however, and the hope is that sense will prevail, although given the US legal system’s performance thus far in this case I am not sure it will.

While we are on a negative track, given these are called the Irrationals, I did toy with giving it to a speaker earlier this year at an industry event who spent minutes passionately proclaiming that his firm is not and has not been, a high frequency trader, only to slip into the conversation a little later that said firm owned microwave towers. I have to confess I was looking around the audience with a look on my face that said, “Is it only me?”

I prefer, however, to end the year on a more positive note and one that reflects my belief that the FX industry is alive and well, in spite of the low volatility. I have noted before in this accolade that it is given in the spirit of endeavour and entrepreneurship that built this industry – to people who are willing to think outside the box, the FX market’s equivalent of Sydney’s Festival of Dangerous Ideas (which, I think, is a slightly bigger deal than this…)

I have, according to readers, had my own dangerous ideas this year – and indeed I probably have, however I am firmly of the opinion that unless you talk about the unthinkable occasionally you will end up treading water, and that inevitably leads to exhaustion, and sinking.

Before naming the winner I feel I ought to give an honourable mention to XTX Markets, clearly it is a firm willing to challenge convention and its advocacy in challenging how the industry handles liquidity and last look to name just two have helped push the conversation on. I understand that I agree with the core arguments made by the firm (this is, remember, a subjective accolade I am presenting here) especially on last look, but it is important that either individually or as a firm, these issues are debated. It is not only about FX (although that is all I care about really!), for the firm has also been a key submitter to consultation processes in other markets around issues such as speed bumps.

Challenging conventional wisdom is at the heart of my decision to give my People of the Year Irrational to Citi’s FX business – for this year it has caused a stir by thinking what to some is the unthinkable in two areas; namely that the high volume non-bank market makers and HFTs are not key to a bank’s FX prime brokerage business; and that it is important to be on every platform to maximise liquidity and access to clients.

There are, of course, other factors that led to the decision by Citi earlier this year to end services to some very high profile, and high volume market players, but prominent was the sheer amount of resources needed to manage such high volume clients, especially with PB prices at current levels. We live in an FX world in which prices are meant to continually press lower (along with spreads) but there comes a time when this becomes uneconomic for the provider(s). Generally speaking over the past few years this has been routinely ignored by banks eager for market share at almost any cost. In the world to which we have become accustomed it is anathema to question anything that would reduce the client footprint, especially in a fee-based business, but Citi did that in assessing and then taking the decision to offload certain clients.

The noise around that decision has diminished in recent months and fewer PBs I speak to are talking in glowing terms about picking up a lot of the business. In some ways this should not be surprising because the customers concerned all had multiple PBs, but the surge of optimism and positivity that flooded the PB market when the decision became public has subsided. I suspect we have a situation where the high volume accounts are now more spread around the industry in terms of their primary PB – and that is probably a good thing for everyone.

The second challenge from Citi came in the form of a questionnaire that sought to reduce the ridiculous number of connections the bank had to various platforms and liquidity pools. I have long been arguing that the level of liquidity recycling has got out of control, I read of the smallest prime-of-prime or private trading house claiming to be a “liquidity provider” when clearly they are recycling liquidity from one of a few sources.

By at least investigating the issue, Citi is making the industry think, and it is significant to me that several of the major LPs in FX have signalled to me that they are in the throes of making the same study, with the same likely outcome – which will be more FX platforms struggling to justify their self-designation as a primary source of liquidity. The consensus over the past few years has very much been that LPs need to connect to as many venues as possible to capture as much client business as they can to help their market share and internalisation rates. I have argued this is nonsense for some time, not least because, as I suspect the LPs are now finding out, all too often the same client is across multiple platforms and the number of unique clients on certain venues is minimal, perhaps non-existent.

I like people that think outside the box, to use the cliché, it is how we, as an industry, innovate, advance, and remain relevant to our customers. The crucial lifeblood of the FX industry is liquidity – without it customers are left on their own, searching for a match with another client that will happen…at some stage. And don’t worry about the slippage, you can ignore the 30 points the market moved against you while waiting for a match because you don’t TCA to arrival price!

In Citi’s idea to cut the number of platforms there is a recognition of the importance of liquidity and that it has been under-valued for too long by clients and LPs. This year we have seen one or two global macro hedge funds change how they operate because, frankly, they don’t get the information flow they used to, and even if they did, fewer LPs are willing to make them choice in 500 which used to be the stipulation to “see the flow”.

Looking at the channels through which this vital lifeblood is pumped is an extension of that decision to change how they service certain clients and this analysis could not have been done without advances in data science (and the quality of the underlying data itself). I suspect Citi may just be the first to consider this latest, fundamental, change to how it operates, but it won’t be the last. The decisions taken may not be popular in all circles but that is irrelevant, the bank has an obligation to its staff and shareholders as well as its customers. A strong relationship is built upon honesty and openness, and by considering and taking some tough decisions Citi is worthy of our respect for what it has done this year. The unthinkable is no longer unthinkable, and for that, I for one thank Citi’s FX business.


Twitter @lamboPnL

Colin Lambert

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