Thursday’s column on what constitutes “institutional” and what exactly is an LP got people fired up, but before that I need to reiterate that my praise in that column for those doing good in the industry was not limited to the two Hall of Famers I mentioned. Although we do run the HoF and naturally want to highlight that, my thanks and deep respect extend (as I hope I made clear on Thursday) to the many of you that got in touch to highlight what they or their firms had been doing. I think we can all be proud of how the FX industry is contributing to the fight against the pandemic.
That done, let’s get back to the response to Thursday’s column. Generally speaking all of those who got in contact agreed that there was a problem with the definition of “institutional” and that too many firms were sometimes deliberately and deceptively their client base in that fashion. There was one person who thought that the “best LPs in the market are the prime-of-primes” but I think, certainly hope, they were being ironic!
Interestingly more people were fired up at my suggestion that “unique” liquidity was anything but, especially in the PoP space where they are all serviced by the same top group of LPs. Several of you highlighted that the how the PoPs curate their liquidity can make them unique thanks to the work they do building dedicated liquidity pools for clients and how they use last look for example. That is fair, although if I were to be pedantic – and that, after all, should be the strapline to this column – I would argue that the only really unique aspect would be how they curate the same liquidity streams from the same group of top LPs
Maybe we should agree that what PoPs can offer is a “unique” experience, although I would again observe that there is not the room for that many different models, after all what are we doing here, we are connecting a group of LPs with clients to whom they don’t want to extend credit and connectivity – how many different ways do you do that? Is there a liquidity pool out there without three or more of, for example, Citi, Deutsche, JP Morgan, UBS and XTX in there?
I also want to highlight, as a follow up, how many platforms don’t help the issue with the sheer number of “liquidity providers” they claim in their marketing, for this in many ways further builds the (mis)conception that there are a lot out there. Let’s take just two platforms, FXall and 360T – and I am using them because they were the easiest for me to get data on. One claims over 180 bank and non-bank LPs, the other 200.
I cannot see how there are that many genuine LPs out there. In the October 2019 UK FX Joint Standing Committee FX turnover survey, more than 98% of reported turnover was held by 18 respondents (in the US it was 98.7% held by 16). Add in maybe five or six genuine non-bank LPs that may not be covered by those surveys, chuck ion a few regional specialists and…we are still only about 15% of the way to those totals. Where do the others come from?
I need to stress that this is not about those two platforms, the others have different numbers but most claim well in excess of 50, probably the exceptions being the exchanges, who don’t necessarily acknowledge the role of liquidity provider, and FXSpotStream which is an invitation only service.
Several correspondents observed that PoPs are also “LPs”, using the counter-argument that anyone posting interest to a platform is an LP – and while I acknowledge that, I don’t accept it! In my mind an LP – perhaps as one correspondent pointed out I should use the phrase “market maker” – is someone who is offering a two-way price, that they have generated, to the market for most of the time. In other words, it is not just about, “here’s a bid or offer” it is “here is my two-way price, in a market amount – do your worst”. PoPs posting liquidity to venues are not LPs, they are posting interest, not supplying a two-way price for others to deal on.
Someone said to me the other day that lockdown is what happens when compliance runs the world and while I agree with my particular government’s approach there is some truth in that – it’s about risk aversion. Similarly, I suspect that the whole liquidity mirage that I have been discussing for so long, is actually what happens when marketing takes over the world. It was so much simpler when traders run the world!