P&L Report Card
Although several firms have been focused on this for years, it did seem like a year or two ago, a shroud was lifted from so many in the foreign exchange market and they were able to see what best execution really meant. Gone were the days of ringing your mate to get the deal done, or directing a trade to a provider as a “reward” for business elsewhere – suddenly FX execution was a big deal.
If we are being honest we still think there are too many clients out there who don't take their FX execution seriously enough, but for those that do, the sell side has come up with solutions that offer plenty of choice.
P&L Report Card
It is fair to say that for the single dealer platform in FX the comeback is complete. Just a few years ago one could hardly move for predictions of the product’s demise, although it is noticeable that few, if any, major banks stopped investing. There was a hiatus of sorts at some institutions, but 2016 saw the realisation that investment is a continuous process and 2017 saw the first fruit of those investment seeds ripen.
It has to be said, there are still one or two banks continuing to debate the need for investment in a single dealer platform, however the discussion is probably part of a wider conversation about the institution’s willingness to commit to FX full stop. At the top end of the table, investment dollars are not bountiful by any means, but they are there, and are being used.
P&L Report Card
Although there is still definitely a push towards homogenising asset classes on the part of some regulators, generally speaking the last few years have seen practitioners realise that FX in particular, cannot fit into any of the boxes they currently have labelled “equities”.
Some banks went down this route and tried to lever FICC into the equities model and generally speaking it didn't go well – as shown by those institutions retreating back to their siloed models.
This does not mean, however, that a strong multi-asset class offering cannot be built – it most certainly can, but it does mean there are inevitable challenges associated with doing so. First and probably foremost, which business runs the project? Even within FICC there are different drivers and requirements, throw in equities and the number multiplies by several magnitudes.
If one phrase could describe a year in financial markets, 2017 would definitely be the year of MiFID II – the regulation dominated a lot of headlines, thinking and, importantly, budgets throughout the year.
In the single dealer platform space, this meant that if other work was done, it probably happened early in the year while people were still somewhat complacent about another delay to the regulation. Once we entered the second half of the year, the message from all banks was pretty much the same – technology budgets and resources were sucked up by MiFID II on a huge scale.
Following the announcement that CME Group is to buy OTC platform operator and post trade services provider NEX Group for $5.4 billion, Galen Stops, raises five important questions that both the parties involved in the deal, and the wider FX market, probably need to consider. Is it good value? Could there be more deals for OTC platforms? Do OTC platforms need scale to survive? Will this deal lead to more futures trading? And does this deal represent competition for LCH?
If there’s one thing that has become abundantly clear over the past few years, it is that many OTC platforms have decided that they need to scale their businesses up and out in order to be successful in today’s FX market.
This was made abundantly clear in a press call today when Terry Duffy and Michael Spencer, respectively the CEOs of CME Group and NEX Group, talked about the logic behind their $5.4 billion tie-up.
“Effectively, what we’re building is a bigger supermarket,” said Spencer. “Why do people shop in supermarkets? Because it’s convenient to buy everything in one place.”
Galen Stops takes a look at how and why Aston Capital Management is planning to scale up following its recent $100m investment.
Aston Capital Management recently received an injection of $100 million in AUM and an additional $5 million in seed operating capital from private investors. Following this investment, the firm’s CEO Isaac Lieberman is, perhaps unsurprisingly, bullish about its future.
“We have a goal through our strategic mandate and product development timeline to have capacity to be managing $2 billion in AUM within two years and I can actually see us achieving this goal quickly as this business accelerates,” he says.
To help achieve this goal, Lieberman has deliberately been structuring the firm so that it can easily scale up in the future. For starters, the firm has been getting a whole slew of regulatory and accountancy registrations in place.
Recycling is a good thing - just ask the environmentalists - but is it a good in FX? Colin Lambert thinks this year, it could be decided that it is not.
The phrase "liquidity mirage" is almost as old as e-FX trading, but it's hard to believe that the originator of that phrase had today's FX market in mind. In 2003, when many of us first heard then Bank of England chief dealer Martin Mallett use the phrase, even the e-world was a very different place. Technology had not yet democratised the industry, non-bank market makers were finding their way in equities and futures markets and yet to really enter FX, and there was a real divide between market maker and liquidity consumer.
Institutional investors have long understood the value of diversifying their portfolios, and this usually means investing internationally.
But when they buy foreign equities, they’re actually buying two portfolios, the first being the long equities denominated in their base currency, and the second is that they’re shorting their base currency against the foreign currency they need to purchase the equity.
This presents institutional investors with a choice: they can do nothing and accept the risk of holding this foreign currency, hedge that currency exposure passively or manage it actively.
The use of a last look window by market makers will decrease in 2018, but don't expect the practice to disappear any time soon, says Galen Stops.
If you're sick of reading endless articles and hearing lengthy debates at conferences regarding last look, then the first part of this prediction will be music to your ears: in 2018 the industry conversation will move on from this topic.
This prediction comes despite a second one, that last look will not disappear in 2018.
Yes, XTX Markets made headlines by committing to a zero hold time on their FX trades – not to be confused with offering firm liquidity – while other market makers have made more private assurances of a similar kind.