P&L Report Card

This is becoming a very interesting area in the FX industry because it was noticeable this year that some banks who had previously been very keen on servicing their peers, were less so in 2018. We suspect this is one consequence of regional banks having to demonstrate a good degree of best execution for their own clients, meaning in turn that the value left on the table for the bigger bank is reduced. Lower margins equals less satisfaction on the part of the big bank, equals a growing reluctance to go the extra yard for the regional player.

The fact remains that even the smallest regional player probably has one or two quants crunching the numbers on the FX business, and this in turn leads to a more efficient process, but also smarter execution – again, to the cost of the top level LP.

It is significant the number of larger players who have over the past year noted the difficultly they have in making money out of regional bank flow. Historically this has been the case with client banks that overaggregated and thus drove the relationship boldly into the adverse selection space, but even though many banks have trimmed the number of single banks on their aggregation engines, there is still, apparently, little value in the flow.

This means that either the regional players have to quote their end user customer wider so that margin is available for everyone, build their own platform (something too few are willing to countenance), or think differently. The latter probably involves algos but comes with a health warning. If a customer knows they are ultimately using a bigger bank’s suite of algo products, credit lines willing, they will go to the source – and thus the regional bank’s nightmare of losing their good customers to the top of the table becomes a reality.

If we are right and there is going to be a squeeze on regional banks, they will have to take one of the aforementioned paths and if it is quoting wider nothing really changes beyond an unsatisfied customer. Rather than build it is probably better for the regional player to buy something off the shelf, but that doesn’t really solve the issue, which is who is willing to hold the risk? If it is not the bigger bank, because they don’t think they can make money it has to be the regional player…or the client.

It could actually be a hybrid solution of course, the regional player could offer the customer a price limit for a larger ticket and then use an algo themselves, passing along any price improvement beyond the risk transfer price at arrival.

So where does this leave the landscape? Generally speaking any relationship has to be backed up by good analytics so the regional player can at least estimate market conditions when quoting for a larger ticket (which for them could be the equivalent of something modest for the major players). Good content and options pricing is also vital.

When discussing the banks most associated with servicing this tricky segment, we have historically stuck to the top end of the table in Citi, Deutsche, Goldman Sachs, JP Morgan and UBS – and all remain, in different ways, excellent for a regional bank looking to take a larger bank’s services. The analytics packages are meaningful in terms of the value they provide, the options pricing is strong and – generally – the cash FX pricing is sharp.

We would also, however, point the regional bank in another direction they may not have considered – Morgan Stanley. The firm, as we discuss elsewhere in this feature has approached the idea of creating liquidity pools a little differently by establishing lots of CLOBs for particular groups of clients that historically match off well.

This, plus the excellent analytics and algo strategies available on Fusion Edge, make Morgan Stanley a player in a market segment that it – and the clients – may not have been looking at.

Winner – JP Morgan

J P Morgan doubles up in this award, having won it for the first time last year and many of the reasons we quoted in the 2017 feature are still very valid. The bank offers a full service platform with great analytics, content, options and cash pricing – and although it tends to want to forget its aggregator, the resurgence in Barclays’ Gator would suggest that all that is needed is patience.

Market information is easily available on eXecute, something the sales and trading teams at regional banks like – after all, who doesn’t want to sound informed on the phone? – and the bank still has its digital solutions group which embraces the shared economy and looks at opportunities in the banking industry.

The big difference this year is something that is fast becoming the centrepiece of JP Morgan’s development in 2018 – the algo canister, Algo Central. By offering flexible execution tools, alongside the already mentioned market data analytics, the bank is empowering regional bank trading and sales teams.

We noted in an earlier review in this feature how JP Morgan is empowering professional traders on execution desks, well that description – and this can often be forgotten – applies to regional bank traders just as much. Many of them have more years in the market than they would care to remember, but still appreciate the opportunity to showcase their skill set and unique market knowledge.

The bank trader is professional, aware of their surroundings, market conditions and, importantly, the psychology of markets. What the regional bank trader doesn’t always have, is access to good information on what the markets are doing in a very short space of time – and that’s where the analytics come in.

The regional bank has taken on more of an execution consultant role in recent years, much as the larger banks have, as risk warehousing becomes more and more frowned upon, and therefore they need to be able to talk to their client about what is happening right now.

For the regional bank, the conversation has turned to best execution and if that is the case, it makes sense for them to interact with the best execution shop on the street – and as we have signalled in these awards, we believe that to be JP Morgan.

Galen Stops

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