P&L Report Card

As data has continued to improve in emerging markets so too has the level of competition risen amongst the banks for what remains, still, high value business. This data has been driven to a small degree by more dealing (or pricing) on public platforms, but generally speaking, given fears of market impact (and given how concerned clients are about it in G10 they must be traumatised when it comes to EM!) emerging markets remains a single dealer, or small aggregation, game.

The aforementioned improvement in data has meant better analytics, and it is noticeable that those banks offering good analytics packages have extended their offering in emerging markets – clearly this is an area of differentiation.

So too, on the broader analytical scale, is research, so the easier it is to move to execution from content, the more popular a platform will be. Not only is good analysis of emerging markets incredibly valuable, so too is the speed with which one can execute a hedge, or indeed, a trade idea.

We are not sure how successful the algos will be in emerging markets, given the aforementioned benefits of dealing with a single or very small group of LPs. Signalling risk is off the scale in EM markets and as such this is one area where customers are crying out for risk warehousing services – meaning algo execution is not top of their wish list.

Probably the biggest challenge in emerging markets is the cost of trading, especially in an era when regulators seem intent on pushing the all-to-all model backed up by clearing.

Yes, this makes the world safer (did emerging market FX cause the GFC?) but it comes at a cost and customers seem less than willing to play the regulators’ game – they are staying with their banks for the moment.

This means, of course, that the real value and potential differentiator in emerging markets remains at the start of the process – in meeting the customer. The cost remains downstream, so spreads may not tighten any further in these currency pairs, but we may well see more of the functionality traditionally associated with G10 – flow, liquidity and spread analysis, creep further into EM.

The interesting player in this space remains HSBC, which is, of course, a powerhouse in the emerging markets space. We have already noted the challenges facing the bank in bringing so many systems under one umbrella, but that is more related to the broader FX business. If the bank can achieve a degree of uniformity across its different emerging markets offerings, it could become extremely difficult to challenge.

If there could be a model for HSBC to look at, we would suggest Citi has done a great job bringing legacy systems together (and then kicking them out as Velocity extended its reach). Velocity, and Pulse, which now sits within it, has been built so well with such flexibility, that new markets can be added to the platform with relatively little work.

Elsewhere, Barclays, BNP Paribas and Commerzbank continue to impress with their reach in certain emerging markets – generally eastern Europe – and of course Standard Chartered, while maintaining a lower profile, has the emerging markets franchise most players dream of.

Winner – Goldman Sachs

We have discussed elsewhere in this report, how not only is there a generational shift looming over the market in terms of a new tech-savvy generation taking over on execution desks, but also how those desks are being given responsibility for multi-asset classes. This is important in G10 but even more so in emerging markets, where the correlations between local bond, equity and currency markets are often more marked than they are elsewhere.

This means the bank that can approach a local or emerging market from the full service perspective has an advantage – throw in excellent analytics, great execution tools and, of course, good liquidity, and you have a winner, which again this year, we believe to be Goldman Sachs.

The icing on the cake from Goldman is the bank’s incredibly strong commodities offering – again the linkages between a lot of these markets and EM are strong, thus the bank can embed itself deeply with its emerging markets customers.

Goldman is also continuing to benefit from it decision to buck the trend some years ago when many of its competitors withdrew from the commodities market, thereby weakening their emerging markets franchise. Goldman ramped up its approach, built its liquidity profile in commodities and this helped the bank establish a firm foothold in EM – one that few have been able to challenge on a consistent basis.

As has long been the case in our judging of emerging markets we do not necessarily look for specific functionality aimed at the regions or local markets, rather we look for a uniformity of approach that allows EM clients to benefit from the same technology as G10 customers.

We have previously noted how Marquee is an excellent platform with a full suite of algos, options capabilities and analytics, backed up by an appetite for e-liquidity provision.

The interesting thing looking ahead, however, will be how well the re-skinned Marquee will service clients across asset classes – if the firm succeeds in breaking down these siloes on its platform it will be offering a powerful proposition, one that handles the needs of just about all clients in emerging markets. Clients have been telling us for some years that Goldman stands out in emerging markets, and as the bank re-shapes its business, we can only surmise that the best is about to get better.

Galen Stops

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