Rather than, as it has been in previous years, this award reflecting the editor’s (in this case managing editor’s) view of the platforms, we have decided to make it a recognition award. Our thoughts on the various platforms are littered throughout this feature so there is no need to go over old ground, therefore the Editor’s Award will henceforth be given, where necessary – it may not be an annual event – to a bank that we at Profit & Loss feel has changed the dialogue in the industry. It could be thought leadership, it could be a truly groundbreaking technology development, or perhaps, as is the case this year, it could be for a business decision.
To be fair, this award is bestowed upon Citi for multiple reasons, but let’s start with its decision around this time last year to cut the scope of its prime brokerage business. You can argue long and hard, and believe us people do, about why Citi was driven to that decision; our sense it was not a single event, rather a build up of pressure on the business to the degree that the risk-reward equations were simply not adding up.
By suggesting, as the bank did in a white paper last year, that prime brokerage was tremendously under priced, it was stating the unthinkable to many. PB had always been priced in a certain fashion, why would people want to think about changing it? The debate that followed continues to this day, but one thing was triggered by that paper and the move to remove some of its highest volume clients – people started talking about the sort of technology outlay required to manage such a large client franchise. The result, to date, has been a more diffused PB industry in terms of clients, something that we believe should act as a buffer in times of stress.
The second, and, to us, linked decision, was to cut the number of connections to the bank. Yes, it can validly be argued that Citi went too far initially in terms of where it connected, not all followed them, but the decision to take a look at the value offered by so many of these channels was again a brave one for what remains in most people’s eyes (justifiably) as one of very few truly universal banks.
The fact is, thanks to fragmentation, the liquidity mirage in FX has become even bigger. We have prime-of-primes doing the right thing and being a credit conduit and we have others doing the wrong thing and proclaiming themselves liquidity providers. These models have one thing in common – they are all liquidity recyclers and if Citi’s decision means they have less oil to run their business, then it should be a good thing, if for no other reason than we will be able to better work out exactly what liquidity levels are in FX (and don’t get this writer started on last look!).
Probably the biggest compliment paid to Citi over this decision comes again from its peers. While not all had followed them in having so many connections, there was a realisation that there were still probably too many, thus other firms started, and continue, conducting the same process.
These decisions exercise leadership, indeed more than one platform head has told this publication they found the questionnaire delivered by Citi thoughtful and fair. There is a recognition, finally we may add, that liquidity – genuine liquidity – has tremendous value and banks are moving to protect it. This also represents a good example of how AI for example is changing the FX world, for we doubt that deep enough analysis, across the bank’s business, could have been conducted to justify such a decision even three years ago.
Above all, what these decisions represent is a bank thinking the unthinkable, and that approach is in the DNA of FX markets that have long innovated around market structure (both good and bad). Not everyone will agree with Citi’s analysis, but few will deny it was well thought out and could have a radical impact on the market structure in the months and years to come.