Following the launch of Sucden Financial’s new OTC FX options service, Galen Stops talks to Noel Singh, head of e-FX business development at the brokerage, about how it’s planning to diversify its FX offering.
Despite having an FX franchise that is over 30 years old, an e-FX offering that has been around for more than eight years and a balance sheet of over $100 million, Sucden Financial is not exactly a household name in the wholesale FX market.
But the firm is now working to change that as it seeks to diversify its FX business in response to changing market conditions.
“Were in a period of fairly low volatility and lower trading volumes and that forces you to look at your business model and look at your client base, and then look for ways to diversify and evolve,” explains Singh.
Traditionally, much of Sucden’s FX business has been concentrated in specific client sectors, which can naturally leave the firm exposed to sudden market or regulatory changes.
For example, one sector where Sucden has a strong footprint already is amongst retail FX providers. In February Turkey’s Capital Markets Board (CMB) announced new rules restricting the maximum leverage on FX trading from 100:1 to 10:1, while also requiring retail traders to place a minimum account deposit of at least 50,000 lira, the equivalent to almost $14,000.
A number of retail FX brokers reported a significant decrease in trading activity from Turkey as a result of these new requirements, which in turn impacts the revenue streams of firms that service these brokers.
Singh says that this is part of the reason why Sucden is looking to expand its client base, with a particular focus on signing up institutional funds and regional or super-regional banks as clients. In order to do this, the firm is expanding the number of products that it offers, building out its prime business and re-vamping its technology.
Profit & Loss previously reported that Sucden has launched an OTC FX options service, which offers historical data and product coverage for over 120 different types of FX options. But while the firm works to build its options business from the ground up, the company is also building out the firm’s existing deliverable FX business.
“The deliverable business is really the essence of FX,” he says. “It’s a German car manufacturer selling cars in Japan that needs to convert his yen into euros.”
This market represents a major opportunity for Sucden, according to Singh, because there are many small and medium sized enterprises (SME) that do a significant amount of FX trading in terms of notional volume, but are also often paying very wide spreads to execute it. Therefore, if Sucden can provide the same deliverable FX services as these firms are currently receiving but reduce the spread that they have to pay, then it becomes an attractive proposition for both parties.
To this end, Sucden is making investments in its technology, and has agreed a new partnership with a technology vendor that it says will provide strong ECN access, pre-trade market risk and controls tools, connectivity and low latency trading capabilities. In addition, Singh says that the firm’s access to credit will enable it to develop its deliverable FX business amongst this business segment.
“We’re very lucky that we have ten direct credit lines with banks, and included in those credit lines are deliverable facilities. So we’re well positioned to price into a lot of the deliverable providers, which is a great opportunity for us as it gives us a much more diverse and predictable income base,” he comments.
Non-bank prime services
These direct credit lines also help Sucden differentiate its prime services business, adds Singh. For the straight-through-processing (STP) business that Sucden sees it is able to carve out a stream of the banks that it has direct credit with, which can be cheaper than the prime brokerage cost normally required to reach those liquidity providers. The firm can then pass on these savings to its clients.
“Prime-of-prime” has become a very familiar title, and one that many firms with very different business models are all claiming. But Singh dislikes this term, preferring instead to refer to Sucden as a “non-bank prime”, because he says “we look and feel like a traditional bank”.
He backs up this claim by pointing out that in addition to dealing with agency STP business, where it simply passes through FX volume to the liquidity provider, and prime services business, which provides access to third party execution venues, Sucden also has corporate hedging, voice sales, OTC FX options and a deliverable FX business lines, as well as its futures and options business
Despite this bank-like range of services, Singh concedes that for some firms who are used to trading on a disclosed basis shifting to a non-bank prime, where the liquidity providers remain anonymous, remains something of a psychological hurdle.
To try and tackle this problem Sucden lets clients anonymously tag the liquidity providers that it offers access to so that they can conduct effective analysis of the liquidity they’re receiving.
This means that if one bank is top of book but rejecting a lot of trades the client can see this and have a conversation with Sucden about why this is happening, or whether they need to remove that particular bank from the stream, even if they don’t know the actual identity of that bank.
“We can actually deliver a tighter spread to these firms than they were getting through disclosed liquidity. Because of the scale of our business and the amount of volume that we put through, we get much tighter liquidity and so clients can benefit from that volume by coming through us,” says Singh.
Therefore, argues Singh, using a non-bank prime such as Sucden “doesn’t feel like a compromise and doesn’t have to be more expensive” than using a traditional bank prime broker.
The rise of “non-bank primes”, coming so soon after HFT firms made the transition to marketing themselves as “non-bank market makers”, is perhaps suggestive of a broader trend.
“Unbundling” has become something of a buzzword in the technology industry in recent years, but Singh says that there are some interesting initiatives afoot in the FX market that seek to further unbundle what have traditionally been bank provided services.
“If you look at unbundling there are people trying to remove the credit aspect from a prime relationship,” he notes.
In one model for doing this that Singh highlights is for participants to put up their own collateral, but have an insurance pledge pool of money in the background. The contributors of that pool receive interest on the money that they put in, on the understanding that if any client goes bust or into default then that money goes into the pledge pool. It’s not dissimilar to a clearing house model, except that third parties provide the default fund rather than the clearing members.
Singh also sees the potential for distributed ledger technology (DLT) to have a major impact in terms of unbundling services.
“When I sit down and think about the benefits associated with DLT, I find that there’s a lot that you can do with it in terms of pre-loaded credit, aggregation, trade netting and settlement,” he says.
The viability of new technologies and business models that could further remove specific services outside of the banks remains to be seen in many cases, but it’s clear that Sucden is working to keep itself abreast of the many developments that are taking place in this area and looking for ways that they could be applicable to its business.
As Sucden looks to continue to diversify its business lines and client base, Singh says that one of the biggest challenges that it faces is in educating market participants about the services that it offers.
“We’re a big firm; the parent company is sixty-five years old, Sucden Financial has been in London for forty-four years, we have one-hundred million-dollar plus in balance sheet and so we’re a very credible counterparty for some of these larger firms in the market. The big challenge now is getting out there and making people aware of what we can do,” he says.