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The Franchise Builder?

TCA can be about more than measuring execution quality. Colin Lambert talks to a firm that believes it can be the genesis of a new type of bank-client relationship in FX.

A TCA report has been analysed and the lessons learned – time to file it away, never to be seen again right? Wrong, according to Andy Woolmer, CEO of NewChangeFX, who believes the data offers a tremendous opportunity to build a new type of FX franchise.

“Clients originally used our data for TCA, but it has moved beyond that and it needed to,” he explains. “Too many times the TCA provided to a client was based upon execution from the algo that was used – that circularity represented a problem for the asset manager and, by association, the bank. Why would they want to get involved in something where the trade feeds the analysis?

“We have moved on now, though, to the stage where the TCA can help create a new kind of relationship, one that is sustainable and fair to both sides,” he continues. “Data is driving the reinvention of the FX relationship between bank and client and if used correctly it can create a more positive environment for the next generation of traders who can look at the job on a long-term sustainable basis.”

Woolmer believes that the rise of independent analysis allows clients to tender their FX business and “build a meaningful relationship over a period of time”.

In many ways, his idea is not dissimilar to the prime brokerage business – the client puts out a tender for their business with all the relevant data and information, and the liquidity providers then know exactly what they are likely to be dealing with and can analyse it and price it appropriately.

“The banks can look at flow from the last five years, for example, and then overlay their historical and existing natural axes to see how well the client’s flow would have helped them,” he explains. “They can look at the level of
netting opportunities and from there build a real partnership. They can effectively live benchmark the business they will see from that client and say ‘OK we will charge x’. It is a great opportunity to build a more symbiotic relationship in FX.”

When the idea is put to the head of e-FX trading at a large bank, the response is cautious, however. “I like the idea in principle and it could be a really good way to take some of the existing tension out of the relationship, but it bothers me that a client could serve up its data from the last five years and then change strategy one week after you have committed to providing a certain level of pricing.

“If the agreement came with guarantees around certain aspects of the business – mainly around the timing of order
placement and what happens in dislocated markets, it is workable, though.”

In response, Woolmer observes, “As the client is signing a contract for a set period of time, the framework of the agreement cannot change without both parties’ consent.”

Woolmer also believes such an agreement would benefit both sides because on one hand it will allow the client to reduce the number of counterparties, and on the other, banks will have the opportunity to take more risk on a considered basis. “The bank can also do a lot more around the advice it gives the client on executions because they have an independent rate measuring their service,” he points out.

“They can also lock in a client for three, five or more years, and that has to be attractive for a bank’s FX business in this environment.”

The key element as far as Woolmer is concerned is that the banks will be using independent data, not so much to feed their pricing engines, but more to validate the services they are offering around trading and execution. “By giving the NewChange mid, for example, they are giving the client full confidence,” he argues. “It is shifting back to traditional relationship banking backed up by high quality data.

“We need to get banks thinking about more than just grabbing business and then nicking 1/10 of a tick from it,” he adds. “There is better quality business out there and all it needs is a different approach and the confidence brought by independent data analytics. “There is a lot of alpha left on the table by asset managers and corporates, but looking forward, I think it will no longer be paid in spread or mark up but in risk holding,” he adds. “So much of this flow is non-directional, all it needs is providers who can validate the price at which they assume the risk and who are comfortable holding it.”

There are fears in some circles that the more clients understand about how much they are paying for FX execution, the more at risk the relative bank’s revenue stream is, but that seems short-sighted.

Inevitably, the creep of data into the FX business will highlight those providers that continue to price unfairly so a change is inevitable. “We already do more analysis of our FX providers than we ever did and we are going to do more,” says the head of risk at a large US asset manager. “We understand that a service provider needs to be profitable, but we think the whole conversation can be more sophisticated – it is not all about dollars per trade.”

Woolmer is in wholehearted agreement. “We have used our data to analyse clients’ execution costs and some were paying upwards of $650 per million, the data is there so they should use it,” he asserts. “It doesn’t necessarily mean the bank loses out, more that the client can tender that business and it can be priced appropriately for the bank to make the necessary returns on equity and the client to preserve underlying investor funds.”

Galen Stops

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