Clarity of Thought

One of the traditions at year end is to take stock. Reflecting on the past 12 months is an exercise that brings clarity of thought. Going through a crisis can have a similar effect.

As the economy finally stabilizes following the events in the fall of 2008, we are looking over a changed landscape. There has been a lot of change in the FX market place, in the number of participants, and in how the survivors do business. In the world of financial services, we have noticed a renewed focus on core competencies. Banks and brokers who owned real estate, sold their offices and leased them back. They outsourced proprietary operations and are leasing back services that do the same.

On the positive, the state of the Internet economy allows for many business services to be delivered On Demand.  While consumer-focused businesses embraced that trend and started to reap its benefits years ago, we see it finally taking hold in FX markets as well. A crisis brings clarity of thought.

Instead of investing millions of dollars in a proprietary IT infrastructure to run foreign exchange operations in-house, while simultaneously assuming operational and market risk, FX brokers and banks took stake and realized there is a smarter, low-cost way to do the same:

  • Participate in a shared FX infrastructure that spreads operational cost and system risk amongst hundreds of participants
  • Subscribe to On Demand services that scale seamlessly up and down in line with customer demands
  • Only pay for services when actually using the system, i.e. generating revenue for oneself
  • Free company resources to focus on marketing efforts to build one’s business

Fear, Uncertainty, and Doubt (FUD) Strategy Applied in Foreign Exchange

In my many years working in foreign exchange markets, I have seen many innovations that shattered business models and changed the way things are done. One truth that I still consider to be relevant is the distinction between the role of an agent and that of a market maker. Agents are incentivized to maximize a customer’s welfare because that is how they make the most money. Market makers are incentivized to learn as much as possible about how markets function, and about the various strategies of market participants (including their own customers), so that they can use this proprietary intelligence to their advantage by being smarter than the next guy. Or in other words: An agency broker makes money charging a fix fee for best execution; a market maker makes money from the bid/ask spread by internalizing the order flow. You can imagine my surprise as I came across a marketing pamphlet of one of the largest banks in the world that seemed to have melded the two roles into one

There are Friends and Enemies, but no Frenemies

In its brochure, the bank claims to be able to fulfill the role of being both an agency for a customer and a market maker. An agent/market-maker-hybrid sounds to me like something straight out of Dr. Frankenstein’s laboratory. To illustrate the inherent lethal conflict, let’s look at key elements such as order creation, order execution, and order completion. Continue reading Fear, Uncertainty, and Doubt (FUD) Strategy Applied in Foreign Exchange