Reading industry-related headlines over the last eight months or so must have been scary. Volumes dipped to historic lows towards the end of last year and some major players including many market making banks and large ECNs have been experiencing internal reorganizations with the associated departure of high-profile executives. Let me state for the record that this is not an attempt to judge anyone as they are going through tough times. This is an attempt to put what is happening into perspective and provide FX market participants with a better understanding of what we are experiencing. Where many see only gloom and doom, I also see a story about opportunity and growth.
One-size-fits-all era is coming to an end
In a recent commentary on personnel changes at EBS, Colin Lambert, Profit & Loss (restricted access), puts the finger for the firm’s difficulties at “increasing competitive pressure” and suggest among other things that EBS is “feeling the squeeze from internalisation and more granular streaming from banks”. I don’t want to make light of what this may mean for individuals affected by these restructurings, but for the industry as a whole, these changes are a positive sign. They prove that FX markets are maturing, that competition is increasing and that the one-size-fits-all area in FX is coming to an end. The future will see a much larger number of different business models, liquidity sources, risk management approaches, FX exchanges, all co-existing in an even larger market than FX is today.
Continue reading FX markets are experiencing a paradigm shift and many are hurting. Don’t be afraid. What you are experiencing are growing pains.
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