Level 1 FX brokers launder new strategies as market makers seek gold


Now is the time for us, the e-commerce industry, to show the banks a clean pair of heels and take the Level 1 forex side of our business to the next level.

As might be expected, fear has taken hold in the traditional banking industry on a global scale, as their retail and commercial divisions have been inundated with customers who are effectively sending them a “Dear John”, incapable. to deal with refunds, invoices or commercial commitments. .

The phone lines of banks around the world are now full of customers, whether they are heads of large companies or individuals with low incomes, calling to warn that they will not pay their loans, mortgages, commercial rents, bills or monthly withdrawals. for the foreseeable future due to the enforced inability to work or operate businesses, which could well lead to a situation in which many banks could collapse.

Since the electronic brokerage industry has depended on Tier 1 banks for their premier brokerage services since the dawn of e-commerce, banks are now at a crossroads as they are threatened by their own retail sectors. and failing salespeople, but lose market share to market makers even before this dictatorial shutdown of companies begins.

With an aversion to some Level 1 exchange rate trading practices in recent years by liquidity takers such as major blue chip brokers, these being the traditional single broker banking platform stipulations Such as the tolerance for execution of the last look and the requirement of a large balance sheet in the tens of millions in order to maintain a blue chip brokerage deal, there has been a definitive shift towards the use of market makers. nonbanks such as XTX Markets, Jump and Citadel Securities, with XTX Markets holding the top in terms of global Tier 1 FX market share for some time, ahead of banks for the first time in history.

Today, banks are starting to utter sound bytes that appear to be attempts to deflect negative market sentiment from them.

This is largely a difficult scenario for Level 1 dealers. They are engaged in large scale banking operations, which has not been a profitable business for many years now, and with the downturn. This current hurts them hard, is almost unsustainable given the amount of real estate, personnel, regulations, underwriting criteria and operational costs. is only required to lend very small loans and then finds that they will not be repaid.

They are also engaged in level 1 foreign exchange trading, which is by far the core business of most of these banks, and that’s understandable. It only takes one office – usually in Canary Wharf, London – a team of smart resellers numbering a few hundred, in one location, with no huge logistics, real estate or HR costs or traditional business overheads, no underwriting and no small individual time -consumption of narrow margin and high risk offers.

The forex market is huge for most Canary Wharf Tier 1 banks, but they have implemented their own reprehensible methods over the years, including the aforementioned requirement of a minimum balance sheet of $ 50 million per a premium premium to maintain a matching credit agreement for OTC transactions and the obnoxious practice of last look execution.

This month Deutsche Bank, whose Canary Wharf-based operation was once number two in the world for foreign exchange market share on its sole dealer platform but now languishes in seventh place, released a message filled with fear.

The bank has publicly stated that it is confident its new strategy and restructuring has made its business more resilient in light of the disruption caused by the potential spread of the coronavirus across Europe.

Deutsche Bank chief executive Christian Sewing described the risks the coronavirus imposes on his business in a message to staff, but assured that he has a strong capital and liquidity base to handle further disruption .

“We are much better equipped for a difficult phase in the financial markets today than we were just a year ago,” Sewing said. “Looking at our performance in the quarter to date, it is clear to me that our new strategy is not only an important prerequisite for sustainable growth and profitability, but has improved our flexibility and resilience. , especially in an unfavorable environment. “

Deutsche Bank confirmed in July that it will implement the biggest overhaul of the bank’s business in a decade, with plans including a targeted reduction in adjusted costs of around € 6 billion by 2022 and the loss approximately 18,000 full-time positions. The institution also agreed to transfer its blue chip brokerage and electronic equity franchises to BNP Paribas after years of doubts about the sustainability of the business.

“We have put in place appropriate measures depending on the situation on the ground or in the respective area of ​​the bank. Many teams have moved into split mode, while others rely in part on staff working from home. We have reduced business travel to a minimum and canceled large-scale events, ”Sewing said.

JP Morgan, Goldman Sachs and other big banks are also said to have taken similar precautions by dividing up some of their teams and warning staff to prepare to work from home.

As inefficiency sets in and trading desks are affected, this type of message is truly a placebo, attempting to allay the concerns of cash takers as well as staff.

How can OTC derivatives companies with blue chip brokerage arrangements be confident that market execution will be timely in this volatile time, when many stakes are at stake and the banks have huge demands?

Meanwhile, market makers are doing extremely well. XTX Markets leads the pack, with HC Tech and Jump Trading just behind them, ahead of the single broker platforms of UBS, Goldman Sachs, Bank of America Merrill Lynch and BNP Paribas, all once invincible FX brokers that every taker of liquidity had to dip in order to maintain their OTC counterparty arrangement.

The trend among market makers repeated in the retail forex sector this month. B-book companies that take risks on their own trading desks (NOT specialty stores, proper companies that stick to correct prices, but execute on their own trading desk instead of sending orders to a bank) have made an absolute fortune.

The markets are volatile and trading activity is at a very high level during the period of global foreclosure, which means that many retail traders are taking high risks and incurring trading losses resulting in the content market wins. Brokers who manage their own risk management and operate a b-book model at appropriate pricing are currently making a fortune. The only thing they need to keep in mind is that if the current business activity is very high, but customers are losing, innovative methods of gaining new customers and encouraging them not to make rash decisions will be part of it. of the customer service mantra.

As I watch the tumbleweed blowing across Canada Square, we are definitely seeing a time when good quality market makers can step up and give traders what they want: good quality, fast execution without last look practices. , with low costs due to not needing to deposit $ 50 million into an escrow account to find out that the bank that requested it is in trouble and will reject transactions.

We are in a time in global markets where the e-commerce industry can get things done. The best leading brokers with their extremely comprehensive and highly sophisticated systems for connecting to live markets around the world, retail brokers with their own quality infrastructure and risk management systems, and specialists in market integration that offer high-tech risk and analysis systems.

Now is the time for us to stand out as industry leaders and replace failing banks for Tier 1 FX trading in a credible, fair, profitable and efficient manner – which is, after all. , what today’s traders want.


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