“Institutional clients, and their retail clients in the case of retail brokers, can end up with a far better deal if they can access liquidity directly from their prime of prime but still have the ability to take whichever direct price feed they prefer” – James Watson, CEO, ADS Securities, London.
London’s prominence as a global center for institutional FX and prime brokerage is most certainly on the increase, and the quality of the firms providing services to international retail electronic trading companies is continuing to raise its bar.
This year, some of the industry’s large, well capitalized FX firms have entered the prime brokerage arena, one of which is ADS Securities in London.
Expertise in prime brokerage, bank relationships and market infrastructure is critical within firms that provide quality execution facilities to other OTC brokerages, and in London this summer, FinanceFeeds met with Marco Baggioli, at the time COO at ADS Securities in London, and as of last week Executive Managing Director of Global Brokerage after his promotion.
Shortly after the establishment of ADS Securities prime brokerage, Mr Baggioli explained to FinanceFeeds that he considers that the entire methodology by which most of the OTC derivatives industry operates in terms of execution has reached a point at which change and evolution is needed.
Mr. Baggioli, an expert in institutional trade execution and prime brokerage relationships, estimates that there is a potential credit gap affecting up to $1.3 trillion in terms of average daily volume that needs to be filled, and that the entire method by which OTC firms conduct their business from the relationships with banks, through liquidity and technology providers and prime brokerages, right down to the retail brokerage needs to be examined in order to overcome this matter, reduce the cost and improve the efficiency of prime brokerage relationships.
“The lack of credit will lead to much wider spreads and increased pricing for all, from banks, to hedge funds, international businesses and all FX traders and, at the moment, no one is facing up to the problem” stated Mr. Baggioli.
Entering further into the discussion in order to examine solutions for this, Mr. Baggioli divides the retail brokerage world into three groups
In explaining how he views the current topography, Mr. Baggioli said “To me , when I look at the retail space, I divide the world into 3 major groups of providers.”
“One group is made up of global players like ADS Securities, FXCM and Saxo Bank. Those, whether they were hit or not by the Swiss National Bank event in January 2015 tend to have less problems with regard to cost base or PB credit lines” he explained.
“Global brokerages have less problems with their cost base because even if these brokers have retail clients on small tickets, their prime broker allows for very cost effective aggregation of trades. These global players have the ability to keep prime brokerage costs low by not suffering small ticket charges. They do this by putting together the flow of a very large number of clients and give them to their prime brokerage once aggregated usually via Netlink” – Marco Baggioli, Executive Director, Global Brokerage, ADS Securities LLC
“The second group is made up of purely local retail brokers which are specialists in their own niche market or region, whether it is because of regulations that mean that they cannot go abroad, or it is because everything is in the local language of their market, for example” explained Mr. Baggioli.
“This type of company often suffers from very high prime brokerage costs. This is because, for example, if you are a broker in Turkey and offer 24 hour access to clients and trade G5 with liquidity from several different makers, it becomes quite difficult to aggregate throughout the day a relatively small and fragmented flow into a million dollar ticket, or more, to give to your prime broker and avoid surcharges, even during market liquidity hours like London morning.
Let’s say they pay $3 per million, which is competitive, however $3 per million doesn’t apply pro-rata to a $10,000 ticket because small ticket surcharges would kick in below the $1 million mark. The actual cost for that ticket is probably going to be $1.50 because the prime brokerage needs to cover CLS costs, hence making the actual per million fee charge on that type of flow $150.” – Marco Baggioli, Executive Director, Global Brokerage, ADS Securities.
“For these types of companies I would recommend not to go the prime brokerage way, not even the PoP one. It is better for that type of retail brokers to go to a global provider like ADS Securities and take our liquidity in aggregated form instead. We have access to about 80 feeds from bank and non-bank providers as well as from ECNs in one package with no PB costs at all; our retail broker client can chose what LPs the want to add to the pool and we can save them 100% of the prime brokerage costs, whilst providing the same level of best execution they are getting today”.
“The third group is the one made of medium size retail brokers whose business is large enough to cost effectively pay for a PB relationship but whose balance sheet falls short of the minimum required by the larger PBs for their onboarding. ADS Securities’ PoP services would be perfectly suited to their needs” revealed Mr. Baggioli.
Last week, James Watson, CEO of ADS Securities in London was present when the company was presented by FXWeek with the accolade of recognition as a top quality prime of prime provider.
Speaking to FinanceFeeds today, Mr. Watson said “Our innovative prime of prime solution plugs a very real hole that has opened up in the market. Yes we’ve seen some intermediaries come to the table, but they’ve been forcing clients to work from their prices, which in turn may not be what the end taker may get directly from the same liquidity providers.”
Mr. Watson further explained “Institutional clients, and their retail clients in the case of Retail Brokers, can end up with a far better deal if they can access liquidity directly from their prime of prime but still have the ability to take whichever direct price feed they prefer.”
Now that this aspect of the business has been established to this level, the company is furthering its institutional provision by expanding its pre and post trade clearing functionality.
From this week, ADS Securities London will deliver customized credit intermediation solutions to DMALINK, providing their specifically targeted counterparties access to a sustainable prime brokerage ecosystem. The service agreement will leverage ADS Securities’ strong relationships with existing PBs and its high level of capitalization to provide DMALINK with sustainable access to credit and counterparties, and further enhance their hands-on client support. DMALINK distributes major, minor and exotic spot currencies including Gold and Silver to clients throughout the UK, Continental Europe, North America and the APAC region.
Speaking on this today, Mr. Baggioli explained to FinanceFeeds “The Prime Brokerage model as it used to operate is now essentially an elite service. It’s now only serving a relatively small part of the market and some real evolution was clearly overdue. We formally launched our Prime of Prime product last month and we are very pleased to have DMALink among our very first clients.”
“There’s certainly no shortage of interest from other market participants, either. The gap in this market is so great that we need more of the well-capitalized brokers to join with their own initiatives, but I’m confident that ADS has already made a significant contribution in terms of improving liquidity” concluded Mr. Baggioli.
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