FX brokers fed up of being given short shrift? Here is how to influence the banks

One of the most difficult day to day operational roles within the FX industry, and indeed the OTC derivatives business as a whole, is the management of order flow between brokerage and prime brokerage division of a bank.

Working as a chief dealer, or as an order management official at a brokerage or prime of prime requires constant relationship building on a real time, trade-by-trade basis with the liquidity providing Tier 1 banks.

Since 2015, that position has become significantly more difficult, largely as a result of Citigroup, at the time the largest FX dealer by market share, which issued a report stating that it expects 56% of all OTC derivatives counterparty credit agreements to end in default.

That report struck fear into the neighboring Tier 1 banks which handle the majority of FX order flow in London’s Canary Wharf, creating a liquidity crunch and sending many FX firms looking to either b-book all orders and use a price feed for reference, or look toward sending more order flow to non-bank market makers and interdealer brokers, which, despite some efforts from banks such as NatWest Markets, the investment banking division of RBS which told FinanceFeeds during a meeting two years ago that it is very much open to OTC derivatives business, has led to XTX Markets and some interdealer brokers taking the reins.

The difficult relationship between banks and OTC firms is something that should be examined closely, as the multi-asset direction that FX brokerages now need to pursue in order to improve their product ranges and gain access to more sustainable client bases could be the solution.

This is because completely contrary to the discourse between banks and non-bank electronic trading firms, asset management companies and hedge funds have massive influence over the major Tier 1 banks, in particular the banks that provide FX liquidity to brokerages.

Today’s blatant example of this manifests itself as Barclays insiders have stated that Jupiter Asset Management is preparing to back corporate raider Edward Bramson in his fight for a board seat at Barclays.

Imagine an institutional FX brokerage or liquidity taker that processes trillions of dollars worth of notional value in trades through the BARX platform being able to influence the bank on who it admits to its board! That would never happen.

Yet, for Jupiter Asset Management, a multi-asset wealth manager, this sort of lobbying power is second nature.

Jupiter Asset Management is expected to support a motion at Barclays’ annual meeting next month to make him a non-executive director. It would give the notoriously aggressive Mr Bramson a big boost in his battle, which is expected to be opposed by most shareholders.

How on earth does a liquidity taker and asset management firm manage to get into Barclays annual general meetings, let alone influnence decisions made at them? Very simply, Jupiter is one of Barclays’ 25 largest investors, with a 0.56 per cent stake according to Reuters data. It also owns 3.6 per cent of Mr Bramson’s fund, Sherborne Investors Guernsey C.

So, therefore, all it takes is a less than 1% shareholding at Barclays and your company can influence who they want on the board. Many large FX brokerages with their own infrastructure could easily afford to buy into Barclays or any other Tier 1 FX liquidity provider if 0.56% constitutes enough power to gain voting rights.

Fed up with being given the short shrift by the BARX platform and its intrinsic last look execution procedure that Barclays absolutely sticks by? A tiny shareholding should see to that.

In the case of the Jupiter stake, most of this stock is owned by fund manager Ben Whitmore. Mr Bramson, who controls a 5.51 per cent stake in Barclays through Sherborne, is trying to insert himself on the bank board so he can change its direction, which seems to be easy to lobby with a small shareholding from Jupiter.

Barclays attacked Mr Bramson for failing to understand how banking works, and said a major overhaul would be extremely disruptive just after it finished a round of savage cuts. Bramson has also been slammed for failing to set out a detailed plan of what he wants Barclays to do.

Imagine being able to sit at the AGM at a major publicly listed Tier 1 FX interbank giant and have influence over installing a board member from our industry who is favorable toward our business? It would be ground breaking.

An audit of IP, then a bid for shares, and acceptance as a bona fide trading business would be necessary by a professional services firm, then the stock would be readily available on the public market.

Currently, only multi-asset investment managers hold such stock but there would be no reason why firms with their own infrastructure in our sector cannot buy in and have such say at meetings.

It has always been, and will always be more measurable environment if Tier 1 banks continue to hold the majority of FX order flow, however with continual adherence to last look procedures in terms of execution which allow banks to pick and choose which trades to reject when their own liquidity takers cannot do that when passing aggregated liquidity to retail brokers, and continual lawsuits relating to benchmark rigging and insider trading, transparency is not something that some of the bank desks are known for these days.

Ergo, using a non-bank market maker such as Hotspot FX, now owned by BATS Global Markets, or XTX Markets or Citadel Securities has become popular.

Today’s reluctance by Tier 1 banks to extend counterparty credit to the non-bank OTC derivatives sector is one of the factors that has resulted in XTX Markets now being in an astonishing second position globally for handling FX order flow at top level, between JPMorgan and UBS, a position usually reserved for banks, and the first time in history that a non-bank market maker has dominated the global FX dealing sector.

In 2018, Barclays’ market share is down to 4.19%, placing Barclays in 9th position globally as an actual entity (its FX market share still being third in the world), yet last summer’s announcement of second quarter earnings heralds enormous increases in overall revenues compared to the same period last year.

They are not in a position to ignore the OTC derivatives sector, as that is a core business activity for their single dealer platform BARX.

Now’s the time, gentlemen.