Keep calm and carry on – Op Ed

The UK referendum will be a huge point for the electorate, but will make absolutely no difference to the structure of our industry, whether Britain stays or leaves the EU. A detailed opinion by Andrew Saks-McLeod


On June 23 this year, just one week from today, Britain’s electorate will, in what has become very much a matter of course, either be straining at the leash to head to the polling station, or will display apathy and stay at home.

The difference is, that this is no ordinary election in which a government official is appointed, or even a new prime minister elected. This is a referendum which determines the nation’s future, regardless of leader, as a member of the European Union, or as a completely independent sovereign nation.

Electronic trading throughout its history, first among the bank and institutional desks of New York and London, and the proprietary trading desks and exchange listed derivatives venues of Chicago, and then in later years retail traders across the entire world, has had market decisions driven by news events, one of which is election results and, in the currency markets, the resultant disparity between currencies that ensues from such geopolitical events.

Since joining the European Union in 1973, and what was at the time called the European Economic Area (EEA), often referred to as the Common Market, there has been no such referendum in which the British electorate have been able to make a democratic decision on membership or an exit from the European Union.

This, combined with the matter that electronic trading across all assets, in all sectors, did not exist in those days, and has now advanced to become one of the most technologically advanced industries in the world with one of the highest revenues, that relies on the exchange of currencies, which in turn relies on the stability and continuity of each nation whose sovereign currency is traded.

The British pound was kept, and indeed is the most valuable currency in the world today. A very shrewd move for Britain, as it meant European Union membership for 43 years without having to join any common monetary policy. In the advent of the Euro, when European nations had individual currencies, those who are as old as me (!) will perhaps remember Britain having been opposed to participating in a single currency whose prototype was created by the Economic and Monetary Union.

The euro came into existence on 1 January 1999, although it had been a goal of the European Union and its predecessors since the 1960s.

After tough negotiations, particularly due to opposition from the United Kingdom, the Maastricht Treaty entered into force in 1993 with the aim of of creating an economic and monetary union by 1999 for all EU states except the UK and Denmark, even though Denmark has a fixed exchange rate policy with the euro.

The British pound and the Euro are two of the most commonly traded major currency pairs, however there is much more to the referendum’s potential outcome than just market volatility.

During the last week, FinanceFeeds has published the risk management and margin policies of many renowned FX brokerages which are taking prudent steps to protect themselves and their customers from exposure to potentially volatile markets in the immediate period before and after the referendum’s voting takes place, however there are other aspects to bear in mind.

London is the global center for interbank FX, with just 6 banks (Citi, Barclays, JPMorgan, Deutsche Bank and Goldman Sachs) accounting for over 47% of all international interbank FX order flow.

That is a remarkable percentage, especially bearing in mind that this represents the vast majority of all interbank order execution for the entire western markets – Singapore overtook Hong Kong as Asia’s largest financial center earlier this year, largely because its banks produce the vast majority of the order flow for the Asia Pacific region, and New York and Chicago are equities, stocks, futures and options centers, largely conducted via exchanges, rather than OTC bank-based FX trading centers.

This means that once the few days of volatility calms down, and the traditional British stiff upper lip is maintained, corporate and wider market considerations would come into effect with a much longer lasting impact.

Before taking a close look at that, it is worth considering just how many actual voters there are. It is also worth considering that the voting is open to all citizens over the age of 18, not just those in specific fields. Simply put, it is a national democratic procedure, not a financial markets and business orientated matter for politicians and business leaders.

A supermarket warehouse operative in Yorkshire, for example, will have no interest in what an application deployment engineer for bank trading desks in London seeks to achieve by the country remaining in the European Union or leaving it.

The corporate financial sector in London, however, is most likely to consider this referendum as one of the most important geopolitical events in the last 40 years because Britain is completely, and disproportionately, powered by its Square Mile and Canary Wharf-based financial services, institutional liquidity and banking businesses.

On this basis, being independent from Europe, or remaining a member of the union, is of massive interest.

In 2012, a gentleman called E Blundell made a request to the Electoral Commission to enquire as to how many actual voters there are.
Unlike in many countries, Britain does not issue ID cards to citizens, or permanent and temporary residents, therefore the Electoral Commission actually admitted in writing that it was not possible to know the exact figure, and that it relies on people being registered on the Electoral Roll and those de-registering to vote.

Those who are not registered on the Electoral Roll that are the unknown number due to these factors.

After a series of letters and no doubt a degree of the bureaucratic hand-wringing that has come to be expected from government departments, a reply was poffered, and it was quite surprising.

As of of 1 December 2011 there were 47,383,464 entries on the local government electoral register and 46,107,152 entries on the Parliamentary electoral register. There are two different electoral registers, one for Parliamentary elections and one for local government elections. For other elections or referendums, one register or the other is always used.

This is over half of the entire population, therefore granting a mass audience from all walks of life the chance to change the entire commercial and economic structure of the country – and by change it, I mean whether the country stays in or out of the European Union.

This morning, former CEO of Habib Bank AG in Zurich, Professor Moorad Choudhry made a point that I have considered for quite some time. “Whatever reason a bank sets up in London, is it logical to suppose that the primary one is for access to the EU when it is already located in the EU?

“Why put up with London salaries, London rents and London weather to access the EU when you already can? Why are banks from virtually every EU country located in London when there are precious few UK banks in most EU countries?” – Professor Moorad Choudhry

That is absolutely right indeed.

It is not the membership of the European Union, nor is it access to Europe’s markets, that put the emphasis on London’s banks and institutional firms to build up such a world-dominating presence in the city.

Britain dominates the world markets, from Tier 1 banks, which are the very highest level of liquidity sourcing, right down to the retail spread betting and CFD firms which have existed in London since the mid 1980s and have proprietary trading platforms aiming at a predominantly British client base.

A visit to CMC Markets’ head office at the palatious 133 Houndsditch is a case in point. Upon entering the firm’s vast offices which employ over 900 staff, the next generation trading platform is displayed on the wall in the company’s reception.

This trading platform cost over $100 million to develop, and if my estimate is correct, approximately $150,000 per month to maintain when considering the cost of developers and support engineers, server hosting, and the magnitude of operating an on-site trading environment.

All of this, to service a predominantly British client base. CMC Markets’ second largest market after Britain is Germany, however it would not be much of a consideration for a company such as CMC Markets to pay a maximum of $100,000 to obtain a Cyprus license and then operate a small office in Cyprus to serve German clients under the MiFID rulings, with no change whatsoever to their account or trading environment.

Licensing from CySec is now so synonymous with retail FX trading, and has gained a very good reputation of late, therefore this, combined with the established names of large, London-based firms is a very good solution.

Regulatory experts that I have spoken to at length this week have concurred that no firm will establish in Germany, for example, where a banking license is required and it is expensive and bureaucratic, but will gain CySec licensing. Who ever heard of a German brokerage that does any scale of global business anyway?

Interestingly, CMC Markets founder and CEO, Peter Cruddas is a virulent opponent of remaining in the EU, having donated over £1 million to the Brexit campaign and regularly commenting in public on his advocacy of Britain leaving the EU. Mr. Cruddas is former Treasurer of the Conservative Party.

IG Group is a similar case in point, however two particular London-based companies have begun to develop their own Prime Brokerage services, and will extend this globally, which indeed has absolutely no bearing on whether the UK stays in the EU, or leaves as the vast majority of regulators in all jurisdictions globally, stipulate that brokers taking liquidity from, or being white label partners of other firms in different countries must have the regulatory license applicable to the nation in which they are based – nothing to do with the EU, it could be Canada, Japan, Taiwan, or Australia.

The two companies which have launched prime brokerage services very recently are AFX Group and ADS Securities, both operating from the City. These companies will onboard brokerages from across the world which are looking to work with well capitalized firms that have the correct approach to execution and liquidity relationships with the broker (customer) and banks (providers), have FCA regulation (when was the last time a broker asked a liquidity provider if they had German, French or Spanish regulation??) and equally importantly, are lead by some of the most experienced people in this sector of the business.

ADS Securities Chief Operating Officer Marco Baggioli is of the highest caliber, and in developing the Prime-of-Prime product offering, the companysaw a unique opportunity to leverage both its strong relationships with existing PBs and its high level of capitalization to offer institutions substantial credit facilities to support their prime brokerage needs.

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 ADSS, 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, COO, ADS Securities LLC

AFX Group took a similar approach, enlisting former Managing Director of FXCM’s institutional division Francois Nembrini to head its new institutional service.

In a meeting with Mr. Nembrini two weeks ago, he explained to me “$250,000 would easily get a Prime 5 years ago, we are now talking about minimum amounts in the $15 million if not $25 million or $100 million in some of the large Primes.”

For this reason, 2016 has become a year in which prime of prime services and the connectivity providers that facilitate their link to the live market and to retail brokerages have had to innovate substantially in order to provide better prime of prime relationships and access to best execution for the brokers that use the services, and it is London that provides this, not any other region in Europe, and a remain or exit by Britain from the European Union will make no difference whatsoever on the institutional liquidity provision side.

London is where the talent is. London is where the providers with strong capital bases are, and the world’s brokerages will continue their LP and PB relationships with London based firms regardless of the outcome of the referendum.

In the banking sector, most business between London and the world is conducted within London, or toward the Far East – HSBC, Barclays, Royal Bank of Scotland, Goldman Sachs and Citibank among other Tier 1 interbank liquidity providers also have major offices in Hong Kong and Singapore – North America, certain parts of  the Middle East, Russia and the Antipodes.

Meanwhile many EU member states do not have a developed electronic markets economy, instead having large bureaucracies and sovereign debt, which has been fueled by many bailouts provided by the European Central Bank and the IMF.

Therefore, if the electorate votes to leave the EU, Britain will likely save money, and entrepreneurism will once again flourish, the country will be rid of massive socialist bureaucracy that hinders progress and potentially salaries and standards of living (outside this industry sector) will likely increase.

If Britain remains in the EU, boards of companies, government departments and other large entities will potentially make cost savings and take a long-term view of how the economy may behave considering the continued £10 billion that the country would have to pay to remain in the EU, the potential exposure to EU debt, and bureaucracy that is created by the EU which hinders trade abroad.

These are factors that the electorate at large will probably consider, but for our industry it will make absolutely no difference whatsoever to the structure of the business and its entire ecosystem, apart from a few risk management measures to avoid exposure to volatile markets.

Professor Choudhry sums the whole thing up perfectly.

“There are obvious downsides to leaving, starting with harder cross-border access. But if one produces goods or services that other people want, other people will buy them. This is why Apple and Samsung have no problem selling to the EU and why Adele has no problem selling records outside it. It also explains why certain countries in the EU, with all the benefits the EU does bring, don’t thrive and are stuck in semi-permanent recession: they don’t produce anything anybody wants” he said today.

Stiff upper lip, chaps, it’s business as usual.


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