Some of London’s eFX establishment moving toward agency business

During some extensive discussions in the City of London this morning with some senior executives within the institutional FX industry, an important dynamic was discussed that is signaling a new direction for some of the liquidity providers that face retail FX brokerages.

In the non-bank FX sector, there can be two possible definitions of what constitutes an institutional FX entity, one being a prime of prime brokerage which provides aggregated Tier 1 bank liquidity to retail brokerages, the other being the non-bank market makers that operate between institutions and participate in give-up business with singular prime brokerage agreements and do not extend their services to the retail sector at all.

That is effectively the might of London’s trading sector, firms doing commercial settlements and institution-to-institution business, however London still has by default the largest prime brokerage business for retail FX, distributed to retail brokerages via prime of prime brokers with direct counterparty relationships with Tier 1 banks, of which there are only a handful in the world.

This morning’s discussion in the Square Mile raised a point that there is currently a diversion away from brokerage business among some of the liquidity providers in the City, and a move toward other types of liquidity takers as target markets for liquidity provision.

One such firm mentioned is a long-established commodities brokerage which has an eFX division, and has been in existence for almost fifty years, and has shed several senior eFX professionals from its payroll over the past two years, and another is a modern, up to date firm with an unusual operating model that was established just eight years ago, and both are London based.

“Retail brokers need super tight spreads, they don’t want extraneous functionality such as no last look execution” one senior bank FX prime brokerage executive explained to FinanceFeeds this morning.

According to a senior sales trader at one of Canary Wharf”s interbank dealers, two companies specifically are looking to exit from providing liquidity to retail FX brokerages, and are looking to align themselves more closely with market makers such as non-bank liquidity aggregator and distributor Edgwater Markets and Makor Securities, which is a company that was established in 2011 to provide bespoke advice and execution to leading institutional investors in Equity, Fixed Income, FX and specialized trading strategies.

Thus, FinanceFeeds can confirm that for retail FX brokers, the choice of actual genuine prime of prime brokerages from which to take liquidity that is placed directly with Tier 1 liquidity providers is now restricted to Saxo Bank, Swissquote, Invast Global, IS Prime, CFH Clearing and Advanced Markets. Thus, these are the prime of primes to use.

“I think that if you can’t run a certain level of risk, it is proving to be hard to compete for retail broker business” said a prime of prime brokerage risk manager this morning when asked by FinanceFeeds about this direction.

“In Asia, some of London’s firms that face retail brokerages are looking toward focusing on agency business only” he said.

If this is the case, maintaining a good quality prime of prime brokerage relationship will rely on the firm concerned being extremely efficient because it is becoming harder to run a profitable prime of prime these days, and only those with very substantial bank relationships and large balance sheets in traditional financial centers will currently have any edge.