Major banks continue to focus on electronic trading and automation – Full report

As more banks close branches it means that the stand-off between Tier 1 banks and the non-bank OTC derivatives world is not a sustainable one, and the banks actually need us. This can only be a good thing.


A drive around the West End or City of London these days will reveal a very different character to that of just ten years ago.

Whilst the inimitable shape of the window from which the world’s largest financial center can be viewed remains roughly the same as fifty years ago, the iconic London Taxi – or ‘black cab’ – giving comfort to those appreciating obsolescence-beating landmarks, the subject itself is a complete contrast.

Where are the branches of the banks that have a three hundred year history in this city?

Looking up at the towers that dominate Canary Wharf will reveal the logos and monikers of Barclays, Merrill Lynch, Goldman Sachs, Citigroup and HSBC, all of which are responsible for their part in London’s total domination of the world’s capital markets business, with 64% of all interbank trading order flow being handled by just six bank head offices in Canary Wharf.

However, at street level, things are somewhat different. Bank branches are now Apple MacIntosh-lined cafes – Metrobank’s plate glass facilities resemble an iDigital store more than a retail bank’s branch – and larger, City-based entities which used to allow customer access such as Midland Bank (now part of RBS) can now witness their legacy as its head office is now The Ned, one of London’s prominent venues with seven restaurants, a spa, a hotel, conference facilities and a private members club replacing the area in which customers once lined up at counters.

Today, more focus on the electronic trading sector is evident by two major banks, and to add to this centralization of resources and concentration on core business activities that make far more profit than branch banking, Lloyds Banking Group and RBS have begun to close down retail branches.

For our industry, however, Lloyds Banking Group is one firm that understands the specific requirements.

Last year Lloyds Bank actually came up trumps with our research when looking at which Tier 1 bank provides a good solution for FX brokerages to hold client funds and operating capital accounts. The company’s business and commercial banking unit is centralized with operations in Scotland, and is largely a call center-based experience, however the branches are staffed with knowledgeable employees who welcome business, and are able to understand the needs of a complex firm such as an FX company or service provider which conducts a lot of international transactions and needs to be able to have a multi-faceted service including the holding of client assets.

As long as the relevant documents from shareholders are provided, and the company’s past credit record is all clear, the account can be open and running with all facilities operational within a week. During our investigation, Lloyds Bank also showed no animosity toward FX industry participants.

That has not been the case for many other banks, who turn down FX brokers, forcing them to use third tier offshore banks to great detriment to their businesses.

Unusually for a British Tier 1 bank, Lloyds Bank does not participate in interbank FX at all.

It is, however, the largest banking institution in the world, and its commercial division is of the highest standing indeed.

Today, Lloyds Banking Group announced that it is axing nearly 400 jobs as part of a company-wide shake-up to bolster its online and mobile services performance. Roughly 435 new roles will also be created in the efforts to compete in an increasingly digital market.

This, therefore, is not a downsizing exercise or a redundancy sweep, it is a shift from the old and unprofitable branch activities to total modernity.

A Lloyds spokesperson said yesterday that the new roles will be created in the bank’s transformation division, with a focus on engineering and design to allow the bank to provide more leading-edge products and services, adding that the announcement “will result in an overall net increase in the number of roles within our organisation … it does involve making difficult decisions”.

Just at the same time, Royal Bank of Scotland (RBS) yesterday announced that it will cut its English and Welsh branch network in half in January 2019 with the loss of more than 250 jobs as further testimony to the dynamic of major banks cutting back their sprawling networks.

RBS is closing 54 branches, leaving another 54, including six in London and the south east. The bank promised no further branch closures until 2020. The bank said the cuts were required after it failed to sell its Williams & Glyn brand, meaning it would have competing RBS and Natwest branches in the same location.

Regulators had planned to force RBS to sell Williams & Glyn to address concerns over state aid following the financial crisis. However, RBS failed to sell the network, and was instead forced to pay £700m to help boost competition in the small business lending market.

Whilst the reduction of branches continue, RBS is going absolutely full steam ahead with electronic trading and FX Prime Brokerage. Last summer, FinanceFeeds met with senior executives at RBS at the company’s head office, along with its NatWest Markets division, who showed a very distinct interest in fostering prime of prime relationships with non-bank entities, as long as the relevant (and extensive!) due diligence is completed.

FinanceFeeds followed this up with some London-based prime of prime brokerages, and it appears that most certainly, RBS has the lowest entry barriers and is actually willing to do business as a Tier 1 counterparty. The bank realizes that London’s prime of prime sector is very well organized and is operated by large, well-backed corporations and in some cases hedge funds, and that the rules are followed diligently, hence its willingness to open its doors once again.

Another indicator of this was evident during FinanceFeeds presence within the offices of a major interbank FX dealer that handles over 12% of the world’s FX order flow which hosted a round table. This invitation, completely unprompted, invited FinanceFeeds to be present as a key proponent of the OTC derivatives sector. This demonstrates further that the banks are holding their hand out once again. Of course, criteria will still remain strict, but the OTC business is something they want.

Today’s decisions by Lloyds and RBS follow in the identical footsteps of British Tier 1 peers.

Last year, Barclays’ initiative in this direction expanded further as the bank prepared to close the accounts of 7,000 low-return customers, or move them to another bank in what is being hawked under a politically correct description, that being that it is attempting to reshape its offering to keep pace with tighter capital rules.

More likely, Barclays saw traditional banking as an expensive, resource-hungry exercise and is looking to remove as much of it as possible from the high streets of Britain and Europe, and now other banks are following suit.

This is a direction that Barclays has been taking for quite some time. FinanceFeeds was made aware this year by several senior executives of established small to medium enterprises in Britain whose business accounts had been run to perfection, simply finding that Barclays has terminated their accounts.

Barclays is the world’s third largest Tier 1 FX dealer by volume, with 8.11% of the world’s order flow going through its books.

Barclays is also one of Europe’s largest retail traditional banking institutions, with a network across the entire continent from its base in London.

…or rather it was one of Europe’s largest traditional banking institutions.

It is clear that economies of scale are vital for large financial institutions, however Barclays is conducting its dominance by focusing on FX and other interbank derivatives asset classes rather than its traditional business, as just two weeks ago the British company completed its complete exit from the European market’s traditional banking sector, culminating in the sale of the final remaining 74 branches in France to private equity firm AnaCap Financial Partners, meaning that it now can concentrate its efforts solely on being at the very forefront of London’s global electronic trading epicenter.

Structural changes to the markets, management upheaval among many big banks, new non-bank entrants and lack of volumes and volatility have seemingly levelled the playing field among the industry’s biggest firms.

The biggest change in the rankings this year is the decline of the combined market share of the top five global banks. Their market share peaked in 2009 at 61.5% and was still above 60% as recently as 2014.

By 2015, the top five banks accounted for just 44.7% of total volume, however Barclays battles it out in the race for supremecy with Citi and Deutsche Bank, both of which also conduct their entire business from London.

So, that is the end of Barclays’ operation of branch banking across European high streets, a direction that concludes the Bank’s offloading of its entire Barclaycard credit card operations in Spain and Portugal to Bancopopular-e, a total divestment of its stake in Barclays Africa, a complete dispensement of its Egyptian operations and the sale of its wealth and investment management business in Singapore and Hong Kong.

Meanwhile, on home territory, Barclays continues to stand out in terms of procedure and its domination of market practice with regard to electronic trading with its BARX single-dealer platform.

Barclays is one of the world’s most prominent proponents of the last look execution procedure, its BARX platform which provides FX liquidity by streaming indicative prices on an in house and third party platform basis.

Barclays’ corporate standpoint on the reasons why it uses last look methodology is that being one of the world’s largest interbank FX dealers, it does not generally seek to reject trade requests. However, electronic spot FX market-making is a highly competitive industry and for the reasons set out above it necessarily exposes the liquidity provider to the risk of trading on incorrect pricing.

Barclays maintains that last look functionality is used to protect against these risks and allows liquidity providers to show considerably tighter electronically streamed prices than they otherwise could – something that the bank considers beneficial to every user of electronic FX trading platforms and is very hard line with regard to this.

The bank is aiming to get at least a 10 per cent return on capital from its markets clients and has recently launched a computer system called Flight Deck to help rank customers based on their returns levels and identify those who are currently not making the grade.

Ultimately, running one office in Canary Wharf and running dealing desks and being a Tier 1 bank market maker for the entire world’s markets is a far more profitable endeavor than owning thousands of expensive branches, having real estate, staff, logistics, maintenance, marketing and operational costs just to provide low income individuals with small mortgages and loans for which they will require endless customer service support.

All in all, it means that the stand-off between Tier 1 banks and the non-bank OTC derivatives world is not a sustainable one, and the banks actually need us. This can only be a good thing.

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