No serious firm in Asia cares about spreads. It is all about client money, fast withdrawals and good regulation

We investigate the myth that Chinese IBs just want low spreads. Here is a detailed insight into why their knowledge of the entire market from Tier 1 bank execution to success fees, client asset protection and fast money transfers is vital.

A common misconception among smaller retail FX brokerages when approaching large introducing brokers in the Asia Pacific region which is dominated for the large part by mainland China, is that due to the vast volumes being traded often on behalf of the customers of introducing brokers on a managed portfolio basis, spreads matter to the point of negotiating over tiny amounts above base on EURUSD pairs.

FinanceFeeds has continued research this week in China, having spoken to various IBs as well as brokerages that serve them which have a large and well established network across China, deducing that spread is not a concern at all when choosing a brokerage with which to place their clients’ business.

This morning, FinanceFeeds spoke to two senior business development directors of separate companies, both of which have ASIC and FCA regulation and a large presence within mainland China, both of whom concurred that tight spreads are unimportant, and what matters is speed of money transfer in and out of the brokerage, good quality regulation and in that case only the FCA or ASIC will do, security of client funds and where trades are being executed.

Last year was most certainly a year in which the entire prime brokerage sector was subject to a massive amount of evolution in the Western world, largely due to the increasing demand from brokerages for the best possible execution and access to the most accurate pricing and trade processing environment, as well as the counteraction to this, which has manifested itself in the major Tier 1 banks having curtailed the extension of credit to OTC derivatives firms due to their extremely conservative approach to counterparty credit risk.

CMC Markets Head of Greater China Biyi Cheng with FinanceFeeds CEO Andrew Saks-McLeod

This has created a situation in which the main Tier 1 banks are now ultra-conservative and are still licking their wounds by selling off retail divisions in their entirety, and restricting how much risk they take on counterparty credit extension to retail brokerages despite their operational leaders understanding the importance and efficiency of Tier 1 counterparty credit extension to the OTC sector.

Chinese IBs  and brokerage executives know this very well indeed, and recently FinanceFeeds spoke in front of 400 Chinese FX industry executives in Shanghai, all of whom concurred that a detailed understanding of how brokerage infrastructure works from the top (Tier 1 bank and single dealer platform) down (payment services provision to and from China on a bulk/omnibus basis and retail execution via prime of prime to live markets) was paramount for those using MAM accounts to trade vast client assets and process them to FX firms in Western financial centers.

Two companies with the correct approach to this are Saxo Bank and CMC Markets, both whom have their own proprietary prime of prime solution that is hosted within China and can provide a comprehensive system for Chinese IBs.

Complexity due to lack of credit and massive capital requirements? No problem in China

Meanwhile, brokers which have to face these counterparties have to stump up massive capital bases to maintain relationships with them and still be subjected to last look order execution on single-dealer platforms and then have to strike up relationships with further non-bank electronic communications networks such as EBS, Currenex, Hotspot FX and FXall in order to attempt to provide a more comprehensive liquidity solution against the banks’ pulling the rug out from under everyone’s feet.

The same brokerages are battling with this whilst focusing on mainland China, and its own restrictions toward allowing any transaction over $50,000 (which is nothing because most brokers have an omnibus account or a prime brokerage agreement and have to send much higher figures than that each month to overseas banks of the brokers they work with) out of the country for the purposes of derivatives trading.

China’s own banks, all of which are owned by the state, are massively well capitalized and have a very clever model indeed.

They do not expose themselves to risk, and they have assets which consist of property, cash, investments in company stock and indices that are so enormous that it is hard to quantify.

Saxo Bank’s Head of API Business Lucian Lauerman engages in discussion with wealth managers and hedge fund executives, Hong Kong 2017

These banks, unlike the weary western banks, will extend counterparty credit to FX brokerages in China without the blink of an eyelid over risk.

Western banks are already wounded enough and are restricting what they can see quite transparently. It would be futile for a Western prime broker with no presence in mainland China to go to a Western bank’s eFX desk and ask for a large prime brokerage deal because of a massive Chinese partner that has been onboarded.

There is no way for the bank to check how large and how well capitalized that firm is, as one is one side of the firewall, and the other is, well, the wrong side.

The answer would be no.

For Chinese banks, offering Chinese liquidity to Chinese prime of primes and then distributing aggregated feeds to Chinese FX brokerages, the sky is the limit and this single factor, when it unfolds and is in place on a widespread scale, will cause the Chinese FX industry to absolutely mushroom in volume and power.

Prime of primes that have presence in China, that are not Chinese by origin, including Sucden Financial (HK) Ltd, Advanced Markets (Shanghai) and Saxo Bank’s APAC division will be able to participate very freely in this because they will be considered Chinese entities as they have their entire infrastructure based in China and therefore inside the firewall and under the all-seeing eye of the Chinese government.

There is also now new evidence that the Chinese government’s domestic-market-orientation is never going to wane, however the country’s banks are powering the APAC economy’s other strong FX areas that are a sleeping giant, unnoticed by Western eyes.

How can the major FX tier 1 dealers in London such as Barclays, JP Morgan, Citi, Deutsche Bank and HSBC as listed in the chart above have such a lowering market share, yet still be favored.

This is because China is entering the global arena via the back door. Of course, domestic FX industry executives in China know that only RMB liquidity can be offered at good rates and good execution by Chinese banks, the rest is foreign, and anathema to the Communist government, however looking at South Korea’s FX order flow figures for the past three months tells the story exactly how it is.

The daily FX turnover by local and foreign banks in South Korea rose 11.9% in the first quarter from the previous quarter, and the daily FX turnover averaged $49.98 billion in the January to March period, compared to the previous quarter’s $44.66 billion, according to the Bank of Korea.

So what? Well, South Korea is becoming an area of opening to the world for China’s FX liquidity. South Korea and China launched a direct exchange market for their currencies in December 2014, meaning that Yuan can be exchanged directly and then traded in other currencies and against other currencies by local and foreign banks in South Korea.

This has now been taken up by many participants and the daily trading volume of FX spots reached $19.41 billion in the first quarter of this year up 11.8% from the previous quarter.

Thus, South Korea itself may not be the originator of Tier 1 liquidity per se, but it is one of the outposts for Chinese connection from banks to the outside world, and is eating into global market share whilst said banks are unburdened with the woes of Western stalwarts.

As last year drew to a close, Singapore continued to dominate as the largest FX center in Asia for Interbank dealership.

The average daily trading volume of Singapore’s FX market was US$517 billion in April 2016, up 35% from US$383 billion in April 2013. Singapore’s share of global FX volumes has grown to 7.9% in 2016, from 5.7% three years ago.

The expansion in Singapore’s FX market was chiefly driven by growth in G10 and Asian currencies such as the Yuan (78%3), JPY (67%3), GBP (60%3) and Korean Won (55%3). Foreign exchange swaps made up the largest traded foreign exchange product class in Singapore and accounted for 48%4 of all trades, followed by spot (24%4) and FX forwards.

This clearly shows that the Chinese Yuan is using Singaporean bank trading desks as an outlet on the live international market, and the high Korean Won (KRW) figure shown here is likely due to the Yuan-Won direct exchange facilties in Korea.

Bear in mind that many brokers in China are looking to become increasingly dominant and have the purchasing power and balance sheets to gain whatever they want as most have over $250 million in assets under management and in some cases dwarf the brokers that they refer business to, and the market structured in this way represents the future.

Of the prime of primes that are mentioned above, all of them have significant presence in China, with local offices, local hosting and the ability to serve a local Chinese audience of brokerages with Tier 1 liquidity from within the mainland, Chinese management and Chinese systems that are government friendly.

Bearing in mind that this infrastructural evolution has created the catalyst to combine Western top level execution with Chinese business acumen and retail trading volume via automated accounts on MAM systems that are often managed by the IBs on behalf of their clients, success fees, external commissions paid by clients of IBs and account management charges are more of a revenue generator for IBs than any competitive spread may be.

Read this next

Industry News

Horizon Software rebrands to Horizon Trading Solutions

“Horizon Trading Solutions has seen accelerated global growth over the past year to meet the rising demand for our trading solutions and built-for-purpose technology offering. The choice to rebrand represents a key part of this development, while maintaining our heritage and history in the industry.”

Market News

USDJPY has surged to levels last witnessed in 2022. Should we consider opening a short position?

The recent resurgence of the US dollar has propelled USD/JPY to new heights, touching levels not seen since 2022. This surge comes against the backdrop of stable short-term yields and ongoing economic data that fails to signal a significant slowdown, prompting questions about the extent of current monetary easing measures.

Digital Assets

DED Trends on Twitter After Memecoin Snapshot Announcement

Polkadot-backed community coin #DED, made it to the trending charts on X, demonstrating community’s engagement and interest behind the memecoin. 

Digital Assets

BlockDAG Presale Nears $10 Million Amid Toncoin’s Momentum, Green Bitcoin’s Presale, and the Rise of Other Top Cryptos

This article will examine three top trending topics: Toncoin’s potential, Green Bitcoin’s innovative presale, and BlockDAG’s sustainable mining approach. These cryptocurrencies take centre stage for their uniqueness and innovation.

Digital Assets

Coinbase scores minor victory vs SEC, but lawsuit to proceed

A federal judge in Manhattan, U.S. District Judge Katherine Polk Failla, ruled on Wednesday that the U.S. Securities and Exchange Commission’s (SEC) lawsuit against Coinbase can largely proceed.

Web3

COTI Teams Up with Civic for Enhanced Digital Identity Control

СOTI and Civic are teaming up to enhance digital identity security in Web3, aiming to provide users with more control over their digital selves through innovative technology.

Digital Assets

BlockDAG Takes on Chainlink (LINK) Crypto, and RON With DeFi Card and 5000x Profit Potential

Explore BlockDAG’s innovative DeFi card, which transforms cryptocurrency into spendable cash, alongside Chainlink (LINK) crypto and Ronin’s advancements.

Digital Assets

Court finally decides on Sam Bankman-Fried sentence, experts predict 20 years

Sam Bankman-Fried, the former CEO of the now-defunct cryptocurrency exchange FTX, is set to face sentencing on Thursday in a pivotal moment that could see the entrepreneur beginning a lengthy period in federal prison.

Crypto Insider

DeFi Winter Thaws: A Look at the Emerging Landscape

The past year has seen a significant shift in the Decentralized Finance (DeFi) market, transitioning from a period of decline (“DeFi winter”) to a potential season of growth.

<