We thought it was just the b-bookers… Oh, wait!…..

The retail brokerage sector has done very well this year, however the Tier 1 FX dealers are romping home too. Could there be a similarity?

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During the past few months, ever since the propaganda was unleashed onto the world’s populace with hypnotic soundbytes such as “stay home” filling the audio and radio waves creating a catatonic influence on a large percentage of easily led members of the public who now languish jobless, muzzled and disempowered, there has been one particular industry sector that has been extremely productive.

That is the sector represented by market making entities within the retail electronic trading industry, running what is known as a ‘b-book’, meaning that trades are executed at their own dealing desk by the broker, instead of sent to the live market for execution by their liquidity provider on a commission basis.

When looking at the figures and speaking to brokerages across the global FX and CFD industry, it is clear that most of them have been working extremely hard over the past few months, and business has been excellent, however the upturn has been a result of existing customers trading more than usual, and not as a result of any new clients coming on board.

Whilst this dynamic is perhaps a good thing given the current situation in which the global cost of the heavy handed mandatory shuttering of businesses has resulted in an estimated £21 trillion loss to the major economic first tier nations in just six months which will take generations to recover, if recoverable at all should the global elite manage to force socialism upon us all, it is not just the retail brokerages that have been making hay.

We hear a lot of doom and gloom relating to Tier 1 banks in the mainstream media, many reports stating that they are stagnating and the risk of loan defaults – both domestic and business – as people lose their jobs, take ‘payment holidays’ or default entirely, and as businesses fold and cannot repay the capital on borrowing.

These are indeed very real aspects, however what is perhaps less known is that some of the Tier 1 banks have experienced such a high level of increase in trading the markets that they can almost negate their retail and commercial lending risk.

JP Morgan, which is a substantial participant in Tier 1 FX dealing with a 10.78% global market share for 2020, meaning that it is number one in the world in terms of trading volume for Tier 1 banks, surpassed only by non-bank market maker XTX Markets, is a case in point.

The company took a £8.1billion hit against future bad loans in the previous quarter, however management said it was less worried about losses than it was three months ago and set aside just £471million, and overall revenue fell to £23.1billion, but still came in ahead of analysts’ expectations.

However, that was the gloom over with, because rather interestingly, trading was a bright spot. It was up an astonishing 30% in just the third quarter of this reporting period to £5.1billion despite one of the worst recessions in decades, and the bank has maintained its forecast for full-year interest income at about £42.4billion.

A 30% increase in trading over a three month period is quite staggering, especially when considering that the majority of the Tier 1 FX dealers at the highest end of the market share pecking order generally have steady order flow statistics, because they are at the top of the market and also because of the way they manage risk by rejecting or taking a ‘last look’ on trades they do not wish to execute.

That leads us to an important point. If the b-book retail firms were doing well during the lockdown period whilst market volatility was high and traders were at home with more time to commit to trading, why were the banks?

The answer is that they are also a form of b-book. They are just the top end of the agency execution hierarchy and the trade stops with them, as they are creating the market by dealing on an interbank basis. They have their own dealing desks which do not have a higher level of liquidity provision to pass trades to.

They reject what they don’t want , and take last look on many trades – two practices that would see retail FX firms standing with a bowed head in front of the regulator.

It certainly appears that even though the banks generally tend to decry extending counterparty credit to OTC derivatives companies, it is certainly their core business, as FinanceFeeds has said before, and therefore they cannot do without it.

It also demonstrates that trading volatility and increased activity has made its way through to the top tier, which highlights the similarity between JP Morgan’s vast and polished trading desks in Canary Wharf and Wall Street and the down to earth retail FX firms in the retail sector.

 

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