Will the failure of European banks benefit FX brokerages and non-bank prime brokerage? FinanceFeeds investigation

During recent weeks, banks in Europe have experienced tremendous downturns in their results, producing losses that have run into the billions which have been followed by collapsing stock prices and imminent mass staff redundancies.

The majority of the banks concerned represent those with a large proportion of London’s interbank FX market share, accompanied by Germany’s Deutsche Bank which is the world’s second largest FX dealer by market share.

Citi has reduced its bonuses by up to 36% with CEO Tidjane Thiam preparing to take a very large hit, and a staff reduction plan spanning the next two years is on the cards.

Whilst the fiscal problems in Europe come home to roost and the banks flounder, what effect does this have on the FX industry?

Indeed, most FX brokerages, prime brokerages and liquidity providers rely on aggregated liquidity from the major FX dealers of Canary Wharf and the Square Mile for the processing of their order flow, however there is another, perhaps advantageous aspect in all of this, in that investors may seek to trade FX as a liquid, borderless asset instead of bank stocks which are heading downward with the velocity of an iron girder being pushed over a precipice.

This has to be good for FX brokerages, especially considering the geopolitical factors in staunch socialist mainland Europe which are acting very much against any form of economic recovery.

FinanceFeeds investigated this matter by speaking to senior executives within companies in different sectors to discover their experiences with this trend.

Jean-Raphael Nahas, Head of Sales at Blackwell Global explained

“The main worry now for European banks is the plunge of interest rates being set to a negative which of course will have effect on the balance sheets. in addition many banks are exposed due to the oil prices. overall this brings great uncertainty to trade bank stocks and there is a way FX companies can benefit this from this change.”

“Forex companies nowadays offer a number of trading instruments and therefore can attract many investors. Investors can benefit ofcourse from the high liquidity round the clock and benefit from the leverage offerings” concluded Mr. Nahas.

Mariano Obludzyner, CEO of LegacyFX in Cyprus took a look at how the global nature of non-bank FX prime brokerages and retail FX firms could actually benefit from the doldrums that the major European FX interbank dealers are in.

“The ongoing downward spiral that some of the City’s giants are experiencing, and the associated share price depreciation has a positive aspect as well as the inevitable negative aspect related to potential difficulties with liquidity provision” he said.

“The positive aspect for non-bank FX firms and their liquidity providers or prime brokerages is that the situation that many of Europe’s banks find themselves in could be of benefit due to the borderless nature of electronic trading firms and non-bank prime brokerages” continued Mr. Obludzyner.

“For example, liquidity aggregation could be done via banks abroad, esepcially with today’s low latency connections to Singapore, Hong Kong or North America, plus retail clients will maybe trade more FX now because they are concerned about region-specific bank stocks, whereas FX is non-region specific” – Mariano Obludzyner, CEO, LegacyFX.

Mushegh Tovmasyan, CEO of Divisa Capital explained to FinanceFeeds “Top banks collapsing is a bigger risk to brokers from a safety of funds perspective rather than those banks acting as FX liquidity providers as brokers need to hold their cash somewhere. It is a big concern for management and also a regulatory requirement to mitigate those risks.”

When asked whether non-bank FX liquidity providers and retail FX firms can perhaps benefit from the decline of the European banks stock values, because the non-bank FX sector is non-region specific and can take its liquidity from more buoyant institutions in other regions, plus attract retail traders wishing to trade FX instead of falling bank stock, Mr. Tovmasyan said.

“It is not quite that straight forward. Traders using FX firms to trade stocks essentially means that the FX firms are becoming multi asset online brokers. FX firms moving their liquidity is a bit of misconception. The pricing engines can be moved but the liquidity providers are largely the same, only change is the connectivity to their local engines. There are a number of local liquidity providers but the core of FX liquidity is still shared between the 5 main banks channeled in/out via various venues” – Mushegh Tovmasyan, CEO, Divisa Capital.

Mr. Tovmasyan continued to explain that “There are non bank marketmakers in FX which range from B book brokers to HFT funds, but this is not directly affected by the decline in stock prices of banks from risk a perspective. As a non bank aggregator we have seen some interesting trends such as banks being less aggressive than they were before. We have also seen the rise of the HFTs along with the quality of their pricing and execution and also we have seen client hold larger deposits with us as we seem safer than their own banks.”

Nauman Anees, CEO and CO-Founder at ThinkForex explained “Non Bank liquidity providers in one way shape or form trade their way up to prime brokers and in some cases the same trade will hit the same prime brokerage from multiple different counterparties.”

“The counterparties that have a prime brokerage line usually in some way have the same prime brokerage, for example several firms may use the same prime brokerage. Non Bank liquidity providers can fill a niche market if they can build and manage the right non bank liquidity pool with good regulation, infrastructure and pricing” continued Mr. Anees.

“I see a huge opportunity in 2016 for FX and CFD firms well capitalized to handle the volatiltiy this year as more there is money pouring out of equitiies and into FX, CFD and alternative assets . Retail Traders as with any trader love volatility as most trade on short term gains model . FX , CFD and Options present the idea opportunity for them on this”- Nauman Anees, CEO and Co-Founder, ThinkForex.

Mr. Anees further aded “Overall Banks have had a tough year last year and I don’t see their balance sheets getting better anytime soon so I believe as more bank stocks do take a downturn we will see further volatility in the finance sector in equities and a liquidity gap in some cases for banks that do not want to price certain asset classes anymore.”

“Retail focused FX firm with good infrastructure, technology teams, well regulated and capitalized have a massive opportunity to fill a niche gap in providing Institutional style liquidity to retail FX traders. ThinkForex has a dedicated ultra low latency cross connect from its Data Centers in NY4 , LD5 and soon to be launched Hong Kong. This allows us to deliver our pricing globally within a very short timeframe vs using a traditional internet connection” concluded Mr. Anees.

With HSBC having made their decision to stay in London this week and to cease its three-yearly review on where to locate its corporate headquarters, the confidence in London as a world financial center remains, however it is very clear that the global view is being taken, and FX firms must take this into account when looking at all aspects of their business, including how best to benefit from such market forces.

Photograph: Cabot Square, Canary Wharf, London E14. Home to the majority of the global interbank FX institutions.