World’s third largest FX dealer by volume lashes out at US investor’s plans to ‘break up the business’

As major banks begin to give way to non-bank market makers for FX order flow market share, two major shareholders at Barclays go to war about plans for its investment banking division, which is the side of the company that provides liquidity to FX firms

Barclays has long been one of the world’s largest Tier 1 interbank FX dealers, its global financial markets key-component, the BARX single-dealer platform having garnered a love-hate relationship among liquidity takers, largely due to the company’s overtly pro-last look stance which has been doggedly adhered to for several years.

Five years ago, in 2013, Barclays was most certainly an all-encompassing dominator of the Tier 1 electronic trading world. with 10.4% of all worldwide FX order flow being processed through the bank’s Canary Wharf operations.

Since then, things have changed dramatically, placing a non-bank market maker at the very top of the market share statistics, that being XTX Markets which now accounts for a massive 18.9% of all global FX order flow, whilst Barclays handles just 10.4% yet is still in third place.

The last two years have been tumultuous for the bank to say the least, and in terms of internal wranglings at the top, this week is no exception.

Edward Bramson, who is the CEO and principal at Sherborne & Company Incorporated, described as an “activist investor” and “corporate raider” in many boardrooms, is a 5.2% shareholder in Barclays, which stands him as the bank’s fourth largest shareholder.

Mr Bramson, who was born in London and emigrated to New York in 1975, admits that some people would describe him as “pond scum”, and in the summer of last year, Mr Bramson, who is an example of the aggressive activist investors that are buying stakes in UK companies with the aim of shaking things up and extracting returns was welcomed as a major shareholder but the greeting was no doubt made through gritted teeth as Mr Bramson’s record of dogged agitation suggested that Barclays senior management could be in for a hard time.

This trepidation has proven correct, as this morning, Barclays shareholder Richard Buxton, who invested 3% of his Merian UK Alpha Fund in Barlcays lashed out at Mr Bramson, accusing him of attempting to break up Barclays Investment Banking division, which is the section of the company which is responsible for Tier 1 FX dealing.

Mr Buxton firmly stated “We have a holding in Sherborne, so Bramson does communicate with us and has come in to see us, but we don’t agree with what he’s trying to do. The idea that this is the right moment to significantly downsize the investment bank is wrong. We also think it’s wrong that if you were to do so, you would magically release vast amounts of capital to shareholders.”

Mr Buxton also called for an overhaul of Barclays’ culture to ensure all staff act with integrity in the wake of a scandal which saw boss Jes Staley fined £642,000 for wrongly trying to unmask a whistleblower.

Perhaps with this level of corporate discourse, there is some merit in the use of non-bank market makers and therefore it is quite easy to see why XTX Markets has achieved such a massive penetration into Tier 1 FX market share.

It has always been, and will always be more measurable environment if Tier 1 banks continue to hold the majority of FX order flow, however with continual adherence to last look procedures in terms of execution which allow banks to pick and choose which trades to reject when their own liquidity takers cannot do that when passing aggregated liquidity to retail brokers, and continual lawsuits relating to benchmark rigging and insider trading, transparency is not something that some of the bank desks are known for these days.

Ergo, using a non-bank market maker such as Hotspot FX, now owned by BATS Global Markets, or XTX Markets or Citadel has become popular.

Today’s reluctance by Tier 1 banks to extend counterparty credit to the non-bank OTC derivatives sector is one of the factors that has resulted in XTX Markets now being in an astonishing second position globally for handling FX order flow at top level, between JPMorgan and UBS, a position usually reserved for banks, and the first time in history that a non-bank market maker has dominated the global FX dealing sector.

In 2018, Barclays’ market share is down to 4.19%, placing Barclays in 9th position globally as an actual entity (its FX market share still being third in the world), yet last summer’s announcement of second quarter earnings heralds enormous increases in overall revenues compared to the same period last year.

Pre-tax profits at Barclays for the first six months of 2018 fell from £2.3 billion to £1.6 billion after the bank paid out about £2 billion, including a £1.4 billion settlement with the US Justice Department.

Without the charges, Barclays experienced a pre-tax profits jump of 20% to £3.7 billion, with the UK arm seeing a 30% rise to £826 million, and total income for the period was flat at £10.9 billion.

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.

Perhaps a new era is upon us in terms of first tier liquidity for electronic markets.

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