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Survival of the richest: It once seemed the obvious solution for the industry was to pool liquidity on to a single venue – until recently I would have bet that this was an inevitable outcome.
YoursMineShag: “Sometimes you have to look back to go forward...”
Freebie of the week: What a strange piece of marketing, so old fashioned that the staff on the stand had to explain what it was.
Puth leaves JPM: David Puth’s sudden departure from JPMorgan this week not surprisingly got tongues wagging in the market.
JDFX: More sinned against than sinning: It seems the company’s only real mistake has been naivety.
Off to a winning start: We destroyed the opposition, even though Colin had just got back from a jolly in China and was severely jet-lagged and I was, I confess, a little drunk. |
Survival of the richest
It baffles me how many banks can afford to maintain their proprietary trading portals. Having reported over the years on the costs incurred by regulated exchanges and the independent software vendors (ISV) in other markets, such as futures, I simply cannot believe it is economically viable for many participants in the FX market to continuously shell out to keep their trading platforms up-to-date.
I was recently at an equity-oriented conference organised by one ISV, GL Trade, where Anne Ambrose, worldwide director financial services industry vertical at HP, claimed that she knew of a client who had spent over $2 billion to shave just two milliseconds of latency off its network.
After the conference, I checked with Anne that I hadn’t misheard the figure. She confirmed I had not. This is surely lunacy – an almost mutual assured destruction strategy for FX, if you like. It once seemed the obvious solution for the industry was to pool liquidity on to a single venue – until recently I would have bet that this was an inevitable outcome.
However, as our diagram from October 20 explaining the market’s structure was meant to show (A picture paints a thousand words), many now believe there is no need for this to happen because technology does it virtually. The market will probably keep a few major liquidity sources at its hub, such as EBS, Reuters and the CME, with numerous alternative platforms spinning around them as satellites.
Latency has been a major issue in FX over the last 18 months or so. I hear that now most of the major banks have devised a way to trace and identify who is taking advantage and that they are swift to boot any perceived miscreants off their platforms. It sound crude, but if they consistently find they lose on trades, they end the relationship. Things appear to be on a relatively even kilter for the moment, but they are bound to change.
I was chatting to Jeff Feig, global head of Citigroup, about some industry issues. Jeff pointed out that if banks don’t continue to invest in trading technology, they run the risk of falling behind. “We’re in a technology arms race. Everyone else gets better and then we have to spend more. For the last two to three years, we’ve been investing heavily after a period where we clearly didn’t invest enough,” he says. So, if even the likes of the mighty Citi can temporarily become also-rans in the market, what chance do smaller banks with far lower IT budgets have.
It seems the bigger players are hoping that many of their smaller rivals will give up and fall into their arms in return for a white-labelled solution. For the moment, smaller players fortunate to have a decent FX franchise look for alternatives. I know of one bank, which was actually one of the first with an e-commerce platform, that has latency on its platform of several seconds. This is not seen as a major concern, because its client base isn’t the sort looking to nickel and dime them. Whether or not this will last, remains to be seen.
YoursMineShag
Wearing a slightly different hat, I sent out a press release last week that offered a solution to the FX technology arms race with the launch, “of a completely new FX trading platform to meet the needs for all participants in the huge global foreign exchange (FX) market. The platform, www.yoursmineshag.com, will provide a completely transparent trading arena for everyone who wants to manage their FX exposure, or trade and speculate in the currency markets.”
The release went on to say: “YoursMineShag has been launched by Ron Smith-Galer, who has over 35 years of experience in the FX market.” It added: “Perhaps the platform’s greatest innovation is the way in which it tackles latency.” Apparently, YoursMineShag has a speed throttle to make sure that transaction and messaging times are the same for everyone, as well as a button called “WhatAreYouForMeShag”. It quoted Ron as saying: “Sometimes you have to look back to go forward... We will have sophisticated monitoring, and anyone suspected of latency arbitraging will be obliged to quote whoever they have picked off a price back in what is considered the normal amount. This will be a legal obligation.”
The reaction to the press release was very interesting. Several journalists called me, claiming that the word shag made it an obvious spoof; some even suggested that Ron Smith-Galer did not exist, perhaps on the basis that his brief CV stated that he had moved into FX in 1969 after an initial career on the Ford production line at Dagenham, Essex.
Those that checked with market contacts found that the platform did have obvious appeal, mainly because of its use of ‘shag’ – a common term of endearment in FX circles – and for the common sense of its functionality. As for industry participants, the chief executive of one major trading venue sent me an e-mail offering Ron a job, which Ron turned down, saying that he’s got enough to do with the plumbing business he set up when he retired from FX. Many of my dealing pals said it all made sense; a few even complained they couldn’t access the site and asked for permission to do so.
