According to figures from the Bank of England released on Monday, daily FX turnover averaged $2 trillion in the UK during April, down 2% on October 2011, and 5% on the same month last year. On the same day, the Federal Reserve Bank of New York released data that showed that US volumes had fallen by 12%. In both cases, the numbers are being held up by swap volumes, while spot has come under some pressure. In the UK, spot volumes were down 12%, and in the US they fell by twice that. This raises the question: are the lower volumes being distributed evenly across the market? The answer is no, according to Deutsche Bank, the leading FX bank by volume for the past eight years.
The German bank says that it has recorded four straight quarters of record volumes, and over the first half of the year its overall volumes are 25% higher than in the same period last year. Breaking volumes down by product, they say that spot is lagging the overall growth rate, while swaps and options are exceeding it.
| “What is really exciting is the long-term strategic work we are doing create a brand new engine, work which is starting to bear fruit right now.” Kevin Rodgers |
UBS, too, says first-half volumes are outperforming the central bank data, although it declined to say what percentage growth it had recorded compared with the same period last year. The Swiss bank says it is benefiting from the introduction of its new algorithmic pricing, which went live in the third quarter last year. This, UBS says, has gained significant traction in spot. Swap volumes are flat, it adds. According to Zar Amrolia, Deutsche’s global head of FX and head of markets electronic trading, the bank is gaining market share from rivals driven by a surge in volume from banks, pension funds and corporates. He says trading volumes with banks and pension funds are “north of 50% higher” in the first half. Real-money and hedge fund volumes are still growing, but to a lesser extent, he says.
What is behind this apparent outperformance? There are a confluence of reasons, but credit rating is certainly a key factor driving it, says Amrolia. Deutsche Bank and HSBC are the two highest-rated banks among the key FX players, both rated A+ by Standard & Poor’s, a notch above Citi, UBS, Barclays and JPMorgan, which make up the top-six FX banks in the Euromoney survey.
“If you ask clients the question of how important credit rating is, your counterparty rating is, they would say it’s is a top-five factor,” says Amrolia. “Of course clients will always say the number-one factor is price, but credit rating will always be one of the determining factors.”
Nonetheless, Deutsche is very keen to point to other factors that it sees as driving the bank's outperformance of the official central bank figures (although not a like-for-like comparison). Kevin Rodgers, the bank’s global head of trading, says it’s also the result of several key initiatives by the bank in recent years.
He points to the growth in its DBSelect platform and the addition of an overlay product, as well as the integra project, which has involved the global markets division forming a close alliance with the global transactional banking (GTB) group, which is now run by a former head of FX at Deutsche, Jim Turley.
“That’s having a big impact on the way we are penetrating a lot of our client base, which previously we were not,” says Rodgers.
Deutsche is also forecasting a further acceleration in its volume growth rate in the second half, as the new Autobahn platform and API get fully rolled out to its client base.
It officially launched its next generation Autobahn, ABFX2, which has already been live for a portion of its key FX clients for several months. With its more modular approach, using the concept of an App store, it enables clients to custom build trading and workflow functionality to fit their individual requirements. Deutsche is also working on a corporate Autobahn solution called Autobahn Corporate Treasury.
Corporates are a key target for Deutsche; at present they are the weakest part of its client portfolio. Amrolia says volumes are up more than 20% in the first half, and he intends to build on that as the bank rolls out its corporate treasury product beyond Germany.
“There are already several hundred users on it, which has the whole concept of cashflow forecasting, inter-company netting, etc, built into it,” he says. “We are making the new release and we’ll integrate it to the overall global release.”
These latest platform developments are what Rodgers calls the “shop window”. But considerable development has been going on behind the scenes in terms of Autobahn’s engine room, some of which Deutsche is still keeping very much under wraps, such as the details of its new API.
But according to Rogers, enhancements to the way the bank manages risk and manufactures liquidity have brought incremental improvements to the existing trading technology.
“The results we’ve seen in the last four quarters are due to improvements in our existing technology base. We’ve fine-tuned and squeezed tons of extra performance out of what we already have in place: projects on hardware, communications, co-location and the like,” he says. “But what is really exciting is the long-term strategic work we are doing to create a brand new engine, work which is starting to bear fruit right now.”