Deutsche’s former FX head says the transformation is coming

The headline results of Euromoney's 2015 foreign exchange survey show the leading banks have been remarkably consistent, despite the upheavals in the sector. But, beneath the surface there are changes that will transform the competitive landscape of the industry. Deeper analysis of the survey results demonstrates that’s already starting to happen.

Kevin Rodgers was global head of foreign exchange at Deutsche Bank until June 2014. His book on the computerization of banking will be published by Penguin Random House in 2016.  By Kevin Rodgers
Former global head of foreign exchange at Deutsche Bank

FX-survey-logo-2015
Results index 

When I used to work in FX, I hated the Euromoney survey with all my heart. I wasn’t alone: I think that the spirits of all my colleagues and my rivals used to sink each year at the thought of having to ring up clients and pester them for votes.

That’s not to say that the survey wasn’t extraordinarily useful – it was and remains the best benchmark of market penetration and performance we have. It’s just that seeing the burning resentment in a normally placid salesman’s eyes when I reminded him – again – to call fund X or Y rather took the edge off things.

This year, though, is different. This year the staff at Euromoney did all the canvassing, making the process painless for banks and much less of a hassle for clients.

Overall FX Market Share 
OVERALL-FX-MARKET-SHARE-2015  
Source:  Euromoney FX Survey
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The first thing that strikes me is that, despite the changes to the survey process, the 2015 Euromoney FX survey is remarkably consistent with previous years. True, overall reported volume is lower, which is probably mainly a result of the change in methodology, but the top 10 banks in 2014 are still the top 10 banks in 2015, albeit with the cards slightly shuffled as if by a lazy croupier.

The top three of Citi, Deutsche Bank and Barclays remain unmoved, although in the places below the podium, JPMorgan and Bank of America Merrill Lynch rise while UBS and HSBC fall. RBS, once one of the mainstays of the top five, is on the verge of falling out of the top 10. And that top 10 looks an increasingly distant dream for the likes of Morgan Stanley and Credit Suisse, which would have been racing certainties for that position a few years ago.

 FX rank and market share –
 Non-financial corporations

 3-FX-rank-and-market-share-Non-financial-corporations-chart
 Source:  Euromoney FX Survey
 
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The same observation can be applied product by product and client sector by client sector. There are some risers and there are some fallers, but the shape of the market structure has not changed. The same banks dominate electronic trading and options. Ditto the corporate sector, although HSBC knocks Citi off top spot in a very close race. In real money, Citi edges Deutsche by a margin almost as tight as you’d get on a euro/dollar trade. It is safe to say that, at least seen from the vantage of market shares, and with eyes slightly squinted, the 2015 survey shows an evolution from that of 2014 but nothing much more dramatic.

I am sure there will be the normal heated inquests in banks’ FX departments about why they fell from fifth to sixth in one category or the other, but – and I realise I say this from the lofty, academic calm of retirement – they are wasting their energy this year. My advice? Wait until 2016 to have a proper scrap.

The one bank where the market-share movements in this survey do appear to be unquestionably part of a larger, longer-term pattern is RBS. Falling two places from eighth to 10th in overall share is a continuation of its steady fall from fourth in the 2009 survey. However, its retained hold on fifth in Corporates looks to be evidence of a strategic shift to its core customer base. No doubt this is a result of obeying the wishes of its owners, the UK government.

But what clues does this survey give us about the FX market in the future? The same long-term forces are at work on the market as always have been. First, there is the continuing impact of technology. It is instructive to look at the concentration of market share in various client and product categories in this light. The top five banks in electronic markets, a sector dominated by high-frequency trading clients, take nearly 60% of volume.

FX Survey: Real money
4 FX Survey Real money chart  
Source:   Euromoney FX Survey
View results from FX Survey 2015 

In real money and corporates though, concentration is much lower – the top five banks take 44% and 39% respectively. Even more striking, the electronic market share gap between the frontrunner (Deutsche) to the number five bank (JPMorgan) is around 10%; with corporates the equivalent spread is less than 3% (HSBC first, RBS fifth); and with real money (Citi to HSBC) it is less than 2%.

Why are the corporate and real money sectors much more closely contested? In part, this can be explained by the need to share business resulting from real money panel rules, and by the spread of lending to corporates.

A big part of the difference lies in technology. What do you need to be best at as a bank to satisfy an HFT fund through an electronic platform? In a word: price. The (pretty much) one-dimensional nature of this sector lends itself to a technological arms race – speed, connectivity – with its consequent winner-takes-all structure.

But real money and corporate clients are trickier to service; their needs are much more varied. Although the leading banks have thrown a great deal of money, time and effort at serving them electronically, none of them has landed the knock-out blow with a platform that dominates.