Foreign exchange
If there’s one business that has always been noticeable by its absence from Bank of America’s ambitious push into investment banking, it’s foreign exchange. It is certainly no newcomer, but it has never figured much outside of its traditional US corporate client base and, to an extent, the Asian business it inherited through one of its early acquisitions, Security Pacific.
Its relative insignificance – it rarely finishes in the top 10 of Euromoney’s annual foreign exchange survey – might have pleased competitors but it’s no longer an acceptable state of affairs inside the bank.
After years of benign neglect while the bank concentrated on building a bonds and equities franchise, its executives decided earlier this year to expand its FX operations. In charge since March has been Christiane Mandell, who until then was head of institutional sales, as well as head of e-commerce for a time. Since she started, she says, the bank has added more than 70 new institutional clients, and intends to increase this further in the coming months. “The bank wasn’t sure about the growth potential of this business for a while,” she says. “It seemed like it might become commoditized when the euro was introduced. Only in the last two years was it clear that it is increasingly important to the bottom line and that market share counts.”
That might initially seem to be nothing more than an excuse, but several others have pondered the same question, and just four years ago UBS embarked on a strategic review of the business to decide whether it was viable, in which case it would invest heavily, or not, in which case it would get out. It stayed, invested, and for the past two years has come top of Euromoney’s survey.
UBS set off from a much better starting position than Bank of America is now at, at least in terms of market share. Much of UBS’s success since has come from identifying new clients – such as non-market-making banks – and pursuing them more aggressively than rivals. But it can also be attributed to its early investment in technology which, though expensive to develop, helped greatly in garnering market share.
Late to the game
Bank of America was very late to the FX technology game. In some senses that has saved it money, as banks wasted a lot on single-dealer offerings and multi-dealer platforms in the late 1990s and into 2001.
But it also means Bank of America has a lot of catching up to do: it hadn’t built much, and has taken little, if any, part in developing the multi-bank and independent trading platforms that have sprung up in the past four years. As a consequence, it has been hiring. When Mandell took over in March it had just 10 technology people in FX. There are now 80, and there could be as many as 150 by the middle of next year. “We’re building up that side of things very quickly,” says Mandell. “Those who understand the role of technology in this marketplace are the ones who succeed.”
She has also hired some of the top FX e-commerce people, especially Scott Freeman, whom she lured away from Citigroup to become head of electronic trading services. “My brief is to help Chris grow the electronic trading and distribution side, more specifically to build, maintain and sell a suite of trading applications to institutional forex players,” she says.
“We’re not one of the banks that misspent on technology, and as a result are not saddled with old e-trading systems,” she says. “Our goal is not to offer simply what everyone else does, but to build better execution systems to increase service and increase the number of clients we have. That said, we know we have to be able to offer top-notch spot, forwards and options trading online as well as online settlement.”
Mandell’s main target for expansion is no surprise: the institutional investor base, including hedge funds, which has become a much larger player in recent years. Bank of America has a long way to go, ranking fifteenth with institutional investors and thirteenth with hedge funds in Euromoney’s most recent survey in May. In part, Mandell is looking to other groups in the investment bank to source new clients. “We grew an investment bank organically here in credit products, securitization and CDOs,” she says. “Clients using us there might be new to our foreign exchange product, but they know the bank.” And she’s making a hard pitch on what strengths the FX team does have: “We know what we do is good, be that market-making, research, or local markets knowledge from the banks bought to make up what is now Bank of America.”
Mandell does not plan to hire as many people in sales and trading as she has in technology. “I don’t need to hire that many, although we’re always looking for good people.” In some cases it’s more about restructuring the way BofA does business, as head of FX research Bob Sinche, who joined from Citigroup this year, explains: “The research product was quite strong when I arrived, but we needed to be better at communicating what we do to our clients. They’re inundated with information, so we needed to make sure they could get, find and digest our research views quickly. To that end, we had a number of disparate research products which we have since consolidated.”
The real driver of growth, though, is technology. “We’ve been doing a lot of development in high-frequency trading and applying that to electronic trading,” says Mandell. She calls it systematic trading, compares it to equities programme trading, and for now is staying coy about the details.
No predictions
She’s also not making predictions of where the bank will rank next year, but does say that “we want to be very important very quickly. Our strategy is starting to take hold, we’re stronger this year with clients than last year, but there’s a long way to go yet.”
Competitors have yet to notice it. An FX professional at one of the top five banks says: “If I look at our interbank counterparty risk figures as a proxy for how big they are, it’s not much. They’re just 8% of our biggest counterparty, and only 20% of some of the other larger players. It’s very hard to take this market by stealth.”
