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Best Global flow house: Deutsche Bank |
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Also nominated: Barclays Capital and HSBC |
The flow business – sales and trading in a broad range of asset classes including rates, credit, equities, commodities and foreign exchange – is now firmly established as one of the cornerstones of global markets franchises. It has become their bread and butter.
Defining its characteristics, though, can be a tricky exercise. Flow can mean different things in different market conditions. For instance in 2010, the inaugural year for this award, the financial markets were in the midst of normalizing – which generally meant rallying – thanks to some generous liquidity assistance from the world’s main central banks. However, the past 12 months have been quite different. Banks’ flow models have been tested by a series of mini crises, such as a southern European debt crisis, which has seeped into the banking system; political upheaval in the Middle East; and a natural disaster in Japan. Simply providing tight bid-offer spreads wasn’t the way to garner flow business or make revenues.
Deutsche Bank proved its mettle amid the re-emergence of market contagion by offering liquidity of a different sort as the European sovereign crisis tore its way around the periphery of the eurozone, while its now perennial leading FX platform stood up to the challenge when the dollar-yen rate collapsed to record lows in the wake of Japan’s earthquake and tsunami, when some of its closest rivals temporarily withdrew from market-making.
These events changed the dynamics of what flow meant to clients. Their requirements became less benign and based purely on price, and more about liquidity provision as an outlet to facilitate the disposal of stressed asset portfolios.
“In this new environment flows are no longer driven by the one-way yield hunger where you can buy market share simply by sacrificing bid-offer or extending balance sheet,” says Colin Fan, Deutsche Bank’s global head of credit and emerging markets.
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“In this new environment flows are no longer driven by the one-way yield hunger where you can buy market share simply by sacrificing bid-offer or extending balance sheet” |
Today’s markets are closer to fair value, with credit spreads neither cheap nor rich, which makes the fight for flow more difficult and riskier because the direction is more symmetrical, says Fan. Moreover, he adds: “You have a lot of black swans flying around, which can easily punish or destroy the unwary.” Mini crises, such as Greece, Egypt and Japan, play in Deutsche’s favour, claims Fan, because the bank has consistently been a preferred flow counterparty because of its strength and outperformance throughout past crises. Meanwhile, many rivals have stumbled badly since 2008 and are still rebuilding.
Indeed, many asset unwinds are still providing some overhang from the global financial crisis. For instance, Maiden Lane, an investment vehicle set up by the Federal Reserve to assume some of the assets of Bear Stearns and AIG, has weighed on credit flow markets. It used a popular new flow-execution method called BWICS, or Bids Wanted in Competition, which uses semi-public auctions with a handful of dealers to sell portfolios of debt. Deutsche proved to be a dominant market maker over the past 12 months.
“Where you benefit from being a flow house is in the ability to absorb large portfolios quickly and quietly,” says Fan. “Over the last 12 months we’ve seen a 50% increase in asset-backed and corporate securities, and over the next year, you’ll see another 50% increase.”
Consequently, flow and risk management were closely connected in all markets, because not all trades were winners. Michele Faissola, global head of rates and commodities, says that generally, out of every 10 trades, five are profitable, three would break even, and two probably lose money. “Providing markets in southern Europe has been very tough. Things blow up and suddenly there’s no bid, then you get some good news and the market rallies,” he says. “The only way to be a consistent flow provider is to be dynamic, relentlessly hedge your portfolio, and accept that you’re going to have some challenging days but in aggregate you’ll be fine.”
That was no more relevant than in FX markets in the wake of the Japanese earthquake last March. Some prominent FX market makers stopped pricing the yen for a period of hours on March 16 as the dollar collapsed against the yen in late New York trading. Deutsche continued to provide prices on the yen throughout the day, underlining the bank’s continued commitment to provide 24-hour liquidity, which has helped it maintain its top-rated position in the Euromoney FX survey for a seventh year, with a market share of 15.64%.
Market share of that scale is likely to be reached in rates markets eventually (currently Deutsche has a 13% share in US rates, according to Greenwich), says Faissola, as new central clearing regulations bring increased scale for banks that integrate flow from both OTC markets and exchanges. “Once you control the collateral of clients there is a really close partnership that becomes strategic,” he says. “Top houses in FX have a larger market share than in fixed income. I believe we’ll see massive consolidation in market share too. If you’re one of the top three flow houses with a 10% to 15% share, if you get through 15% you should be able to monetize it. Flow is about scale.”
