By Kevin Rodgers
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If you like sudden plot twists, you’ll love this year’s Euromoney poll, but if you’re a fan of the continued, slow progression of long-term trends, there’s lots for you, too.
First off, let’s look at the plot twist.
It’s a common (and ancient) fictional trope to see a hero, seemingly out for the count, come back from death – or the brink of it. Game of Thrones’ Jon Snow anyone? In case I sound biased for mentioning heroes in the context of an FX poll, it’s also pretty common for the monster in horror films to lurch back to life as well. You can choose between Jon and Friday the 13th’s Jason.
This year’s poll hero-slash-monster is Deutsche Bank. After many years at number one, the bank had gradually slipped, poll after poll, from second to fifth to eighth last year.
But this year, Deutsche’s FX business is back at number two, confirming the faith the bank’s beleaguered senior management has expressed in it as an area of core strength.
Admittedly, its share was not enough to unseat JPMorgan, which, for the second year running has won the survey, but the gap from JPM to runner up is now only 1.4%.
Similarly, but less spectacularly, Deutsche’s old adversary, Citi, has also improved its ranking from fifth to third, shunting electronic market maker XTX down one place to fourth.
The seemingly perennially competitive UBS has slipped to fifth place, down from second last year. Bank of America Merrill Lynch has fallen even further: from fourth to ninth. On the other hand, racing past Bank of America in the other direction comes State Street at number six – the bank’s highest ever finish.
Barclays, though, a dominant player 10 years ago, still languishes outside the top 10 at 12th. No startling resurrection for them this year.
All this positional churning at the top of the overall leader board is also visible in some of the sub-category results.
For example, JPMorgan was unseated from its position as the number one bank in the important western Europe market by Deutsche, although it managed to hold onto a number one or two spot in other regional markets.
Citi made it to number one in swaps – a big volume category despite the rule change in last year’s poll (continued this year) of disregarding sub-one-week volume.
So, what lies behind these lurches, twists and churns? It’s my belief that they are a natural consequence of an important, multi-year trend in the market. Let me explain.
The first thing to state is that the amount of volume a liquidity provider transacts (the measure by which success in this poll is achieved) is, at least to an extent, under its own control by virtue of its pricing decisions. Second, the amount of volume is only very weakly related to profitability. A large chunk of volume in the FX market is transacted at super slim – or sometimes even slightly negative – margins.
Thus, in terms of profit maximization, whether a provider finishes second or fifth (say) in Euromoney is not hugely important. Rather, its placing matters because of the soft advantages that it brings: extra information; bragging rights when hiring people; and marketing kudos (usually in the last, tree-destroying pages of any fat pitch book that sets out ‘awards and credentials’).
But a liquidity providers’ desire to nudge volumes to gain market share to add lustre to its pitch books would only work if that nudge made a meaningful difference to position. It is clear that in recent Euromoney FX surveys it can and does just that.
For instance: State Street’s rise from 10 to six this year is on the back of an extra 1.13% market share; Goldman Sachs’ fall from seven to 10 results from a decline of 1.03% share. Small changes lead to big positional jumps.
Why? It’s the result of a long-term trend in the FX market that this survey’s results are a continuation of: the levelling out of market shares after a long period of growing concentration, which peaked in 2009.
How dramatic this effect has been recently can be illustrated in a couple of ways. First, the combined market share of the top five liquidity providers in 2009 was 61.5%; the same figure for 2019 is 40%.
The ratio of the market share of the number one bank in 2009 to the number 10 bank was 9.27:1; this year the ratio is a mere 2.18:1.
Historically speaking, we are back to the kind of market concentration figures last seen at the start of this century. What explains this pattern?
The run up in concentration from 1999 to 2009 is simple to rationalize: market share fell increasingly into the hands of those banks that had a technological edge in e-trading.
These banks (Deutsche, UBS, Barclays) were European, and their growing dominance was coincidently enhanced in 2008 and 2009 when the market took fright at extending credit to American firms.
But why has the peak in concentration crumbled in recent years?
In part, it’s because the ‘say-no-to-US-banks’ credit effect unwound: that’s why two of the top three banks are now American, compared with none 10 years ago.
As for technology, the position is more complex. Certainly, tech confers an advantage but – and here I am speculating – perhaps we are reaching an asymptote in the absolute advantage it can bring?
As knowledge of how to create e-trading systems and risk systems becomes more widespread, is it possible that when liquidity providers win these days, they win on points, not with a knock out? Is the benefit of incumbency offset by the problems of running legacy systems? Does the current low-volatility environment allow customers more leisure to split and smear orders (unlike in the chaotic and highly concentrated crisis years)?
Whatever the reason, we are clearly not in a market where technological advantage leads inexorably to complete dominance.
But what advancing technology certainly has brought to the fore in recent years is a different type of competitor. This is one of the other main long-term trends illustrated in this year’s poll: the rise (and rise and rise) of the specialist e-firms.
XTX – despite its slip of one place in the overall table – does very impressively once again. It scores a win in spot and forwards (the first ever for a non-bank provider in the category); a win on FX platforms; a win – again – in emerging markets. All of this at the same time as getting stellar CSAT feedback.
And it isn’t just XTX. Market making firm HCTech once again won the Americas regional category and made it to seventh overall. It is breathing down the neck of XTX in the FX trading platforms category, too. Then there’s Jump at 11 (now ahead of the once number two, Barclays) and Citadel Securities at 13 in the overall rankings.
All told, XTX, HCTech, Jump and Citadel Securities now have over 20% market share between them, despite only competing in spot and forwards. Last year they had 14%. A couple of years prior to that? Pretty much zero. Their march seems relentless, especially in the Americas, where they take three of the top four slots.
That said, there are parts of the FX market where they do not yet compete. Here the survey results exhibit far fewer unpredictable plot twists.
In options, JPMorgan takes the crown, followed by Citi and Deutsche. In the non-financial corporation category, traditional corporate specialist HSBC is the convincing winner again.
Corporates are not usually wowed simply by price and – while no FX customer is as loyal as a Jack Russell – can be more easily locked in with difficult-to-replicate ancillary services and credit.
In real money, State Street dominates with a blistering 18.4% share (although a surge by rivals Bank of New York from 24 last year to four this year might be a very good antidote to undue complacency). And in provision to banks, the top five (headed by JPMorgan) is virtually unchanged year on year.
In summary, this year has seen a poll with a number of eyebrow-raising surprises. But, underneath the surface, some long-term structural trends remain in place: indeed, the trend of diminished market-share concentration is actually making it more likely to see surprises on the leader board.
We shall see how it all plays out in the course of another absorbing year in FX.
Until then, good luck.
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Kevin Rodgers is the former head of global foreign exchange at Deutsche Bank. His book, ‘Why aren’t they shouting? A banker’s tale of change, computers and personal crisis’, was published in 2016.
