Foreign exchange: Business as usual for UBS in FX
Revamped pricing boosts turnover; profits from SNB intervention.
These are interesting times for UBS. But in its foreign exchange division, they are interesting for all the right reasons. Under the relatively new leadership of George Athanasopoulos and Chris Vogelgesang, UBS has laid the foundations for lifting the profitability of one of its strongest franchises – at a time when it is needed most to regain lost ground in the engine room of the FX market: electronic trading.
Although in the early part of the last decade UBS had set the standard for electronic trading, by the close of the decade, as volumes surged, the bank was floundering. Between 2008 and 2011 the bank’s market share slipped five percentage points, and UBS was this year overtaken by Barclays Capital as the second-biggest FX bank.
After a few false starts, UBS found the solution, and in October 2010 Chris Purves joined as global head of FX e-trading along with Mark Meredith as head of FX e-trading quantitative analytics and Parwinder Sekhon as head of FX algorithmic technology. The three were tasked with completely revamping UBS’s e-FX pricing, risk management and client trading offerings.
The new pricing was rolled out over May and June this year, both on its single-dealer platform UBS FX Trader Plus and via its APIs. Since then, according to Athanasopoulos and Vogelgesang, electronic trading volumes have tripled and yields (and thus profitability) have risen. They say their market position with some of the highest-volume clients in the electronic markets has gone from 10th to first.
"It’s been a big success story, the biggest turnaround here," says Vogelgesang. "A lot of that is due to the team we hired from Barclays."
That team of three has now grown to 18, as UBS has blended its trading and IT resources into an integrated force.
The new pricing is designed with more variables flowing into it, says Vogelgesang. Unlike other pricing engines in the market, which typically average various pricing sources from around the market to create a mid price, UBS also takes into account pricing in other markets, such as commodity and equity markets. It then backs out the correlations and builds it into an algorithmically calculated price. "The more information you put into your price, the better your price is, and that has clearly worked," Vogelgesang says.
"The fact that we’ve improved our electronic business doesn’t mean we want to de-emphasize the large-ticket business. Clients still have the requirement, now more than ever with the markets being challenged, to effect large-scale risk transfer"
The yield improvements have been achieved in three stages: by identifying predatory flow, which leads to loss-making trades, via new analytics; then introducing algorithmic pricing, which has generated a step-up in yields; and then, most recently, hedging flows algorithmically, so that UBS now hedges up to 70% of its flow.
That’s not to say that UBS is placing a complete emphasis on the machine. "The fact that we’ve improved our electronic business doesn’t mean we want to de-emphasise the large ticket business," says Athanasopoulos. "Clients still have the requirement, now more than ever with the markets being challenged, to effect large-scale risk transfer, and we want to retain that as it is one of our core strengths."
That was put to the test last month when the Swiss National Bank intervened in the currency markets to set a floor on the euro-Swiss franc cross rate at 1.20, a move that caught some in the market off guard. Given the extremity of the move, from about 1.12 to 1.2100, some banks switched off their trading platforms, and even stopped pricing the Swiss franc and its cross rates altogether. According to Athanasopoulos and Vogelgesang, UBS was one of the only banks making prices throughout the intervention.
"If you’re UBS, with the biggest Swiss franc book in the world, you can’t stop making markets just because there’s an intervention," says Vogelgesang. "The business model at UBS in FX is, and always has been, to provide liquidity in any market conditions. However, in the past it was often difficult to break even in difficult market conditions but now we have the ability to be profitable in all market conditions."
Although bid-offer spreads on EBS were trading as wide as 375 ticks during the intervention, UBS claims it was making bid-offer spreads of 50 to 60 ticks. Some banks were clearly hurt by the move but most of the losses were likely to have been taken in the option market. One-month volatilities collapsed from almost 30% to 5% after the event.
"One thing that became obvious to us, and we think we understand the Swiss market very well, is that once the SNB decided to do something they would be successful," says Athanasopoulos. "Thus there would be no upside in going against it."
With UBS possibly profiting handsomely from the intervention – a source inside UBS tells Euromoney it recorded its most profitable day ever, on that day – is there more pressure for the FX division to keep delivering?
"I don’t think we’re under pressure," says Athanasopoulos. "We have a plan, we’re executing the plan, we’re on track and that’s pretty much it. We’ve not seen any impact from clients, if anything we’ve seen expressions of support for our business. It’s business as usual."