JPMorgan’s sacred FX cow on the move
Troy Rohrbaugh, JPMorgan’s global head of FX, believes he might be in a more advantageous position than some of his competitors.
That is because JPMorgan has embarked on an extensive upgrade programme that puts trading technology at the forefront of the bank’s strategy, and where it plans to continue to invest more in its future: e-commerce.
Spending on technology is a big issue facing the FX industry – as it is in other liquid over-the-counter asset classes – as budgets on new projects get trimmed, and some banks re-evaluate the cost-benefit of developing and maintaining their proprietary electronic pricing and distribution platforms.
It is an expensive business, which, like anything, demands a return on investment.
“In FX, I view this as our sacred cow,” Rohrbaugh says in a recent interview with EuromoneyFXNews. “We would cut everywhere else before we cut in e-commerce.”
With management’s backing – Jes Staley, the bank’s investment bank chief, argues that investment banks are effectively becoming technology companies – JPMorgan’s FX division is now part of a multi-layered technology strategy. The firm hopes this will deliver significant cost-savings via its strategic re-engineering programme, a superior range of FX algorithmic execution products and a product delivery that fits with the new age of e-commerce – mobility.
JPMorgan's iPad app
No longer will traders need to be tethered to their desktops. As far as JPMorgan is concerned, the future is in mobile trading, and it intends to be at the forefront of it.
For some, this is a bold statement. Opinions on whether mobile trading can gain acceptance in the institutional and corporate markets are still very much divided or, at worst, heavily skewed towards intractability. This is tangled up in issues about data security and the broad sweep of compliance. For JPMorgan, this is simply a case of misperception.
Its argument suggests that the lines between mobile trading and trading on secure desktops are becoming blurred as the iPad moves towards ubiquity. With many technology consumers now using iPads at their desks, and also on the move, it is just a matter of time before financial markets become comfortable with the same portable idea.
“I don’t think it’s a gimmick, anymore than buying airline tickets on your computer was 10 years ago,” says Rohrbaugh.
The championing of a new generation of electronic devices for use in markets is not necessarily new to JPMorgan. It was the first bank to introduce mobile technology for its desktop platform, Morgan Direct, and it was the first investment bank to offer order functionality to clients on BlackBerry, iPhone, Android and, most recently, the iPad.
Much of this is about market positioning: an ideal opportunity to gain new clients and then keep them, by differentiating themselves from the rest of the market – the majority of which still lag JPMorgan’s development.
“What’s going to get new clients interested in electronic trading with JPMorgan are functions like being able to leave orders and trade remotely,” says Rohrbaugh. “We invested early, we tested it with our own traders and we have been consistent with that investment ever since.”
At present, clients can enter, take profit, stop loss and market orders from their mobile devices, while other order types are amendable on mobiles, and their status is updated live. Execution, or order status, can be configured to be sent by email or by SMS to the customer. In addition, they can monitor them live on a mobile or desktop.
This year, JPMorgan intends to begin the roll out of other order types, including algorithmic strategies, as part of its continual development stream. Rohrbaugh says the firm has focused on its order flow as a way to enhance the end-user experience, by streamlining the myriad ways that the bank takes and receives orders to and from clients.
“We will continue to add order types and will develop our iPad app so it offers a user experience that is closer to what clients are used to on their desktops,” says Rohrbaugh. “The amount of orders that are left on a weekly basis is literally an exponential curve and we think that should keep growing.”
JPMorgan has some ground to make up with the big FX banks. Indeed, for all of its renown as the premier counterparty, and its resilience and provision of liquidity during the financial crisis, it seems, on the surface at least, to have underachieved in FX.
Between 2009 and 2011, it gained 1% in market share, while the two banks on either side of its current fifth spot, Citi and HSBC, gained 1.5 and 2 percentage points respectively.
JPM market share vs Citi and HSBC (2009-2011)
Source: Euromoney Market Data
That is partly due to a lack of investment in its FX e-commerce platform a decade ago, which saw Deutsche Bank, Barclays Capital, UBS and, more recently, Citi as the preferred single-dealer liquidity providers. In the case of HSBC, much of that can be put down to its global footprint.
Furthermore, if there was one common criticism from some high-volume clients about JPMorgan, then it is its “less-than-holistic” approach to product delivery, where segregated profit centres hindered the overall offering.
It is a perception JPMorgan refutes. It says the FX business operates as one integrated profit centre, where e-commerce and FX trading and sales are part of the same business. Its EMEA forwards business, however, sits within the rates division.
The bank also points to its partnerships with its emerging markets, prime brokerage and the global corporate bank – a partnership between the investment bank and treasury services – as fully integrated revenue-sharing businesses.
Algo strategy “second to none”
Rohrbaugh declines to provide volume or growth figures for 2011, but is upbeat about the performance of his division during the past 12 months, which he puts down to an increased intensity in the way the bank covers its clients, but, more pointedly, to the continued development of its algorithmic strategies platform.
“We’ve made continued progress and are a market leader on algos,” he says.
One client who spoke to EuromoneyFXNews says there are been a marked improvement in JPMorgan’s price provision during the past 18 months as it has grown its algorithmic strategies product.
A trader at a large London-based hedge fund describes it as being the “game changer” in terms of his firm’s trading relationship with JPMorgan. He says it offers a broad range of algorithms, which have moved away from the first generation TWAP and VWAP algos towards more agency-based models.
As the hedge fund manager puts it, JPMorgan’s ability to get volume traded in the market, reasonably quickly, with a light footprint is “second to none”.
He also notes that the bank’s ”end-to-end” service is very good as well, which he argues is patchy among other banks – they might offer excellent spot execution but then charge uncompetitive forward rates when they go to “split and roll”.
A closer surveillance of Euromoney Market Data shows JPMorgan’s key strength is with real-money clients, where it ranks third globally, while in most other client categories it sits mid table among the top 10 banks.
In non-financial corporates, its Chase franchise in the US has given it third position behind Citi and Bank of America Merrill Lynch, while outside the US it sits in eighth spot.
Thus, the establishment of JPMorgan’s Global Corporate Bank (GCB) in 2009 is about trying to rectify that imbalance. It now forms the forefront of the bank’s international expansion, which is focused on more than 3,500 organizations in more than 60 countries, aimed at providing local markets coverage to its clients around the world.
“The global corporate bank has been one of our main focuses over the last year in particular,” says Rohrbaugh. FX revenues with the bank’s corporate clients grew 28% within the past 12 months.
Between 2009 and 2011, the firm has increased the number of bankers in the group from 100 to 260, and plans to increase that further to 300. It says there has been about a 40% increase in incremental corporate client revenues related to these new clients, new products or new countries.
This development has direct consequences for the bank’s emerging markets business too. After all, many of these bankers are based in emerging local markets.
“The GCB is not a G10 build out, it’s emerging markets,” says Rohrbaugh.
JPMorgan operates a partnership between its emerging markets and FX franchises, which, Rohrbaugh emphasizes, are as integrated as they could be. Its e-commerce functions and systems are totally interwined.
“The world is evolving so quickly,” he says. “There used to be EM FX clients and G10 FX clients, now they’re just FX clients.”
Emerging market non-financial corporates FX volume (Euromoney 2011)
Source: Euromoney Market Data
That uniformity is the common thread that runs through the bank’s sacred cow: technology. This and the building of GCB represent the bank’s two key strategic initiatives.
Staley’s now well-documented dashboard chart, which hangs on his Manhattan office wall, maps the progress of the bank’s strategic re-engineering programme, due for completion in 2013. By the time it is finished, the bank hopes it will have decommissioned the majority of its legacy internal computer systems, which will save it $300 million a year and deliver $1.3 billion in business benefits.
This, as Rohrbaugh sees it, means more can be spent on further developing technology that serves the changing demands and trends of FX consumers.
“The strategic re-engineering programme, and our investment in infrastructure to create lower long-term costs on our internal platform, will be a huge competitive advantage,” he concludes.