Market making: Winners and losers in the FX spread war
Spot FX prices are so tight that it is almost impossible to make a profit from market making. Some providers are going to struggle to remain profitable, which might not be a bad thing.
The move by Barclays Capital to introduce what it termed “precision pricing” on its eFX platform last April might prove the initial catalyst that will lead to many smaller players being squeezed out of the market. On the other hand, it might prove little more than a slick piece of marketing that will ultimately have little impact.
Ostensibly, Barclays’ decision to quote less than a tick in, by FX standards, small amounts for various currencies, has almost completely eroded the bid-offer spread. As spot FX market makers do not typically charge commission to their clients for prices, it seems that the only way to continue making money is either to have traders with the ability to warehouse and manage risk efficiently, or to have a smart engine doing the quoting.
This is a point Jason Henderson, global head of FX derivatives and precious metals at RBC Capital Markets, highlights: “I think the interesting thing is not the spread. It’s long been noticed that there’s no spread in standard amounts – the users of the market are getting very cheap execution. You need to find other ways of making money when execution fees are so low.”