Cantor Fitzgerald’s announcement in late 2004 that it was going to spin off and then significantly expand its voice broking operations caused some surprise in the market. The new venture, called BGC Partners in honour of Bernie Cantor, founder of the company that still bears his name, made it clear that it intended to expand significantly and that voice broking would play a major role in its operations.
This in itself was easily explained. Despite continuing reports of their demise, human brokers have yet to be replaced fully by computers in many markets. There is a straightforward reason for this. Voice brokers continue to play a huge role in the price discovery mechanism, particularly in more complex products, such as exotic interest rate and currency options.
BGC has been true to its word. It has trebled its workforce since its launch in October 2004, and along the way has taken over rivals Euro Brokers and, more recently, ETC Pollak, a French inter-dealer broker based in Paris. At the time of the second acquisition, announced on October 3, BGC said: “Further expansion in Europe, particularly in Germany and Luxembourg, as well as in Asia and certain emerging markets, is being actively considered.”
BGC’s argument has been that it will offer superior service by combining modern electronic trading using technology from eSpeed, another Cantor offshoot, with an experienced voice broking operation.
However, spot FX is a simple and highly commoditized business. It has frequently been said that those voice brokers still in employment in this sector of the market are surviving off the crumbs from rich men’s tables – with the rich men being Reuters and EBS, the market’s predominant electronic brokers.
So BGC’s spot FX strategy perplexed many market participants and industry commentators. It was undoubtedly seen as highly anachronistic, a view reinforced when it started to hire several industry veterans who were at their peak some time before the advent of electronic broking in 1993.
According to a report published in February by Celent Communications on eSpeed, that system “differs from the other forex trading platforms because it is affiliated with a forex inter-dealer broker business, BGC (the business once known as the Cantor Fitzgerald voice brokerage). The electronic and voice broker business engage in joint marketing efforts and serve to complement each other, according to eSpeed. If eSpeed customers want to trade in sizes larger than what is available on the platform, they are encouraged to call BGC brokers. While the brokers have access to the eSpeed platform, they do not put orders into it.”
If Celent’s interpretation is correct, and BGC will not confirm or deny that it is, it is difficult to see how BGC envisaged managing the risk its brokers would assume from quoting in amounts that were larger than those available on eSpeed. According to Celent’s report, eSpeed’s average trade is around $8 million, which is at least twice the size of deals transacted on EBS.
Therefore, the fact that BGC has seemingly shut down the spot FX operation – despite the company’s reticence, sources insist that BGC’s London and Singapore operations have been closed – comes as no major surprise. Nonetheless, the market seems shocked that BGC gave it so little time to prove whether it was a viable proposition or not.
Apparently, BGC recently lost either all or part of the support of its two major liquidity providers. Neither of these will confirm that it has stopped supplying prices to BGC. But market sources say that one of them in particular had become disgruntled that when it did trade with BGC it was unable to decipher who the end-user was.
Although its use of voice brokers appeared to be a throwback to a bygone era, in other ways BGC looked to be ahead of its time. The company acted as the counterparty to all trades, acting effectively as a quasi-exchange. There is a continuing debate in FX on the likelihood of the market migrating to an exchange-traded model, which is something that the large sell-side liquidity providers seems to be trying to delay. They may want to see the order flow from exchanges and electronic communication networks, but increasingly they are analysing whether they are supplying liquidity too cheaply. Credit still plays a big role in maintaining the sell-side FX institutions’ control of pricing. And it might be possible that BGC was seen as threatening that with its anonymous trading platform.
Also, if Celent’s appraisal of its business is accurate, BGC was also providing a block-trading-type facility for FX. Given the moaning about a lack of liquidity at specific prices in the market, this is something that should probably have been welcomed. Why it was not remains a mystery for the time being.
BGC’s complete unwillingness to comment on whether or not it has closed its spot FX business is inevitably fuelling rumours about the overall health of the company. The only statement emerging from the BGC/eSpeed/Cantor Fitzgerald triumvirate is the following comment made by eSpeed president, Kevin Foley.
“The electronic spot FX market is an enormous opportunity for eSpeed’s platform. eSpeed is committed to the fully electronic spot FX market and continues to invest in its people, its technology and its infrastructure. Our global network, which connects banks and traders throughout the world, provides a major advantage to the electronic spot FX trading community as it delivers enormous capacity and sub-100 millisecond response times,” said Foley in a written response.
At the start of November, Foley gave more hints that, while eSpeed’s spot FX business might not be going as well as anticipated, the company remains committed to it. “Turning to new products, fully electronic notional volumes for new products was $376 billion in the third quarter of 2005 compared with $506 billion in the second quarter of 2005, a decrease of approximately 25%,” said Foley in an analyst call.
“Despite this disappointment, eSpeed remains committed to new products like FX, repos and futures and will continue to develop and foster these products going forward. We continued to invest in our FX platform over the third quarter, including the introduction of new technology features and additional market participants. However, our results have not improved... In short, we are not satisfied with our results to date and we are making significant adjustments to our business model.”
It would appear that one of those adjustments included closing down sister company BGC’s spot broking service.