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It’s tough when you’re not at the top

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By:
Lee Oliver
Published on:

Since I’ve been writing about FX for Euromoney, I have apparently managed to upset one or two players in the market.

My agenda is clear: to write positively about FX, both as a market and as an asset. The vast majority of what goes on in the market deserves praise. But a market this size, and growing this quickly, is bound to be full of inconsistencies and odd practices.

Most FX players understand this; they accept a little bit of rough goes with a lot more smooth.

This week, word reaches me that some people at Merrill Lynch think I may have been a bit unkind in the way I reported Harry Culham’s appointment as its latest global head of FX in the October edition of the magazine. “Merrill has an almost unbelievable record in the number of global heads it has hired and fired over the last decade. However, the fact that Culham is rejoining Merrill, where until early 2002 he was head of FX trading EMEA before leaving for AIG, should ensure he is under no illusions about the risks his new job entails,” I wrote. I’ve had quite a lot of feedback and, generally, the word is that Culham is a good manager who knows his stuff. Maybe Merrill is finally going to get it right in FX, if it is accepted that so far it has got it wrong.

I also suggested last month that Merrill would be the odds-on favourite for our understatement of the year award if anyone ever said: “Merrill has to pay up for its FX staff, as newcomers know they won’t be there for the long term.”

My mum always told me not to be flippant; perhaps I should have listened to her. What I didn’t write was that I was worried I’d been left short and caught after getting paid 4.5 for £100 when asked to make a price on how many global heads Merrill has had over the last decade. Merrill won’t tell me the real price, but after having a quick sniff around, it was pretty easy to come up with a list of seven names, including Culham. They are as follows, with the most recent head first:

  1. Harry Culham    *More Harry Culham coverage on the weeklyFiX
  2. Harry Lengsfeld
  3. Steve Kemp
  4. Michael DeSa
  5. John Wareham
  6. John Key
  7. Keith Jacobsen

David Gu may also have, if only temporarily, technically held the role. So it looks like I’m out at least £250.00, but possibly £350.00. For a humble hack, as I now am, this is not an inconsiderable amount of money. But I shouldn’t grumble. I showed a cheap offer and I got paid.

Anyway, a well-placed senior mucker in the market casually mentioned to me that Lehman may have had almost as many big cheeses over the same period as Merrill. Funnily enough, Lehman, along with most of the other top banks I put the same question to, was a bit reluctant to answer a straight-forward query. It’s not like I asked any of them whether it was true that their e-commerce platforms were rubbish, suffered massive latency and when they did deal, their back offices fell over under the weight of ticket processing – but more of that in future columns.

Lehman has had at least six global heads over the past decade. To be fair, the changes seem like a shuffling of the chairs within the bank, and now it has decided to bring in some fresh ideas with Richard Gladwin. This is a different approach to Merrill’s: shipping in a complete new team every couple of years or less. Here are the names:

  1. Richard Gladwin
  2. Kaushik Amin
  3. Grant Whiteside
  4. Ivan Ritossa
  5. Mark DeGennaro
  6. Alan Marantz

It’s an old quip that even though investment banks are paid to give advice on how to run businesses, they frequently have no idea about how to run their own. At first glance, it is hard not to think this is an accurate appraisal of Merrill’s FX operation.

To test this theory, I decided to take a look at whether or not there was any correlation between the number of global heads banks get through and their performance in the Euromoney FX poll. The banks chosen to represent stability were Citi, Deutsche and UBS. Lehman was somewhere in between and Merrill represented chop and change.

Citi has been incredibly consistent and has not been out of the top three for a decade. Of course, this may be just because of its sheer size and have little to do with the fact that it has had very little management change over that period. Some may feel it has such a great franchise, it could almost run itself, but I don’t actually buy that one. Deutsche’s performance has also been stellar, while UBS and its predecessors were erratic before the new millennium; but as everyone knows, it has been one of the trailblazers in FX ever since. All three have had management stability. When they make changes, they generally come from within.

Compare that with Merrill, whose performance in the poll over the past 10 years makes John Prescott’s syntax look consistent. It was a lowly 24th in 1996 and then shot up to third the next year. Back to 24th in 2002, the bank then managed to climb into the top 10 with a slightly surprising sixth place in 2005, before slipping down to 10th this year (see table).

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

Deutsche

1

1

2

3

3

2

1

2

2

4*

9*

UBS

2

2

1

1

2

7

6

4

7

6*

10

Citi

3

3

3

2

1

1

2

1

1

1

1

Lehman

13

12

14

18

23

28

n/a

n/a

n/a

n/a

n/a

Merrill

10

6

10

11

24

19

7

10

8

3

23

Deutsche, Citi and UBS: Consistent management, consistent placing in the Euromoney poll.

Lehman: Steady improvement.

Merrill: Inconsistent management, inconsistent poll placing.

*Results do not include Bankers for Deutsche, and the combined Swiss Bank /UBS

Lehman has been far steadier, climbing up from 28th slot in 2001 to a high of 12th in 2005, with a very minor slip back to 13th this year. Its performance has been one largely of steady improvement and with a new boss on board, no doubt we can expect it to make a big push to boost its ranking in 2007.

This is not exactly proof positive that you can’t run a stable business without a stable management. But the apparent evidence, such as the performances of the top three contrasted with Merrill, suggests a connection. To find this out from a consultant would cost thousands. With Euromoney, the obvious simply costs a subscription.

The old fix rip off

I got a couple of calls this week about the strange movement in euro/sterling last Friday (October 6). The buzz is that a UK bank had a large order to sell euros at its 1pm fix, which it ‘managed’ by bashing the market shortly before.

In May, Euromoney published an article entitled Does FX need best-execution regulations? In it, I wrote: “The fix sounds like a licence to print money; for large orders it probably is. Why anybody would wish to entrust a decent-sized order to be done against a fix, especially when it is a simple version, such as a print-out of where a market stood at a point in time, is almost incomprehensible and smacks of either incompetence or an unwillingness to take charge of risk.”

Talk is that this particular bank’s €/£ dealer had a fantastic day. He apparently took the day off on Monday (October 9), with one wag suggesting he still had a hang over. As they say, bonuses don’t grow on trees; you have to pick a pocket or two.

Is it really all go with algos?

                                                                                                              more on algorithmic trading
We’ve been led to believe that having fundamentally altered the equity markets, algorithmic (algo) trading is now rapidly crossing over into FX and having similar effects. It seems barely a month goes by without some new all-singing, all-dancing algo being added to someone’s platform.

I’ve had my doubts about the benefits of algos ever since I first heard of their impact around two years ago. Strictly speaking, algos are programmes designed to get better execution, and it is these, rather than programme trading, I’m thinking about. A hedge fund pal tells me that algos are little short of licensed thieving by the sell side. He reckons the benchmarks provided that show best execution has been achieved, such as VWAP, can easily be beaten by a good trader.

I was mulling the topic over last week after attending a conference hosted by front-to-back trading solution vendor GL Trade. I was flabbergasted to hear a claim from Jean-René Giraud, chief executive of EDHEC-Risk Advisory, that just 3% of European buy-side institutions use algos for their equity trading. Just 3%! And I thought equity was the market where its use is widespread.

Algos are used to a greater extent in the US, where the equity market is more fragmented and possibly bears some but not a lot of resemblance to FX. But their almost complete lack of use in Europe begs the obvious question: if the equity market doesn’t need them, then why on earth should the far more liquid, generally commission-free FX business?

Rather than slicing, dicing and waving an order for €200 million into 50 lots, entered apparently randomly into the market over a period of time, wouldn’t it be easier, swifter and probably better to get a one-off quote from one or more banks? In fact, isn’t that kind of what happens now, either on the telephone or on single- and multi-bank platforms?

Now, I’m all for progress and don’t believe in moaning about how the markets were much better in the past, probably because on the whole they weren’t for most participants. But there’s something inside me that says all this algo stuff is a bit like that old fairy story of the Emperor and his new clothes. I suspect that they pander to the need of some fund managers to hide behind meaningless and worthless benchmarks, rather than accept responsibility for their trading decisions. And conveniently, perhaps automation helps the sell side cut explicit costs by getting rid of staff.

It’s a subject I’ll no doubt return to in columns to come. Your thoughts, comments and indeed criticisms are received with thanks – email me at fx@euromoney.com, alternatively add your feedback to the comment section below.

Next week: which bank’s FX platform is not everything it first appears to be?


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  Lee Oliver can be contacted at fx@euromoney.com.           

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