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Foreign Exchange

You get what you pay for

It did take a bit of a sledgehammer approach – which I’m not averse to using – to get CLS to open up.


You get what you pay for

How much CLS charges for its services baffles many in the FX market. It is fair to say that in this age of transparency the organization is often incredibly opaque. That finally appears to be changing, at least to some degree. CLS’s previous reticence only served to convince me that those in the market who described it as a bad tax had a point and I had got the impression that CLS’s charges were somewhat discretionary. Now, however, having looked at the figures, I’m less convinced about both points.

It did take a bit of a sledgehammer approach – which I’m not averse to using – to get CLS to open up. Previously, I drew a blank from numerous sources on what it was charging. Everyone I asked immediately clammed up, as if they were witnesses to a crime who had been nobbled before the trial of the accused.

According to Jonathan Butterfield, EVP, marketing and communication, at CLS Bank, CLS’s pricing structure is not something it arbitrarily sets. Instead, feedback is gathered by its markets advisory committee and the ensuing recommendations are presented to the board.

Butterfield says that CLS naturally has had to respond to changes in the market. One of the biggest issues it has grappled with is the emergence of high-frequency traders. This has resulted in a far higher number of smaller-value tickets going through the system. Astonishingly, trades for less than $1 million now account for about 55% of the tickets that CLS processes. Presumably these are done on single-bank portals.

The cost to settle these small lots now starts at 40 pence per ticket, dropping to 25 pence for incremental volume. For other trades, settlement costs range from 80 pence to £1.10. Obviously, these are not the only costs incurred. Consultancy company Z/Yen, which has worked with more than 20 banks in benchmarking the processing cost of a FX trade over the past six years, has tried to determine how much operational and IT costs further rack up the price of settlement. In 2005, it found that operational costs accounted for another $1.90, while IT costs added $1.30. It is likely that both these have fallen since then. However, for market-sized CLS trades it appears that the cost per ticket is around $4.

This calls into question the viability of some prime brokerage offerings, which apparently start from just $2 per million. It appears some PBs are willing to give their FX business away free in return for a payback in other areas. However, I hear that one PB, which has a tariff starting at $8, is almost fighting new clients off. So even tight-wad end users are finding that you do get what you pay for and sometimes it is worth stumping up a little more for a better service.

Another discovery I made this week is that settling outside CLS is unlikely to prove a cheaper alternative, even if nothing ever goes wrong. Jeremy Smith, director of financial services at Z/Yen told me that in 2005 the operational cost for non-CLS trades rose to $4.10 from $1.90. He says that there is a reduced overall in the CLS environment cost due to greater and more efficient STP. CLS users make a maximum of 63 payments a day. Obviously, netting would reduce this but the industry is unlikely now to choose to settle outside CLS. For the moment, CLS has made it clear that it will not accept pre-netted trades for settlement.

CLS’s decision to talk to me has also put paid to another urban myth that had taken hold. It is not paying IBM a fee per ticket. Butterfield says it has a 10-year fixed management contract with the IT provider but he points out that if IBM did charge per ticket, payments would have soared, standing out clearly in the accounts. When CLS was launched, it was envisaged that it would handle 60,000 tickets a day. Its average is now 250,000, with a peak of twice that.

However, I would still like to see a little bit more openness from CLS. I did ask it for its rule book and constitution, but was told that would cost me the $5 million that CLS charges to join it. Euromoney can be quite generous when it comes to expenses but there is a limit. 

                                                               CLS blocks FXMarketSpace’s plan to pre-net cash trades

FXMarketSpace and the settlement monopoly

The 50/50 joint venture between CME and Reuters is a great concept, bringing very real exchange efficiencies to the cash FX market. However, as is always the case, FXMarketSpace is now finding that it is not simply going to be able to turn its screens on and see a wave of liquidity hitting it from other venues.

The company’s management team have been around long enough to have known that it would not get an easy ride from the beginning. But CLS’s refusal to let it submit netted trades for settlement – which almost looks monopolistic behaviour but which it can no doubt justify because it is an industry-owned utility – has clearly harmed FXMarketSpace’s prospects. FXMarketSpace is swift to point out that netting was not the cornerstone of its business model that some, myself included, have believed and perhaps reported.

History has shown that inferior offerings can win out. Old folk will recall the battle between VHS and Betamax for the video market. More recently, various trading venues have been set up, seemingly with industry backing, simply to exert pressure on incumbents to reduce costs. I don’t actually think this is the case with FXMarketSpace and that it is, potentially, a real alternative to the existing trading venues. The company’s oft-reported claim that it is looking to attract fresh players to the market sounds entirely feasible. If it is successful, it will ultimately bring even greater liquidity to the market, which can only be a good thing and perhaps even force through the ability to net, which removes another risk element from the deal chain.

RBS shuts its FX prop desk

I bumped into an old mate of mine, literally, on Monday night at London Bridge railway station. He is a lover of the corporate lunch and it’s good to see that there is enough fat left in the market to let him indulge his favourite pastime. He was standing on platform 6, and I was walking along platform 5, so you get the picture. Anyway, we had a good old chat on the way home and he told me some of the latest buzz, including news that RBS had shut its FX prop desk.

The bank’s decision is perhaps an indication of how tough it has been this year to make money prop trading FX in the current environment. Among those let go by RBS are the well-respected Andy ‘Baldy’ Baxter, and John Bannerjee, who only got round there a few months ago.

RBS has confirmed the news, saying in a somewhat bland statement: “RBS has closed its FX prop trading desk. We keep the structure of our businesses under constant review to meet the rapidly changing global needs of our customers. As a result of this decision, we will seek to find alternative suitable employment within the organization for those affected.” I hear that all of the desk’s staff are on their toes. Merry Christmas anyone?

Rocking Ronnie

Feedback continues to reach me about YoursMineShag, the “revolutionary FX trading platform” set up by Ron Smith-Galer. What follows is a verbatim copy of an e-mail from one of Ron’s former workmates at RP Martins. “Don’t know if you remember Gary Rudd. He once told me that when he joined Martins as a trainee on Ron’s forward lira desk he obviously experienced Ron’s temper. One of the brokers told him that Ron got like that because he had a metal plate in his head and when the sun shone through the window onto it, it expanded and made him angry, suggesting that Gary should adjust the blinds whenever it was sunny so that the rays wouldn’t touch Ron’s head. Gary reckoned he did this for about three months before he realized that it made no difference!!”

You can’t make this stuff up and although I try not to get all weepy-eyed and nostalgic, the market did seem a lot more fun back then than it is now. I’ll get around to writing my book of anecdotes, “A thing in the City”, one day soon.

EBS: A good buy for him and a good bye from her

I hear that Clara Furse, chief executive of the London Stock Exchange, never got down from her lofty perch in Paternoster Square and visited EBS, who were once her tenants a couple of floors downstairs. This, despite the exchange’s frequent claims that it is actively looking to try to diversify its one-trick pony business line of cash equity and move into other products.

Obviously, EBS’s former owners would not have sold the business to a regulated exchange. And perhaps Clara simply didn’t have time to waste as she rejected one suitor after another and managed to talk the LSE’s shares up to a level that many smart investors, including funnily enough Icap’s Michael Spencer, simply can’t believe. She might have decided that talking to EBS and its handsome chief executive could well have proved too much of a distraction for her as she went about her business.

Anyway, EBS has moved out and is now in the same far less impressive building as Icap, its new owner. Icap is now reaping the rewards of having a new cash generative business line, which ultimately will be more supportive of its share price than hype, puff, spin or hot air. Ultimately, EBS was a good buy for Michael Spencer, and a good bye from Clara Furse.

Gugesh bails out of BoA...

Options trader Gugesh Guganeswaran has jumped ship from Bank of America (BoA) London and is believed to be taking the short walk across Canary Wharf to Barclays. On the surface, the timing of his switch looks odd, coming as it does before official bonus season. Rumours are swirling around the market about the performance of BoA’s option team this year, which suggest that the bank has not only failed to reach budget but that it may even be about to book a loss. Sources suggest it is poised to announce sweeping changes to its team.

...while Suckling heads to RBC

Elsewhere, another options trader, the extremely likeable Adam Suckling, has resigned from Commonwealth Bank of Australia London, with Royal Bank of Canada (RBC) his next port of call. Because of the Australian accounting system, Suckling is believed to have pocketed his bonus, leaving him free to enjoy a nice break over Christmas before starting his new job on January 2. He will report to Patric Booth at RBC.


The Weekly FiX: What's going on in the world of FX this week? Get your FiX to find out.       

  Lee's biography   

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


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