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Foreign Exchange

20 Oct: A picture paints a thousand words

What’s the score with dbFX and FXCM? Deutsche Bank’s decision to launch its dbFX platform for retail FX clients back in May seemed a well-timed move to capture business from what is a rapidly expanding and important market segment.

The bank certainly didn’t play down any suggestion that deals done on dbFX were linked into its highly regarded Autobahn FX platform. In an official press release, Jim Turley, the bank’s then global head of currencies and commodities, said: “When you trade with dbFX, you receive privileged access to the world’s foreign exchange market.”

So it probably comes as a surprise to many of the clients who opened accounts to trade on dbFX that the platform appears, for the time being at least, to be a white-labelled version of FXCM, a platform operated by the privately owned Forex Capital Markets. And while there is no doubt that FXCM has been extremely successful since it was established in 1999 – it claims to have ‘serviced’ over 78,000 clients – you do not have to spend too much time searching on the internet to find that it does not have an entirely whiter-than-white reputation.

One site, www.forexbastards.com, has a page rating the numerous retail FX platforms in existence. “If you have done business with the following forex companies, please submit your forex review as well,” it says.

There are numerous complaints about the way FXCM operates on www.forexbastards.com, as well as on another site called www.elitetrader.com. Perhaps the most frequent are that it shades its prices against clients or simply doesn’t quote when the market is moving. Unfortunately for Deutsche, dbFX has to a minor extent been tarnished by association.

Now, internet bulletin boards are always full of whingeing, especially when mug punters lose money. And the complaints about FXCM are from a tiny percentage of its stated client base. However, that does not mean the moans do not have merit – they just have to be taken with a pinch of salt at least.

Still, many operating in the retail sector are surprised Deutsche apparently chose FXCM to spearhead its push into the retail sector. Sources say that Deutsche actually looked at buying Refco’s defunct 35% stake in FXCM, which is up for sale after the broker’s demise. Talk is, Deutsche walked away after due diligence. Deutsche, FXCM and Refco have all declined to confirm this.

When questioned about dbFX, Zar Amrolia, managing director of global currencies and commodities at Deutsche, swiftly pointed out the following. “The blogs are not critical of Deutsche. The (retail) customers are dealing with Deutsche. The counterparty is Deutsche AG. Their collateral is held by Deutsche AG. The customers do receive prices and execution from Deutsche.”

Amrolia added: “But we are working with a vendor. There’s an NDA [non-disclosure agreement] in place, which prevents me from disclosing it. But there’s nothing to restrict Deutsche Bank from using other vendors. And that is perhaps the key point – that we are not restricted in having multiple vendors to access the retail space, and the likelihood is that Deutsche Bank will do that.”

A spokesman for FXCM also declined to not comment on whether or not the platform was the same as dbFX. As for the criticism posted on the internet, he said: “I won’t comment on anything on the chat rooms, but we do have tens of thousands of happy customers and we wouldn’t have them if we didn’t have a good service.”

Amrolia admits that the deal with the unnamed white-label partner appears strange. “Looking at this in isolation might seem odd. But dbExpress, which is the overall brand of our retail initiative, will look to work with different vendors,” he says.

Apparently, Deutsche is pleased and also surprised at how the initial arrangement has worked. Amrolia says that effectively Deutsche Bank has reclaimed clients, adding that while retail aggregators have done a great job in expanding the market, they have largely done so only as a result of prices from liquidity providers, such as Deutsche.

He makes another important point. “Many of the retail aggregators are being squeezed out by the increased capital requirements of the regulators. Deutsche Bank believes that participation by banks such as DB can only benefit the retail consumer by bringing in best practice and increased governance. This is part of our strategic move into retail, and it will develop,” he says.

Cynically, one has to wonder if Deutsche’s foray into the retail sector was rushed through to gain first-mover advantage. But having dipped its toe into the sector, Deutsche looks set to expand its offering. And to be honest, if your mum was punting her pension in FX, who would you want as her counterparty?

Relocation, relocation, relocation

Banks have outsourced liquidity provision for years. Many traders are notorious for only visiting a pub when they know they have a “wallet”, aka a broker present, to pick up the tab. But as institutions seek to cut costs, traders may do well to ponder what outsourcing liquidity provision may mean in the not-too-distant future. And they may be surprised to find that it’s not just middle- and back-office functions that can get sub-contracted.

A friend told me how he caused widespread consternation at one management meeting held to discuss how the bank he was working at could cut costs. He advocated sacking all the traders on his spot desk and relocating it to India. He told me he was fed up with having to manage a load of what he described as “over-paid, Rolex-wearing dealers”, who constantly moaned about how small their six-figure salaries were. As a former spot dealer myself, I thought he was exaggerating. I never had or wanted a Rolex.

Anyway, his argument was that you could replace a team of what he termed “over-paid order fillers” with a better-educated, keener and most definitely cheaper workforce in India.

This vision is rapidly becoming reality. The first step of outsourcing is often referred to as business processing. The next stage is knowledge processing, and outsourcing a trading operation is just an extension of this. I heard the other day from one company, GH Financials (GHF), a futures and options clearing house, which claims to have already successfully outsourced a lot of its liquidity to places outside London, such as Hungary, Israel and India.

While it would be easy to dismiss what GHF has done on the basis that its business model is more agency than principal – it makes money primarily when the locals (self-employed dealers) make money and continue to trade. But it has long been a successful and recognised house on various regulated derivative exchanges. Sure, providing facilities to locals who risk their own capital is different from building up a team and then letting it loose on the markets with a bank’s balance sheet. But provided proper risk management is in place, it is hard to see why the concept of relocating a trading team to a cheaper location won’t work. Technology has made it possible. It would seem that nobody is safe.

A picture paints a thousand words

And finally... Sometimes the forex markets can seem a little complicated for us mere financial hacks. So my editor and I were eternally grateful when one senior London-based FX banker offered to draw us a simple diagram showing how the pieces all fit together.

And here it is. Clear as mud, eh? Still, it was a very fine lunch...

 

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

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