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Foreign Exchange

I work for a larger securities firm. Now f&*k off

Tact and diplomacy was never my strong point.

GFI considering allowing hedge funds on to its options platform

Colin Heffron, president of GFI, has confirmed market rumours that the company is considering opening up its ForexMatch option trading screen to hedge funds. However, he has declined to put a date on this, saying that there are various technological and business flow issues, such as STP and possibly prime brokerage allocations, to address. Heffron also says GFI has yet to finish sounding out and receiving feedback from clients.

“We’re discussing with our clients about opening up ForexMatch to some of the big, liquidity-providing hedge funds. Some customers have asked us to work with them, as there’s a certain inevitability that if we don’t get some of the larger hedge funds involved, they will migrate to an exchange-traded market. The CME is a threat and rather than have a platform where liquidity can be hoovered up, we’d rather create one which brings liquidity in,” says Heffron.

The decision has inevitably generated debate in the industry. It is well known that other brokers have also considered opening up to hedge funds but have shied away in the face of perceived opposition from the big sell-side players, especially those with a strong presence in hedge fund sales.

In many ways, the oddity is that the option market has remained such a closed shop. There seems little reason why hedge funds cannot access the inter-dealer broker market though prime broker arrangements in the same way that they can access spot prices. The lack of an open market might explain why FX option volume growth has lagged behind spot, as well as options on other assets in recent years.  

GFI’s ruminations have clearly annoyed certain banks; it will also no doubt trigger some fevered debate within them. However, several senior traders I spoke to this week say that they would welcome letting hedge funds access the brokers, if it meant they didn’t have to treat them as customers any more.

Business from certain players is said to be so aggressive that some of my contacts say it is virtually impossible to make money from their trades. By giving them broker access, there is a hope that they will no longer have to quote to win business they don’t want in the first place; they will also be able to whack the funds back and, furthermore, they point out that paying brokerage is undoubtedly cheaper than paying sales credits.

Of course, those employed in hedge fund sales will see the situation differently and want such a move nipped in the bud. But prime brokers might well encourage it in the belief that it will lead to greater turnover and therefore an increase in fee revenues.

Heffron likens the current situation to the late 1980s when such houses as Morgan Stanley and Goldman Sachs were considered to be clients and excluded from dealing through brokers. “If attitudes hadn’t changed then, Goldman and the others would have set up their own system. The market works better by having them in it,” he adds.

I fully agree with these sentiments and remember what an absolute pain it was quoting tight prices to these so-called customers. When I was at Nomura, I was told by Salomon that if I wanted to see its business, I would have to switch its name through the brokers. “And why would I want to do that,” I asked. “Because we’re a large securities house,” came the snotty and arrogant reply.

“Oh,” I said, “It may have escaped your attention, but I work for a far larger securities firm. Now f&*k off.” Tact and diplomacy was never my strong point but the opportunity to get rid of a client who only ever cost me money and who seemed to want his cake and eat it was simply too tempting to turn down. I reckon many banks are going to feel exactly the same way about certain hedge funds, especially those that have blurred the lines between the buy and sell side to the point where they no longer exist.

Looking ahead, I don’t necessarily think that having access to the brokers will be the Utopian world some of the funds think. Heffron agrees that they will have to modify the way they trade if they come through the bookies. At the moment, most of them are over-serviced by their banks, who quote them prices often as tight as a camel’s arse in a sandstorm in all market conditions. But banks don’t have to supply liquidity to brokers if it doesn’t suit them and I reckon that there will be times when the hedge funds discover this to their cost, especially if they behave in a manner that upsets the market’s real liquidity suppliers. 

Having spoken to a few hedge fund traders, it seems they do want a multi-bank option portal of some description. I know that such offerings are in development. Is GFI’s decision a bold one that will give it first-mover advantage and stymie the plans of various ECNs that are believed to be looking to get into the market?

FXMarketSpace’s volumes

So far, FXMarketSpace (FXMS) has been reticent in sharing its volumes with the wider world. But senior executives at its parent companies, Reuters and CME, both spoke glowingly about them this week. “There are a couple of things I would like to pick up on in FX,” said Tom Glocer, in an analysts conference call to coincide with Reuters’ first-quarter results, published on Wednesday.

“ very much on track. There are a number of aspects of FXMarketSpace that please me,” he added. “First, we are seeing good growth in the number of users in the community. Secondly, the customers are diverse in terms of geography and trading style. Thirdly, feedback from customers is that they are very happy with the bid-ask spread, liquidity and depth of book and, last but not least, volumes are growing steadily.”

Glocer confirmed that FXMS’s figures for April will be published on May 7. However, using my initiative, I have found a cunning way to deliver a bit of a scoop before then. Volume figures are actually posted on Reuters. From what I’ve seen, they don’t look that impressive. By 1pm yesterday, a paltry $122 million had traded. Apparently, activity does pick up in the afternoon, when all the Chicago prop shops get going. Even so, while FXMS might well be on track, for the moment it appears a slow one.

Countdown to the FX Poll

Next week is a big one for the FX industry. As well as the annual ACI Congress in Montreal, we will also see the publication of the full, eagerly awaited results of this year’s Euromoney Poll. In addition, we have the annual Euromoney Forex Forum and then FX Poll Awards dinner in London. The dinner is being held at the Emirates Stadium, the home for those of you who don’t know, of some minor English football team. No doubt we can expect plenty of product news, such as various enhancements to this, that and the other platform.

I come to bury Telerate, and praise it

For a few years now, I’ve been lucky enough to be able to access a whole raft of live data on a TelerateStation. So it is with some sadness that I report that Reuters is poised to pull the plug on it.

Telerate has proved a real poisoned chalice over the years since it was set up back in 1969. Cantor Fitzgerald bought it in 1972 and then sold it on to money broker Exco for around $100 million in 1981. Exco had a result, selling it in 1990 for $1.6 billion to Dow Jones, who made a right pig’s ear of its ownership. Dow disposed of it for a rumoured fraction $600 million to Bridge in 1998.

For a brief while, Bridge made some loud noises about challenging Reuters and Bloomberg in the data vending space, but the company was a complete basket case and it imploded in 2001. Reuters snapped up some assets and allowed a Telerate rump to continue trading for a couple of years, before taking that over as well in 2004 for around $175 million. The deal gave it something like a further 50,000 clients, data it didn’t have and penetration into sectors it had previously ignored, as well as full use of the Telerate brand.

It is now in the process of killing this off, and as a result my TelerateStation is about to expire. Reuters has very kindly given me access to a 3000 Xtra terminal, which is invaluable for helping me stay in touch with what’s going on in the market – such as keeping an eye on FXMS’s volumes. The next step might be to get a four-letter dealing code. I’d welcome any suggestions, but please note the old Anglo-Saxon word beginning with a C and ending in T has already been taken.

People moves

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