The summer lull has provided an opportunity to get out and about and do some networking. Last week, I reported that the Bank for International Settlements had published an analysis of the market and provided some indications of how it might develop. Talking recently to several leading market participants, it seems that there is a growing belief that FX is poised to enter another period of substantial change.
Generally, those at the top of the FX chain, and by that I mean banks that are fortunate enough to possess relatively strong balance sheets, have a good credit rating, significant flow and market making capabilities, plus an ability to manage and warehouse risk, are still reporting that FX is a wonderful business to be in. In fact, the main pressure they are facing is from the rest of the business, which has now come to rely on the revenue stream from FX in a way that was probably not imaginable even 18 months ago.
Once you get out of the top tier though, things appear to be getting more difficult. Hedge funds are now wary of who they are dealing with and apparently many are starting to struggle with lack of any kind of trend in FX at the moment. This is also affecting those banks that don’t have flow and there are one or two reports of shoot pontoon (see Making enough noise) being played at some houses.
It is also looking increasingly likely that we will see some kind of consolidation in the industry. Some of this might occur because the small guys are finding it tough to make money in FX but the main factor is that many banks’ balance sheets have been shot to bits and, as one senior figure told me this week, the investment banking model looks as if it has been irreparably damaged. If the Fed hadn’t announced this week that it was considering keeping its funding window open, the chances are that we would have seen some consolidation before the end of the summer. At some point – and at this stage few people seem to know when – various banks will start to look as cheap as chips. Provided they don’t go bust first, they will be taken over.