The state of FX: The view from the helicopter
Should I really be so bothered? Yes, and so should everyone who works in FX.
Readers will have noticed that recently I have got myself in a little bit of a lather over just how difficult it is to get a decent FX service once you step away from what I still term the wholesale marketplace. I have often wondered why it is that I can buy £10 worth of Vodafone shares, for instance, at the same price as a fund manager looking to buy £500,000 worth, but if I want to sell something like €400,000 against sterling, my bank – HSBC for those of you who don’t already know – will quote me a rate which bears little resemblance to the institutional market price.
Actually, I think that there is a good argument to be made for wider prices for smaller transactions. But that doesn’t alter the fact that, once the blinkers are taken off and you look at FX from a wider perspective, service levels are generally appalling. This service gap has presented numerous companies with what they see as a fantastic opportunity. Many of these, especially those catering for the needs of SME and high-networth individual customers regularly bombard me with press releases, many of which make me seethe. I shouldn’t blame them for trying to garner some cheap and easy coverage, but as far as I’m concerned they mainly serve to reinforce how poorly the FX needs of a vast audience are met.
On Tuesday, I was sent two such missives. LOCK INTO EXCHANGE RATES NOW AS STERLING REMAINS VOLATILE, WARNS HIFX, was one. I assume the capital letters gave this ‘news’ much more credence. The release stated: “With the potential for a further fall in the value of the pound, Brits looking to protect their wealth should consider fixing their exchange rate so not to risk it sliding any further recommends currency specialists HiFX.”
The other was a case study. “Hi Lee, I am getting in touch on behalf of foreign exchange specialist, Foremost Currency Group, to offer the below case study which might be of use for your foreign exchange column. In order to minimize the impact of negative movements within the currency market when importing razor blades from Japan, King of Shaves use a specialist foreign exchange tool called a forward contract, which allows them to fix an exchange rate for up to two years, thus reducing their exposure to volatility in the money markets,” it said.
I was offered the chance to talk to King of Shaves, but once I queried how good a hedge a forward was, I seemed unable to seal the appointment. One of my former colleagues, who now works on the buy side, was puzzled by my reaction. “I’m confused. Why does this, patronizing though it is, wind you up?” he asked.
The answer is that it winds me up, because it does not reflect well on the FX industry. I got various other responses from a list of contacts when I asked if I had lost the plot. “Wow that’s sexy, a forward contract, premiums, discounts I remember them. It does look like their trade idea is directionally correct but I do not feel it is well founded long term unless you want to become a very short term FX trader versus assets. We’ve all been down that route before and the trend is to take profit too quickly and never believe the losses will worsen.” was one.
“Honestly, priceless. One would have to assume you made it up,” was another.
“Wtf? You have to wonder how much small firms pay away to get these trades done,” another buy sider asked.
“These guys make you laugh with their commentaries as they make it all seem so guaranteed, which we know it isn’t, as if it were neither of us would be doing what we do now,” someone else added.
Given that HiFX’s advice, handed out on Tuesday, was so specific, I naturally had to send its PR an email.
I followed your advice and locked in my €/£ exposure on Tuesday – but the spot is now 150 pips lower and I’ve lost £7,500. Can you ask HiFX if I should unwind the hedge or if there is any chance I can have my money back. Does it think we'll be back above there in the next six months? I promised my wife a new car, and if it doesn't go back up, she'll have my guts for garters.
A little while later, after not having received any response, I sent her another email.
“Lauren, the world and his brother look like they’re buying their shorts back. My loss is increasing. I’m doing my cods here. Should I hang on? My kids are on my case now - they wanted new Game Boys.”
Should I really be so bothered? Yes, and so should everyone who works in FX. If I’m charitable, I’d say that it is good some advice is being given out. But if I’m honest, a lot of the advice is flaky and every time something goes wrong, it is another negative for the FX industry. It is anachronistic that so many people remain oblivious about how efficient the best financial market in the world really is, which means that in many cases it is costing them dearly.
I’m pleased to announce that HiFX has won the inaugural weeklyFiX REVERSE BAROMETER AWARD”