Watching people give up on big dreams and become more modest in their ambitions can be disheartening. No one likes to admit they can’t be the very best in their particular field.
But when people and institutions focus on the areas where they really excel, rather than trying to be all things to all people, everyone stands to benefit. Service providers can build more profitable businesses, while consumers can be much clearer about what their providers are offering.
This is why there are reasons to be optimistic about what is going on in the FX industry at the moment.
With all the drama of recent times – the benchmark scandal, Mark Johnson’s imprisonment, the burden of Mifid II and the FX Global Code – this ought to be the time when the industry finally moves on. Reduce the compliance meetings, put the piles of regulatory texts back on the shelf and get back to business as usual.
But it’s not quite that simple. The industry has changed in many ways, but above all there is simply less risk-taking capacity on the sell side these days. Regulation and conduct risk have forced most liquidity providers beyond the very top tier to scale back their ambitions and retreat to core competencies.
For some this means concentrating on the home geography, while others have specialities in particular products and client types. For mid-tier players that had long harboured ambitions to grow market share and break into the big league, this may have been a painful experience, involving restructuring, job cuts and a dimming of ambitions.
But it could all lead, in time, to a healthier market, in which competition is a little less intense but market participants are a bit more honest about where they can really add value – and equally importantly – where they can’t.
For buy-side firms that rely on the FX market for hedging and alpha generation, this could make the market easier to navigate than the former status quo where up to 20 banks might claim to be the ideal counterparty to every trade. In this evolving market structure there could be two or three powerhouses that can do everything, but if you need to trade a big Aussie dollar order or have some forwards business to transact, it will be much clearer where to go to get it done.
It also makes more sense for the liquidity providers. Rather than having to compete against the whole market on every trade, they will be able to build up their particular niches and develop market-leading businesses, hiring the best traders and building the best technology for their particular currency or product.
It might seem to be a contradiction, but, in this ever-changing industry, becoming smaller and more focused might just boost profitability.