Peer-to-peer (P2P) FX providers have struggled to convince corporates to cut their ties with banks they have lending or other corporate finance relationships, despite the promise of lower charges.
A number of providers have given up and changed their business model.
So, there is inevitable curiosity when a new entrant hits the market – especially one whose founder admits that P2P matching in FX has been attempted numerous times during the past decade with little or no success.
Will FX HedgePool be any different?
Yes, says CEO and founder Jay Moore, who argues that previous efforts focused exclusively on spot flow, where the trading requirements are typically a response to something else that has happened in the portfolio and need to be executed within a very short timeframe.
“We have taken a different approach by focusing on the swaps market and, more specifically, the monthly roll requirements of passive FX hedging programmes,” he says.
These swaps are relatively predictable, since most passive hedging programmes are mandated to maintain a fixed hedging policy at all times, usually with forward contracts rolling on a monthly or quarterly basis.
This should give FX HedgePool a chance to pull together a group of clients with predictable flows that naturally offset each other every month.
The firm’s customers will still rely on the credit and settlement functions provided by their banks, but once these banks determine their baseline costs for supporting the credit and settlement of these trades, Moore says they will be able to monetize it without additional costs related to managing market risk.
What do other market participants make of this?
Claude Goulet, CEO of Siege FX, which is developing an FX matching system, says the struggles of P2P currency matching providers have more to do with the dependence of medium-sized and smaller corporate organizations on their lending providers, who seek to bundle FX flow and hedging services with balance-sheet provision.
Asset manager Vanguard executed its first transaction on FX HedgePool at the end of January. Goulet reckons this is a sign that P2P trading could be about to receive fresh impetus.
“Initiatives aimed at helping large corporates transact more efficiently will gain traction as banks become more enthusiastic partners,” he says.
“Banks see opportunities to monetize client relationships and ISDAs beyond trading as principal, such as agency execution and credit intermediation.”
Jeremy Thomson-Cook, international payments specialist at Equals (formerly FairFX) reckons improvements in technology, the domination of FX trading by a few large banks and a heightened need to maintain anonymity will encourage more asset managers to trade P2P.
What corporates look for is transparency, immediate liquidity in any currency pair and the technology to automate FX risk management and optimize execution, says Philippe Gelis, CEO of Kantox, an FX fintech.
“Matching trades has never been a strong argument for corporates,” he says. “The largest banks hardly match more than 25% of their own order book, so matching a large proportion of trades is not realistic.”
This indifference to how trades are matched motivated Kantox to stop offering P2P FX services.
“In retail (remittance), there are probably some clients who like the peer-to-peer philosophy, but in the end it is a mere marketing point that provides no real value to the end-client,” adds Gelis.
Customers operating within narrow windows are more focused on cost, speed and quality of service, agrees CurrencyFair CEO Paul Byrne.
“For those customers who have more time to make a trade and use our marketplace product to set their own rate, they are matching with their peers, so trust in the other party is critical,” he says.
What all clients should care about is their execution costs, which cannot be explained by price spreads alone. Understanding how liquidity is accessed, what information leakage it produces and the impact on prices is important in this context, and the use of transaction cost analysis (TCA) services has grown substantially in recent years as a result.
“As we have seen in the equities and securities markets, peer-to-peer or crossing networks have become important sources of alternative liquidity for the buy-side community,” says Siege FX’s Goulet.
“When compared with these other assets, FX has a more homogeneous set of instruments and a greater diversity of participants. This provides a very interesting opportunity.”