FX Sales: How Should it be Judged?

In our latest Voice of Experience contribution, Ted Holloway follows up on recent columns in The Full FX looking at the FX sales role, and argues that the model is changing, or needs to change

Having spent over 30 years in various FX sales roles I wanted to respond to the recent article by the editor of this publication, which asked the question about how different roles in the FX market have changed, and in this instance, specifically the role of FX sales.

The opening paragraph asked whether the market is losing an important skill set (more on that later) and whether important clients are being left behind? This led me to ask the question, what is an important client in today’s market?

My answer would be one that an LP achieves a targeted benchmark return on capital employed. Simply providing liquidity without generating a measurable return in today’s capital-intensive environment does not make good business sense. I rather suspect this has led to the re-shaping of a number of client portfolios, with some finding they are not quite so important as they once thought.

As the article further alludes to, the vast majority of short-term FX business is done via a platform. The BIS survey suggests that although 40% of all FX traded was voice, that was dominated by non-spot. In fact, in the case of spot, over 75% of price requests are now via a platform. For certain institutions this business is lifeblood to their models. For others, who have chosen not to go down that route, less so. Competing for spot business on wafer thin margins offers little return, and is therefore driving how LP’s approach the business. This in turn has had a profound effect on the respective roles of sales and trading.

The FX sales role has changed. For the majority of banks gone are the days of winning as much volume as possible in order to fly their respective flag in an annual poll. The role not only requires individuals to be far more cognisant of credit and regulation, but to also be aware of the various touch points a client has within their institution.

One of the criticisms aimed at sales people, as highlighted in the recent article, was that clients wanted more market colour. This surprised me. Have these clients being living under a rock for the last seven years? LPs are fiercely regulated – what they can, and, more importantly, what they can’t say when reporting client flows, definitely falls into the latter category, and rightly so. No one wants their business in the public domain.

As a result LP’s are now required to observe a “reasonable period of time” (no I don’t know how long that is either) before discussing any flow, and even then you are on potentially very dangerous ground. To me it’s more a case of trying to understand the flows you are seeing. Are they providing any clues?

Calling a client and saying there has been a large seller of X v Y provides little, if any, value, other than maybe explaining a short term spot move. In my view an important part of the FX sales role was providing value to my clients. In order to do this, I first needed to understand my clients’ business. Too often sales people will go into client meetings and either not ask enough questions, or even if they do, not listen to what the client is telling them. More often than not this comes with experience. But as the editor has also mentioned, in a lot of cases the market has been stripped of this experience, with the result that sales desks have become reactive rather than proactive.

As I mentioned before, reporting client flows is a thing of the past. So too, for sales people, is having a view, unless it’s the “House” view. This I find very frustrating. As basic example, for a good period of time throughout my FX career, yield differentials between Treasuries and JGB’s were a decent indicator to potential macro moves in USD/JPY. Additionally, if I was seeing client flow that backed this up, that would be something I could share with my clients who held that interest. In my experience this was far more valuable to clients than the previous example I gave above.

Credit is a key and valuable commodity, LPs are slowly changing their models to recognise this, and that in turn, is shaping their client portfolios

Today the market has moved on even more so, but I strongly suspect there are correlations within the cross-asset markets that are out there, you just have to find them. Sharing those ideas with relevant clients, is what helps you differentiate yourself from the competition.

Although sales and trading roles have changed, client behaviour has not reflected this, particularly at the short-dated end of the market. The abundance of platforms and those competing to get as much volume as possible across them, has led to a saturation of liquidity. Clients are even turning down choice prices on platforms, given that they can often see bids where offers normally exist and vice versa.

This has led to some LPs choosing not to aggressively play in the shorter end of the market, but in areas where there is mutual value. As I have mentioned before credit is a key and valuable commodity. LPs are slowly changing their models to recognise this, and that in turn, is shaping their client portfolios.

The bottom line is that the FX market has changed. LPs are heavily regulated and reputation risk, something I have mentioned in a previous article, supersedes all, and dominates behaviour. Therefore, LPs are being forced to become more focussed on where to devote their capital. The downside of is this that yes, it has led to internalisation models. The combination of this, and the two risks I mentioned above, has led to behavioural change in FX sales.

I believe many have become too narrow in their focus and crucially are now reactive rather than proactive. Whilst I can understand how circumstances have helped in creating this environment, in my experience the only constant in the FX market was, and I suspect remains to be, change.

In such a price dominated and dynamic business you have to find a way of being able to differentiate – in my view that’s being relevant. In order to do that you have to understand your client and above all be proactive. Failure to do that means that you just become nothing more than just another liquidity provider.