The Full FX Conversation – with CMC Markets Connect
Posted by Colin Lambert. Last updated: December 2, 2021
Colin Lambert talks to head of CMC Markets Connect, Richard Elston, about building an institutional business with a difference.
Earlier this year you launched the CMC Markets Connect brand, exclusively targeting an institutional client base, but you’re quite keen to avoid the ‘prime of prime’ branding. What are you doing that differentiates you?
I think the most important thing is we are not merely recycling liquidity through the market. Yes, we are providing market access to multiple asset classes, but our structure allows us to reinforce external liquidity with our own. We have a strong retail brand and so our natural client order flow allows us to reinforce the pricing we receive from Tier 1 liquidity providers.
So you consider yourself a liquidity provider in the real sense of the phrase?
We are. The price we construct for our clients is unique and because of how we blend our own internal liquidity with our external providers, we are able to offer more consistent liquidity to our institutional clients, with robust depth of market. We work with our clients to construct a bespoke stream, different clients have different needs so it’s important we are able to respond to them, and having internal liquidity really helps us go the extra mile.
Are the clients you are working with true institutional players or do they exist in that grey area between retail and institutional?
We work with banks, hedge funds, family offices and asset managers, as well as with brokers, so our client base is very much in the institutional space. It’s all about the quality of the technology, we have 24 years of experience in this space and have recently invested heavily to upgrade our tech stack, such as our locating at LD4. This has allowed us to more easily connect into our clients’ workflow and allowed us to offer a lot more spot FX pairs than previously.
To meet the demands of an institutional client base the technology has to be up to the task, we would not have launched the institutional brand unless we were confident we can provide a superior service and the work of the last 12-18 months in building out our tech stack for our institutional clients is testament to what we have achieved.
For asset managers and family offices, we offer block trading capabilities, and for hedge funds and professional trading firms we can integrate into the reporting solution to minimise back and middle office costs. These are just two examples of where we provide real value to our institutional clients.
It does seem as though for some clients in the FX markets, the bar to being serviced by banks in particular has been heightened, did this play a role in the decision to launch the dedicated institutional business?
The very top end of the FX business has changed, especially for prime brokers and those players just outside the very top tier of LPs. Regulation, in particular capital costs, have hit the large prime brokers hard and several LPs have reduced their commitment to FX. This was an opportunity for CMC Markets – we have a strong balance sheet, we are FTSE 250 listed, and that is attractive to those hedge funds, trading firms and brokers who found themselves disenfranchised by their PBs.
The same could be said for clients just looking for liquidity. They sought to replace those LPs who withdrew or scaled back in FX and again with our balance sheet, technology stack, and our in-depth knowledge of the institutional space, we’re an ideal partner. That we could add some valuable unique liquidity via our retail business was icing on the cake.
It’s interesting the retail aspect of your business is playing a role in Connect…
It provides a robustness to our offering that others cannot match. We have a strong relationship with our Tier 1 providers, but in market dislocations only those with access to multiple sources of liquidity really come through for their clients – that is what our retail flow gave us last year when the pandemic first hit.
We were able to maintain a consistent price throughout the worst disruption – markets were undoubtedly thinner, that happens in highly volatile conditions – but where others lacked the ability or confidence to maintain a stream, we were able to help minimise the disruption to our clients.
This has been recognised in a survey of institutional FX players conducted for us by WBR which found that 85% of respondents saw value in trade flow from retail clients.
It strikes me you’re saying you are, effectively, a non-bank LP now?
It’s one of our services – we have a white label offering where we provide a tailored platform for the client and host and manage the infrastructure for them, we also offer straight connectivity solutions.
The key differentiator is, though, our liquidity model. That is why we felt it important to launch a dedicated institutional business. There is a lot of value in retail flow and that is too often overlooked – we internalise it to provide an institutional service that few can match.
It also allows us to offer additional services that clients expect from their LPs like analytical tools such as transaction cost analysis. We work with our clients to see how a subtle change of approach can enhance performance – it’s hard to do that without a backdrop of robust liquidity against which to measure it.
Data and technology are the focus as you look ahead then?
It’s hard to operate a strong business without a heavy focus on those two areas. We will continue to invest in our technology to reinforce our efforts of the past year where we have reduced latency throughout the trade lifecycle. Client conversations are now data-driven, gone are the days where interactions were subjective, but that same data can also help reinforce our Tier 1 relationships – it’s all about improving the client experience and providing our LP partners with high quality flow.
The changes to the market structure have presented a huge opportunity to fill the mid-market liquidity gap that has emerged, but to meet that demand you have to have the best technology and the ability to stand in when market conditions get tough. These clients have a history of being serviced by some very large banks and their needs are complex and they demand the highest standards from their service providers.
We believe CMC Market Connect is the right partner for these clients, because we bring balance sheet strength, heritage, industry know-how and unique liquidity to the table. That is a powerful proposition.