The Last Look…
Posted by Colin Lambert. Last updated: January 23, 2024
There has always been a delicate balance between the sell and buy sides in the FX market, and on balance, the former has, historically, made decent money out of the latter, especially in the real money space. That doesn’t necessarily mean, however, that the buy side is being exploited.
This week we published the results of a regular regional survey taken for MillTechFX of fund managers and apart from the observation that the same issues face managers no matter where their geographical location, I was also struck by the sense that fund managers think they are hard done by.
For a start, I think we can all agree that there has never been so much market data available in FX markets, which only increases my bewilderment when people claim the market lacks transparency and has “hidden costs”. I would have thought the spread on a price gives a pretty good estimation of the “costs”, but it seems too many people want this broken down into more detail.
I am sure the sell side can provide that, but it would mean yet another technology lift for them and the buy side themselves. It seems to me that the respondents in the survey are already challenged by the basic requirements of technology with so many using email (!) for trade execution – how are these firms going to cope with a reply that not only encompasses the price in the market, but a list (and it could be long) of ingredients within that price? Credit, staffing, liquidity and counterparty risk, technology, compliance checks and, of course, market risk, are just the start.
Equally, respondents didn’t seem to believe they had access to competitive pricing or TCA resources, which, quite frankly, indicates a complete lack of knowledge about how the market has evolved. For a start there are a host of multi-dealer platforms out there (MillTechFX being one and I have little doubt the survey is as much a marketing tool for the platform and information source, but that’s OK), rather than worrying about connecting to more counterparties, sign up with one. Equally, there are independent TCA providers out there that would be only too happy to analyse their execution quality and provide guidance for future strategies.
The problem is not that these services don’t exist, of course – they do – it’s more that yet again the managers don’t want to pay for anything, or if they do, they want it explicit so they can pass it on to their investors.
Forget about all the costs involved in running an FX business – and they are large – there is the basic nature of market risk that deserves to be recognised. Putting a price on a trade and holding that risk – even if it is for a second or two – comes with a risk and potential cost. Do people have the right to trade at mid and squeeze every ounce of margin out of a trade? I would argue, given the underlying costs involved, that they do not – as I have noted before at conferences when liquidity consumers complain about the spread, they can always put their own price in and take the risk on. Funnily enough, few fancy that idea.
A couple of people on the buy side are fond of pointing me in the direction of the revenues reported by banks especially as evidence they are making too much money, but again I don’t agree. For a start many are FICC revenues and dominated by fixed income and the numbers cited to me are rarely net of costs.
I should be clear, this is not an apologia for market makers, they make good money and are not struggling, more this is about stating that it’s actually OK for them to make money. Risk is not free, although too many on the buy side appear to think it is.
My over-riding emotion after reading the MillTechFX survey was that these clients need to look at themselves, rather than the FX industry, for any perceived shortcomings. The majority state that FX is important to their business, so why are they so slow to actually invest in it? After all, it’s not as though they actually have to pay anything once they are on most of the multi-dealer platforms!