The Last Look…

Much has been made about how different roles in the FX market have changed, evolution tends to make that happen, but in the midst of this change are we losing an important skill set and, into the bargain, leaving some very important clients behind?

While it is true that we live in an electronic world (accepting that in the last BIS survey 40% of all FX was traded voice – it was dominated by non-spot), it is less true that the majority of market participants’ decision-making is automated. A vast majority of FX volume is auto-traded, but just how valuable is that trade from a hedge fund or prop firm compared to, for instance, a corporate, fund manager or regional bank?

Many of these firms tend to trade on a platform manually, after making a manual decision, and it is this sector that we may be in danger of leaving behind. A few weeks ago, a friend shared their frustration with me over a lack of market colour from their LPs, prompting me to ask around a bit more. I found that they were not the only ones frustrated by what seemed to several of my correspondents to be an inability on the part of their coverage teams to actual tell them what was going on in the market!

It seems the approach now from too many LPs is a restatement of the “house view”, from which the coverage teams do not, or cannot, deviate, accompanied by an inability to interpret market events – especially surprises. Several people cited recent surprises in inflation data around the world that did not get the market reaction expected. This is fair enough – if markets were predictable they’d be boring, ask any trader from the 2013-18 period – but surely it’s not asking too much for the service providers to have someone who can explain why the market actually moved the way it did?

Should today’s FX coverage teams have more experience and understanding of price action?

To be clear, many LPs do this, but they often do so several hours after the event, when it is as useful, as one correspondent put it, as an ashtray on a motorbike (I heard a few other descriptions in this vein!) As one correspondent put it, ‘why should I deal on their platform when they can’t fulfil the basic service of explaining a market move to me?’

I will confess, my first thought was that perhaps the customers were being over-demanding – after all the moves could have been a surprise to the major LPs themselves and they were waiting for some expert guidance from the economics team – but the reality is, sales and relationships teams have historically been populated by people who really understand the market. Have we, through the process of technological evolution and juniorisation, created a service segment that can only cite (market) data and offer little or no insight beyond what the algos are doing? Should “good” service involve informing customers why there was a reversal quicker than a few hours after the event? Should today’s coverage teams have more experience and understanding of price action?

This goes against the grain for many institutions of course, too many of which insist on the aforementioned ‘house view’ being adhered to, but if they are upsetting an important sub-section of their client base, perhaps they need to think about allowing some freedom of expression (assuming the person expressing knows what they are talking about – if they don’t should they be on the desk?)

We have perhaps become too focused on data science as the key relationship tool, and I wholeheartedly agree that data has made the relationship easier to manage because, especially if it is independently-sourced, it provides a solid basis for open, honest discussion between service provider and customer. It should not, however, be the sole basis for that relationship, because not all clients want, or require that.

This is, in part, yet another manifestation of the FX industry’s decade-long obsession with volume, but the reality is, while these clients may not be high volume, on a dollars-per-million basis, they are probably very high value. Is the internalisation programme operating that well that they can afford to ignore these clients? More pertinently, will it continue to operate sufficiently well as competition continues to crush spreads?

LPs love manual business because of its value, but the service standard around those trades is declining, in some cases rapidly

When the juniorisation trend really kicked in, a few friends in the hedge fund world – normally the first to identify these types of thing – starting asking to talk to the trader rather than the coverage person. This worked for a while, but then the LPs started moving them back to the coverage desk – sometimes because the trader left. One cynical, but potentially insightful, comment I received recently on this issue from a hedge fund trader raised a worrying prospect. “Do the traders even know what is driving the market these days, given they are up to their ears in data?” they asked.

One would hope they do, because traders still need to have, as a core function, an understanding of risk, but it is perhaps a valid comment if, for example, all the trader is doing is managing an internalisation model that rarely – if ever – actually has a position?

My takeaway from all of this is that there may be an opportunity for an LP to exploit an unhappy segment of the market that is increasingly overlooked – the truly manual trader. The feedback I have received is that all the LPs love this business because of the value, but the service standard around those trades is declining, in some cases rapidly. FX remains, especially when dealing with manual traders, a full-service business, and this, perhaps, has been forgotten in too many circles in the rush for volume.

The macroeconomic environment remains uncertain, which tells me at least that data surprises are going to continue for some time. This means the LPs need to better prepare for such an environment by upskilling (horrible word) their coverage teams. To do this, they could do worse that revisit the old-fashioned coverage model, where market-savvy people staff the desks.

We absolutely need teams that can handle data efficiently and effectively, and this will remain a critical part of the FX business. Whilst building these capabilities, however, we should not forget some of the traditional values in our industry. It is not easy building these skill sets, but it can be done, and it needs to be done, because a successful FX coverage desk of the future will very much be a hybrid of data and market knowledge.

colin@thefullfx.com