The Last Look…

Should banks be touting the “house view” of FX markets given how poor, historically, so many economists and strategists have been at actually trading?

This was perhaps the most common response to last week’s column – from a pretty big mailbag I have to say – all of which highlighted to me that the FX industry, especially at banking level, remains in a state of flux when it comes to the business model.

Before taking the big stick to economists, a common theme amongst respondents was the need for a multi-faceted approach to sales, albeit as some were quick to point out, there are too many clients that don’t appreciate the “full service” model. It is probably a “horses for courses” thing, I remain convinced from my previous discussions, that this issue is more about the banks’ inflexibility than anything else. More than a few respondents argued that for a “traditional” full-service role to succeed, the desk needs access to the e-FX flow data quicker than it currently gets it. This is fair, to the extent that the vast majority of trading is electronic, but it raises a few issues.

There is no tip-toeing around the issue, a lot of traditional sales people were, to put it subtly (unlike me I know), rather careless with information that should have stayed in house. If that approach was allied to the data gold mine that is a major LP’s trading engine, I hate to think of what could happen – beyond knowing that it will involve our favourites, the lawyers, at some stage.

Of course, protections can be put in place to protect against this, The FX Global Code is a good starting point, but the core problem from last week’s column remains – the market didn’t do what it probably should have done, and too many coverage people had no clue why. It could have been a flow thing, in which case they are going to struggle, as per the previous point around access to the e-FX flow, but it is also about a lack of experience – some harshly referred to it as a lack of talent – on too many desks.

This inexperience, if indeed it is a big part of the problem, feeds into the main thrust of this week’s column, the “house view”. I know I often swim in cynical waters, but I wholeheartedly agree with the majority of respondents who pointed out that economists and strategists are often on that desk because they can’t actually trade! It’s the old joke about “why can’t you find a one-armed economist?” Answer: because they can’t say “on the other hand” (I’ll get my coat).

The problem – and I have pointed this out before in these columns – is that too often they wait for too much information before making a decision. The market has been moving up for weeks or months, and then the “house view” is formed, that it’s going up. I can’t count the number of times I receive emails about this, in fact there was one in April that highlighted the situation perfectly.

The mail touted the bank’s view that USD/JPY was going up. I happen to agree – and still do in spite of the BoJ’s intervention – but my point is it was already above 150; where was this view in the low 140s when, frankly, it was just as obvious that the interest rate differential wasn’t going to narrow any time soon? The issue, such as it is, is that too many of the people forming the house view (and I should, in fairness, stress that I worked with some really good trading strategists over the years (as well as some rubbish ones) don’t take “buy the rumour, sell the fact” into account, which is what often drives markets.

There are, to reiterate, and use USD/JPY as an example, plenty of really good strategists that called this at 125/130. The problem is, they are either too modest or they don’t get the airtime because they don’t work for a “name”.

Roll this forward, therefore, and you have a coverage team that not only doesn’t know the ins and outs of market behaviour, but they are tied to a view that was formed too late. At best they look like they are floundering, at worst that they are using poor analysis as an excuse to talk to the client in desperate hope of seeing some flow.

Yes, there is a problem with too many institutions’ sales coverage models, but no, there isn’t a great deal that can be done about it unless the people on the desk are trained differently

There were several who also pointed out to me that talking to the trader rarely helps thanks to two factors. Firstly, traders are managing portfolios of currencies, therefore the real level of microstructure detail in a pair might be missed; and secondly, even if they knew the micro detail, they are so busy managing half a dozen or more positions, they don’t have time to talk to anyone!

Quite a few people also picked up on the volume aspect of today’s market – namely if salespeople are being paid in volume credits, and this is not a popular model amongst the readership I suspect, then they don’t care about the value client. It doesn’t matter that they can only tout the house view and talk about the panacea of salespeople, algo flow, because all they want is the algo flow. This is not the fault of the people on the desk, it’s more about the institution and its structure.

There is one other aspect to this that was picked up by one correspondent – a lot of the coverage teams today have little or no idea about the actual market structure beyond what different algo strategies do (answer: the same thing – keep the risk with the client!). It was pointed out to me that next to no coverage teams are talking to their clients about the drivers and quirks of the month/quarter end turns, even as central bank regulation has a direct impact on it.

So, to summarise, the feedback was, yes, there is a problem with too many institutions’ sales coverage models – one friend likened it to yesterday’s service station evolving into today’s petrol (gas) station, with groceries attached – but no, there isn’t a great deal that can be done about it unless the people on the desk are trained differently and, crucially, target the right clients with the right approach.

Of everything that came out of the past week’s feedback, one aspect stood out. Something we recognise in so many walks of life, that we most definitely do not when it comes to FX sales. One size does not fit all.

colin@thefullfx.com