The Last look…

Is there a tipping point at which LPs in the spot FX business say “enough” and actually do something about the pricing models in FX – specifically where they are the only ones to pay brokerage, all the time as spreads continue to be compressed?

During the pandemic I wrote about discussions taking place within Bloomberg about potentially charging for trading on FXGO – at the time there seemed to be a choice between a monthly fee – a la FXSpotStream – or a straight brokerage, in line with just about every other platform. The discussion was, my sources told me at the time, intense, complicated, and hard to conclude one way or the other – precisely why it has taken three or four years before a decision has apparently been made.

I say “apparently” because although it is the talk of the street, and several people tried to penetrate my e-wall while I was in Fiji; Bloomberg, when approached, declined to comment or share any details. Notwithstanding that, LPs, who are, predictably, making angry noises, tell me brokerage is coming.

Angry noises are one thing, taking actual action is another. The LPs believe they already pay a brokerage through their renting of a host of Terminals, and they are not cheap, although it is notable that FX desks in particular looked to trim the number of Terminals they had some years ago in an effort to reduce costs. For its part, Bloomberg would have been well aware this would have been the reaction to such a decision and must be confident will not dent its business. So will it?

Probably the first thing to say is that as a model, there is a precedent. Reuters would charge desks for its screens, while also charging brokerage on Matching, and, later on, FXall. Within that firm, they were, are, separate businesses, and charge accordingly. Equally, Bloomberg has been charging brokerage for several years already, for FX products traded on its regulated MTF. As far as I can discern, it is the overall bill that LPs are worried about, with some talking a trebling of their bill with Bloomberg based upon their trading volumes.

Another factor that Bloomberg may have considered a guard against losing business is its huge advantage in FX – from its fixed income franchise amongst asset managers. It clearly believes that remains rock solid, sufficiently so that it can risk the wrath of the LPs. The fact is for a lot of asset managers, FX is an ancillary business and they don’t want to go through a lot of work connecting to another platform when one exists that they already use for fixed income.

This move is a timely reminder that the LPs are still chuntering away about their brokerage and how they feel that some platforms are milking them for all they can. The problem hasn’t gone away, and for many, margins are being squeezed to the degree that even a move by one platform – albeit a big one – to introduce an extra charge, will have a knock-on effect and squeeze the economics further. It can be managed when markets are busy, volume is up, and profits commensurately higher, but if volatility subsides, a growing number of LPs creep into the area where they start to ponder the value of even running the business.

This is something that concerns the buy side, and it has done in some circles for several years, but it has not yet hit a point at which the buy side actually tries to do something about it – mainly because while the sell side may encourage action, it doesn’t do it firmly enough for fear of losing precious market share. This is where the “volume is everything” business model has got the LPs – they are now at the mercy of the platforms, who can charge pretty much what they like within reason.

I should make clear at this stage, that the platforms should be charging brokerage – they spend a lot of building and maintaining the technology, and in some cases honouring their regulatory requirements – but there are growing questions as to who they should be charging. Specifically, given how some consumers are trading at mid most of the time and often see choice pricing, should they contribute something?

LPs can, of course, “steer” clients to certain venues, and I am told by some on the buy side that they are worried about seeing inferior pricing on FXGO from key counterparties as they factor in the brokerage, but in reality, are they going to notice it? Probably not, but there is potentially a risk to Bloomberg charging from those clients that are connected to multiple venues. If an LP demonstrates that it is showing slightly better spreads on another venue – and the post-trade workflow is unchanged – then some buy siders might start listening to the LPs and prioritise that other venue.

I would warn those buy side firms happy to squeeze LPs for every fraction of a pip, if they are successful, the result will be an exchange. I look forward to their attempts to maintain execution quality whilst selling $100 million, let alone a billion, in such an environment

One area of interest will be what happens with the algos provided on Bloomberg. Obviously the banks receive a fee for the use of their algo, will this be eaten into by a brokerage? If it is, that levels the playing field with those other platforms that also support algos, but who have been charging bro all along.

One other potential risk is that the LPs turn to their much-improved data and analytics to work out if they are still making enough money from certain clients. If this tips them  some of the latter over into the grey area – and five bucks a million can sometimes do that – will they pull the plug? They certainly will not change anything for clients they have strong relationships (i.e. wallet share) with, but this risks tipping a small number of buy side clients into a zone where they could be cut.

So the move by Bloomberg is not without risk, but as noted already, it would have been well-aware of that when it took the decision. The significance of the move was actually highlighted by a social media post stating that FXGO had transacted over a trillion dollars on July 31 – a day when most platforms had a banner day admittedly, but what I think is a first by any venue. As is too often the problem in the platform world, there was no detail behind the triumphant headline – how much was spot etc and was it single count (I am pretty sure it was) – but it does put into perspective the potential impact across the industry if even $500 billion is going to be traded at $3-5 per million, where it wasn’t previously.

To return to the core question of this column, at what stage will the LPs rebel? I suspect the answer will be “not in my time in the industry”, there just isn’t the impetus because there is always someone who can trim a few cents here and there to maintain a competitive position.

As to whether we should worry about this, I have to confess it is hard to feel sorry for billion-dollar businesses, but we should not forget the core reason the FX market exists. If those operators in the real economy, corporates and investors, start to see their returns eroded by wider FX spreads (I am resisting – and failing – all mention of the Fix here), then perhaps we have grounds for serious debate.

We are nowhere near that stage at the moment, nor am I convinced we will ever get there, but I would warn those buy side firms that are happy to squeeze the LPs for every fraction of a pip, if they are successful, the result will be an exchange. I look forward to their attempts to maintain execution quality whilst selling $100 million, let alone a billion, in such an environment!

For Bloomberg, it is likely to have two things in its favour that will see it retain position, aside from the LPs’ bark being worse than their bite. Firstly, more buy side firms want multi-asset class capabilities, and while the experience on the Terminal is not perhaps the best, most asset classes can be traded there. Secondly, and more practically, Bloomberg probably has the biggest buy side audience of all the platforms, and that speaks volumes – in both senses of the word!

colin@thefullfx.com