The Last Look…
Posted by Colin Lambert. Last updated: November 18, 2025
One aspect of the Bank of England paper studying the effect on Credit Suisse’s clients following that bank’s collapse in 2023 highlights a sustained truism of markets, liquidity is undervalued.
The timing of the paper is also propitious because last week I got to relive one of my better moments at a conference, albeit this time over the phone. Specifically, I was talking to someone in the hedge fund industry who was, believe it or not, complaining about the spreads they were charged in the market. They were a little circumspect but my sense was the spreads were pretty tight for the business involved, but this, apparently wasn’t enough.
After ascertaining whether choice was acceptable (it was), I revisited the only time I got a round of applause as a moderator during a session, in Chicago around 15 years ago by observing, following a similar complaint, “if you don’t like the spreads, put a (expletive deleted) bid or offer in and see if you get filled”.
This was as popular on both occasions as a West Ham fan in the middle of the crowd at Millwall, indeed this time I raised the ante by mentioning using an algo as well.
The fact is, we, as an industry, still undervalue liquidity, partly because of the flood of recyclers claiming to be “LPs”, but partly because we have disassociated it with market risk, where the two are realistically joined at the hip.
A lot of customers don’t like the idea of taking on market risk, which is fair enough, that’s why the pros are there, but too many see fit to complain about paying the counterparty for taking that risk on. I understand market makers make good money, and that may grate on some customers, but it’s more about the sheer scale of the business involved rather than an inordinate amount of dollars-per-million.
The BoE paper, similarly, has provoked a couple of comments about LPs “letting their clients down” and “taking advantage of clients in distress”. How? If a client has been trading heavily with Credit Suisse to the exclusion of other LPs, why should those makers drop everything to price them? I understand that the wider spreads were largely a factor of contagion risk, but there was a relationship factor as well – the other LPs simply didn’t know that client well and were likely unwilling to go the extra mile. After all, we all knew Credit Suisse’s problems were client-related, but did we know exactly which one(s)?
In one way, the BoE paper is satisfying, because if clients were ignoring their other LPs, they got payback in the way they least wanted – higher execution costs
More importantly, these markets require capital, if I am an LP and have a host of clients looking for pricing (it was a stressed market after all) who am I going to prioritise? The institution with whom I have been trading regularly, or a fly-in demanding pricing because their regular LP has disappeared on them? It’s unfortunate, but not the LPs’ fault.
Of course, the LPs have brought this attitude upon themselves to a degree with the ‘market share’ strategy they adopted (and quietly dropped in many cases when they looked at better data), which propagated the theory that liquidity was plentiful and cheap, but the bottom line in both instances is a declaration of entitlement that should not exist.
In one way, the BoE paper is satisfying, because if clients were ignoring their other LPs, they got payback in the way they least wanted – higher execution costs. This is not only a reflection of a market, but also, perhaps, insight into a more structured approach to clients on the part of LPs that is properly data-driven. If that is indeed the case, then the balance of power in FX may be shifting slightly towards equilibrium. It will never stay there, of course, it hasn’t in the near-50 years I’ve been in the business, but it will correct some of the imbalance of the past decade or so.
The client is, and will remain, a vitally important part of any LP’s FX business, and good relationships should be recognised in the best possible way – being there when the smelly stuff hits the fan. That said, if clients finally understand that the market risk associated with being an LP does not come for free, that will be a good thing for the industry overall.
