The Last Look…

It’s December, a month of goodwill, which means of course, I am about to take aim at someone – and again it’s certain firms in the real money industry.

I virtually attended an event recently (Covid barred me from physically attending, which may have been a good thing given what I heard). It was the usual mix of panels, some of which were more interesting than others, but it was good to hear from four asset managers about how they are building efficiency into their business.

There were some very good comments made (I particularly enjoyed the contribution from a manager that acknowledged they don’t actually add Alpha, they are all about saving costs) and, as that statement suggests, the main theme was about squeezing every dollar and cent of efficiency out of their trading processes.

So we all know where I am going with this, but bear with me a little longer. There was a heavy emphasis on using data and analytics to improve efficiency and, as a digression, I believe this will start to be felt in the platform world where asset managers are starting to look closer at their LPs’ behaviour, and TCA figured high in the agenda.

Back on topic, one panellist even went to town talking about their firm’s relatively recent increase in focus on market impact and the important savings this was bringing.

I am not sure, had I been at the event, that I could have avoided asking the question (although it probably would have been passed over for others), but I can ask it here. ‘If you are so obsessed with execution costs and market impact, why don’t you actually broaden your very narrow gaze away from your primary markets, to your FX execution?’

Surely these “professionals” can recognise that the mechanism they are using is out-dated, deeply-flawed and in need of updating? If so, why are they not pushing for change?

It is important to note that many progressive managers pay a great deal of attention to their FX execution and, hopefully, it helps add to their performance, because the bottom line is, these are financial transactions and, as I have argued in these pages several times, they demand a professional approach. Yes, managers have largely moved on from the administration trades “get them then done when you want”, which was an open invitation to a trader to make money, but they are still not paying enough attention.

If these “professional” money managers are actual that – professional – their apparent obsession with shareholder value and cost efficiency would make them at least question their use of the London 4pm Fix. At this stage I usually get the “it’s too expensive to change the legals” argument – it may be expensive, but as the latest analysis published on the month-end Fix indicates, over the course of the 20 months The Full FX has been publishing this data, it would add up to the equivalent of $745 per million, per month-end? That expensive?

Even if changing the legals is a huge burden, surely these “professionals” can recognise that the mechanism they are using is out-dated, deeply-flawed and in need of updating? If so, why are they not pushing for change from the incumbent provider? Are they really that ovine in nature that they can continue to be blindly led?

I cannot see any other reason than that I have given before, these firms are wilfully and neglectfully ignoring the trading cost associated with the five-minute window. After all, any “professional” looking at the data would come to the same conclusion surely? And it seems to me that, in their own words, they are looking at the data, so they should have spotted this. Of course, perhaps they’re “professional” enough to think that FX hedging costs don’t matter?

colin@thefullfx.com