Here, a few very important general conundrums from within this sector of the industry are examined and dissected, whereby I give my perspective on the dynamics within the industry which have contributed toward the growth in popularity of Prime of Prime Brokerage.
Why the FX PoP brokerage model continues to grow in popularity.
FX PoP brokerage model continues to grow because FX PoPs are able to provide a very tailored level of service to clients for whom FX is a primary asset class. Traditional prime brokerages typically offer FX services as an add-on for their large customers who need FX as a means of facilitating trades in foreign equities or fixed income products or other transactions with a foreign exchange component. For these customers, as FX may not be the main point of focus, they are less likely to negotiate or even pay attention to the business terms by which they do their FX trading, as it is essentially a bundled service. With the proliferation of prime brokerage customers for whom FX is a primary asset class, there is growing demand for a highly tailored level of service that meets the unique needs of their business and FX PoPs are able to both understand and cater specifically to these needs.
Furthermore, traditional prime brokerages are burdened by an onerous vetting and on-boarding process, where each potential new client is heavily scrutinized to the point where they must build a business case for why it would be worthwhile to do business together. In many cases, it is the credit or legal department of a traditional prime brokerage - who often have a cursory level of familiarity with the FX market - that decides whether to even accept a new customer or not. FX PoPs leverage their expertise and experience working with firms with both conventional and non-conventional business models, which means a sensible and pragmatic on-boarding process.
One final key reason FXPoPs have grown is simply because end users are demanding brokers who align themselves with their clients and implement an agency model. The FX PoPs are the firms that are best positioned to benefit from the increased demand for agency trading.
Understanding what are now considered to be the benchmark attributes of leading FX PoPs.
The key benchmarks of FX PoPs are regulation, costs of trading, scope of offerings and whether the client feels it is able to develop a personal relationship with it's PoP. Regulation is an especially sensitive area given current events - FX PoPs that are regulated in a reputable jurisdiction such as the UK have a much better track record in dealing with counterparty risk than FX PoPs located in other quasi-regulated jurisdictions.
If a client is able to develop a personal relationship with the FX PoP it can mean a huge advantage because, by providing access to credit and Liquidity
Liquidity
The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent
The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent
Read this Term, the FX PoP has the ability to lower the clients' cost of trading and direct them to the best technologies and solutions available.
A PB understands its clients needs, offers a variety of trading & technology solutions geared to match the needs of specific clients is able to provide more enhanced to its clients.
What key questions brokers should be asking about a potential PoP to partner with.
The questions brokers should ask its brokers are really dependent on the needs of the broker but there are some universal questions to ask.
-How dedicated is your firm to making sure its FX PoP program is successful?
-Am I allowed to use my own technology or must I take a one size fits all solution?
-What are your processes for margin/collateral management and what implications might these have for my business?
-What experience do you have catering to clients with similar needs and how have these clients found success after implementing your solution?
Whether a brokers particular market focus or regional area of operations should influence their choice of PoP.
FX PoPs that do not cater to the regional requirements of their clients risk losing these clients to someone who will - as the FX PoP model continues to take hold, increased competition will mean greater choice for customers. The physical location of a company's office may be incidental to their ability to offer a high quality of service. An FX PoP in London can serve a Danish broker just as well, if not better than an FX PoP in Denmark.
How brokers can go about harnessing the powerful customised liquidity solutions provided by PoPs.
Brokers can harness the power of a PoP in a number of ways, but to do so it is incumbent upon them to understand the demographics of their own customer base and maximize the efficacy of the solutions available through customer segmentation. FX PoPs can provide customized liquidity "bands" which need to be matched to the particular trading style and trade size requirements for each customer segment. The FX PoPs can provide the tools and share best practices but brokers play a key role in ensuring that the service is optimized for the needs of their customers.
Ways in which PoPs can assist brokers to offset risk by providing innovative and flexible hedging services.
FX PoPs can provide customized bands of liquidity for larger clients or even direct access to popular institutional platforms such as single bank platforms or ECNs. Further, FX PoPs are capable of providing deep liquidity which allows firms to hedge large orders in a single click.
Steps which PoPs been taking to differentiate their services to better align them with the specific objectives of client.
Many FX PoPs have provided specific proven solutions for specific customer segments. For example a firm can treat have a different solution for a broker who hedges its dealing desk exposure compared to the solution it provides a broker to straight through processes all client orders. Some FX PoPs even have solutions for hedge funds or professional clients.
Ways in which utilising PoPs helps brokers free up time and resources to focus on capturing new business and revenue stream.
A considerable amount of time must be spent working with Liquidity Providers
Liquidity Providers
A liquidity provider (LP) constitutes an individual and/or an institution that functions as a market maker in a given asset class. Broadly speaking, liquidity providers will act as both the buyer and seller of a particular asset, thus making a market. In the equities space, many stock exchanges rely on liquidity providers who make the commitment to provide liquidity in a given equity. These liquidity providers commit to providing liquidity in the hopes that they will be able to make a profit on
A liquidity provider (LP) constitutes an individual and/or an institution that functions as a market maker in a given asset class. Broadly speaking, liquidity providers will act as both the buyer and seller of a particular asset, thus making a market. In the equities space, many stock exchanges rely on liquidity providers who make the commitment to provide liquidity in a given equity. These liquidity providers commit to providing liquidity in the hopes that they will be able to make a profit on
Read this Term to profile the liquidity needs of any customer base and then identify pricing strategies that are mutually beneficial to traders, brokers and the liquidity providers themselves. Insitutional liquidity is a fragile ecosystem - if any of those three key participants suffers decreased profitability as a result of a poor calibration by either or both of the other participants, a significant decrease in trading activity is sure to follow. This is a challenging balancing act, to say the least, and although it is a very necessary exercise that must be performed consistently and continuously, it is best outsourced to FX PoPs for whom this is a key business function. Were a broker to undertake forging and developing these relationships with liquidity providers on its own, it would amount to little more than "reinventing the wheel" rather than focusing one's efforts in the right areas that will yield the highest returns to the business.
Here, a few very important general conundrums from within this sector of the industry are examined and dissected, whereby I give my perspective on the dynamics within the industry which have contributed toward the growth in popularity of Prime of Prime Brokerage.
Why the FX PoP brokerage model continues to grow in popularity.
FX PoP brokerage model continues to grow because FX PoPs are able to provide a very tailored level of service to clients for whom FX is a primary asset class. Traditional prime brokerages typically offer FX services as an add-on for their large customers who need FX as a means of facilitating trades in foreign equities or fixed income products or other transactions with a foreign exchange component. For these customers, as FX may not be the main point of focus, they are less likely to negotiate or even pay attention to the business terms by which they do their FX trading, as it is essentially a bundled service. With the proliferation of prime brokerage customers for whom FX is a primary asset class, there is growing demand for a highly tailored level of service that meets the unique needs of their business and FX PoPs are able to both understand and cater specifically to these needs.
Furthermore, traditional prime brokerages are burdened by an onerous vetting and on-boarding process, where each potential new client is heavily scrutinized to the point where they must build a business case for why it would be worthwhile to do business together. In many cases, it is the credit or legal department of a traditional prime brokerage - who often have a cursory level of familiarity with the FX market - that decides whether to even accept a new customer or not. FX PoPs leverage their expertise and experience working with firms with both conventional and non-conventional business models, which means a sensible and pragmatic on-boarding process.
One final key reason FXPoPs have grown is simply because end users are demanding brokers who align themselves with their clients and implement an agency model. The FX PoPs are the firms that are best positioned to benefit from the increased demand for agency trading.
Understanding what are now considered to be the benchmark attributes of leading FX PoPs.
The key benchmarks of FX PoPs are regulation, costs of trading, scope of offerings and whether the client feels it is able to develop a personal relationship with it's PoP. Regulation is an especially sensitive area given current events - FX PoPs that are regulated in a reputable jurisdiction such as the UK have a much better track record in dealing with counterparty risk than FX PoPs located in other quasi-regulated jurisdictions.
If a client is able to develop a personal relationship with the FX PoP it can mean a huge advantage because, by providing access to credit and Liquidity
Liquidity
The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent
The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent
Read this Term, the FX PoP has the ability to lower the clients' cost of trading and direct them to the best technologies and solutions available.
A PB understands its clients needs, offers a variety of trading & technology solutions geared to match the needs of specific clients is able to provide more enhanced to its clients.
What key questions brokers should be asking about a potential PoP to partner with.
The questions brokers should ask its brokers are really dependent on the needs of the broker but there are some universal questions to ask.
-How dedicated is your firm to making sure its FX PoP program is successful?
-Am I allowed to use my own technology or must I take a one size fits all solution?
-What are your processes for margin/collateral management and what implications might these have for my business?
-What experience do you have catering to clients with similar needs and how have these clients found success after implementing your solution?
Whether a brokers particular market focus or regional area of operations should influence their choice of PoP.
FX PoPs that do not cater to the regional requirements of their clients risk losing these clients to someone who will - as the FX PoP model continues to take hold, increased competition will mean greater choice for customers. The physical location of a company's office may be incidental to their ability to offer a high quality of service. An FX PoP in London can serve a Danish broker just as well, if not better than an FX PoP in Denmark.
How brokers can go about harnessing the powerful customised liquidity solutions provided by PoPs.
Brokers can harness the power of a PoP in a number of ways, but to do so it is incumbent upon them to understand the demographics of their own customer base and maximize the efficacy of the solutions available through customer segmentation. FX PoPs can provide customized liquidity "bands" which need to be matched to the particular trading style and trade size requirements for each customer segment. The FX PoPs can provide the tools and share best practices but brokers play a key role in ensuring that the service is optimized for the needs of their customers.
Ways in which PoPs can assist brokers to offset risk by providing innovative and flexible hedging services.
FX PoPs can provide customized bands of liquidity for larger clients or even direct access to popular institutional platforms such as single bank platforms or ECNs. Further, FX PoPs are capable of providing deep liquidity which allows firms to hedge large orders in a single click.
Steps which PoPs been taking to differentiate their services to better align them with the specific objectives of client.
Many FX PoPs have provided specific proven solutions for specific customer segments. For example a firm can treat have a different solution for a broker who hedges its dealing desk exposure compared to the solution it provides a broker to straight through processes all client orders. Some FX PoPs even have solutions for hedge funds or professional clients.
Ways in which utilising PoPs helps brokers free up time and resources to focus on capturing new business and revenue stream.
A considerable amount of time must be spent working with Liquidity Providers
Liquidity Providers
A liquidity provider (LP) constitutes an individual and/or an institution that functions as a market maker in a given asset class. Broadly speaking, liquidity providers will act as both the buyer and seller of a particular asset, thus making a market. In the equities space, many stock exchanges rely on liquidity providers who make the commitment to provide liquidity in a given equity. These liquidity providers commit to providing liquidity in the hopes that they will be able to make a profit on
A liquidity provider (LP) constitutes an individual and/or an institution that functions as a market maker in a given asset class. Broadly speaking, liquidity providers will act as both the buyer and seller of a particular asset, thus making a market. In the equities space, many stock exchanges rely on liquidity providers who make the commitment to provide liquidity in a given equity. These liquidity providers commit to providing liquidity in the hopes that they will be able to make a profit on
Read this Term to profile the liquidity needs of any customer base and then identify pricing strategies that are mutually beneficial to traders, brokers and the liquidity providers themselves. Insitutional liquidity is a fragile ecosystem - if any of those three key participants suffers decreased profitability as a result of a poor calibration by either or both of the other participants, a significant decrease in trading activity is sure to follow. This is a challenging balancing act, to say the least, and although it is a very necessary exercise that must be performed consistently and continuously, it is best outsourced to FX PoPs for whom this is a key business function. Were a broker to undertake forging and developing these relationships with liquidity providers on its own, it would amount to little more than "reinventing the wheel" rather than focusing one's efforts in the right areas that will yield the highest returns to the business.
