Who's best where? Japan
Methodology
Investment is crucial in the volume game
More banks, leveraged funds and real money managers have taken part in Euromoney’s annual foreign exchange poll than ever before. What’s more, the average financial institution involved in the FX market is trading much bigger volumes than ever before. The number of leveraged funds participating in the poll, for instance, has increased by 63% from 371 to 607, on the previous year. At the same time, the total turnover of all leveraged funds combined has increased by 138% from $13 trillion to $31 trillion.
Alone of the major customer segments, banks and hedge funds have increased their share of the number of votes cast, and of business reported. For the second year in a row north American FX volumes make up in excess of 35% of business transacted (2005, 36.05%; 2006, 35.72%) and one-fifth by number of total votes.
Deutsche Bank has stoutly defended its number one overall position in the poll, managing to expand its lead. It has increased its market share by 2.54 percentage points, to reach an astonishing 19.26%, some 7.4 percentage points above its closest competitor, UBS, whose market share fell slightly. Deutsche has done so well that even its senior FX bankers are surprised. For example, Jim Turley, the bank’s head of global currencies and commodities, admits to being “surprised at the margins, overall and in the hedge fund category”.
| We have exited some client relationships by mutual consent, and used the resources to acquire new clients or deepen existing relationships Zar Amrolia, Deutsche Bank |
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Another indication of the increasing size of the FX market is that UBS’s share of the market fell by more than half a percentage point even though its total turnover was more than double the previous year’s, up from $4.9 trillion to about $10 trillion. So in spite of the relative decline, UBS managing director of FX distribution and member of the UBS investment bank board Fabian Shey can still claim to be “very pleased with the performance [of UBS], in terms of volume and growth in 2005”. An even more pronounced example of this trend is Merrill Lynch, which dropped from sixth to 10th place in the overall ranking, despite increasing its turnover by almost $1 trillion.
As leveraged funds trade the highest volumes of currency on the buy side and have the strongest rate of growth of reported turnover, it is not surprising that a bank’s performance in this category strongly reflects its overall performance. Deutsche has more than twice the market share in leveraged funds than second-placed Barclays Capital. RBS has made the most significant inroads into the top 10 of the overall poll, climbing from 11th place to fifth. In the leveraged fund category, though, it jumped from 12th to fourth. With UBS’s overall market share in decline, it is symptomatic that the Swiss bank lost 2.81 percentage points of its share in this sector, the biggest loss it faces in any of the important categories. Merrill Lynch has suffered a spectacular free fall in the leveraged funds business. With its market share more than halved, Merrill’s ranking has taken a plunge from second place to 10-th. Merrill falls one place behind Bank of America, which was ranked 18th in this category last time around, and is now in eighth place here and overall.
E-commerce advances
The rise in FX activity by hedge funds and other asset managers has been facilitated by continuing improvements in e-commerce. Banks are profiting from FX being seen as an asset class, and that shift in perception has been helped on by technological advances. “The streaming of executable prices on electronic platforms has turned FX into an electronic market comparable to other asset classes that went electronic years earlier,” says Christiane Mandell, head of global FX at Bank of America.
Citigroup is a prime example of the importance of being at the forefront of e-commerce. The bank has claimed the number one spot for research in almost every category. Were this poll about research alone, Citi would top it. But by its own admission the bank is still feeling the effects of not investing sufficiently in technology. This has changed now but the heavy investment that went into improving Citi’s e-commerce platform only started paying off by last September, according to Jeff Feig, global head of FX at Citigroup. “Without a strong prime brokerage business, which we have not had, and a market-leading electronic platform, it is hard to turn the recognition for research value add into market share gains,” he says.
Deutsche’s Turley stresses the opportunities that electronic trading provides for new entrants into the market. A good example is retail FX trading. With the proliferation of banks and retail aggregators engaging in that sector, Turley is confident that retail “is going to grow and grow”.
In an FX study published in April, research firm Greenwich Associates estimates that the strongest growth in electronic foreign exchange volumes was among financial institutions, with retail aggregators recording the biggest increase in this group. “The development of e-commerce will continue, and the way that the market behaves will be impacted by technology,” says Mandell. She sees it as “a natural evolution of the market towards more efficiency”.
Whether through e-commerce or research, bankers will tell you that good service is crucial to the generation and maintenance of business. The poll results reflect this to an extent. Citi has done well in the service categories and is the best performer in research. Feig will tell anyone who listens that the underlying motive for boosting Citi’s research capacities was provision of better service to clients, and that the top spot in the non-financial institution category “reflects the fact that we provide value added with our research”. Bank of America has made the most significant leap up the poll, and is frequently within the top 10 in the research and service categories. This follows the employment of 120 professionals hired for its front office since June 2004, out of 150 additional FX technologists.
Zar Amrolia, global head of currency sales at Deutsche, is explicit about the emphasis his bank places on offering a comprehensive service. “Our objective is to be the number one service provider to our client base,” he says. “We believe we can provide the best-quality execution across every client sector.” And the bank will not allow precious resources to go to waste. “We have exited some client relationships by mutual consent, and used the resources to acquire new clients or deepen existing relationships,” he says. Deutsche’s approach is reflected in the rankings. Although Citi tops the list in most research categories, Deutsche comes top in tailor-made research and in the trading strategy and research categories.
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The streaming of executable prices on electronic platforms has turned FX into an electronic market comparable to other asset classes that went electronic years earlier Christiane Mandell, Bank of America |
Service provision is expensive and margins are tight. “Technology is very expensive, and if you are not a top provider, than it is very hard to keep up,” says Feig. In particular, asset managers demand low prices. Deutsche and UBS can afford to provide service at low cost with the help of their electronic platforms, whose flows enable them to read the market most effectively. Citi is planning on joining them. But the threshold to creating a market-leading platform is high, as it demands substantial investment, and will have to develop in the shadow of the established competitors. Banks that provide service across all markets and products are increasingly concentrated at the top end.
Most of the banks that feature in the poll will cater to a specific market, where they can offer specialist service and profit from good client relationships. This can be a product, a region or a specific client base where they have traditionally had a strong hand. SEB, for example, holds the prime position in the poll for trading the Swedish krona, and Goldman Sachs benefits from client loyalty among hedge funds. Thin bid-offer spreads in FX will make it near impossible for a generic FX provider halfway between the heavyweights at the top and the specialists further down to retain its positioning. “They are caught in between, they do not have the scale to be global players but they are too big to be small,” says Deutsche’s Amrolia.
Just how far the demands for investment and volume will take the polarization between big fish and small fry remains to be seen. Although agreeing to the notion that the middle ground is in peril, Brad Leek, global head of FX institutional sales at RBS, which has broken into the top five overall for market share, does not believe the chasm will leave only the top three as global players. “Clients don’t want to just have three counterparts,” he says. “They are looking for a sufficient degree of diversification, to protect them against systemic risk.”
Global players are successfully playing the volume game. Amrolia has likened Deutsche to a “supermarket”. But while these global supermarkets will put a lot of pressure on their smaller competitors, it does not seem to spell the end of the high street.