FX Survey 2018: The trend is your friend…

By Kevin Rodgers

Illustration: Paul Daviz

One of the first things I was taught as a keen young FX trader, back in the days when you could smoke or fight on the trading floor and when computer screens were deeper than they were wide, was that ‘the trend is your friend.’ That is certainly the case in this year’s Euromoney FX survey for those firms that are the beneficiaries of the FX market’s recent evolution. 

For those caught on the wrong side, the trend is much less friendly.

This year’s winner by overall market share, JPMorgan – only the fourth bank ever to have won the survey – is certainly on the right side of things. Up from sixth in 2014, when it had an overall share of 5.55%, the bank’s rise has been steady every year under long-time business leader Troy Rohrbaugh.

Its top slot in this survey with a share of 12.13% had an air of predictable inevitability about it. Indeed, in the piece I wrote for last year’s survey I’m happy to say that I did predict it.

Much less predictable was the sudden downturn in Citi’s fortunes. Firmly on top of the table in 2014 with 16.04% share, holding on last year with 10.74%, it has now slipped to fifth with just 6.16% – its lowest ranking since 2009.

Its slide is mirrored by the stories of Deutsche Bank and Barclays – powerhouses only four or five years ago – now down to 8th in Deutsche’s case and 11th in Barclays’ (outside the top 10 for the first time since 2001). 

But their fall has meant room for new entrants. One of the places in the top five has been taken by electronic market making outfit XTX Markets. First appearing in the rankings in 2015 at 34th, XTX has gained ground ever since; this year it has finished third overall with a 7.36% share. Its e-rival Jump hovers just outside the top 10, with 2.38%.

To be fair, the rankings in this year’s survey are not strictly comparable with those of the past. The reason being that this year the methodology has been altered. Swaps less than one week in maturity no longer count towards a firm’s total volume. This has the effect of putting more emphasis on spot and forwards market share in the overall rankings, since short-dated flow is a large part of most firms’ swaps volume.

It would be possible to argue at tedious length about the wisdom of re-jigging the survey this way. I personally think it makes sense since – some emerging currencies aside – ultra-short dated swaps have very little to do with a firm’s real prowess in the sharp end of FX. In any case, it makes no difference to JPMorgan’s victory, the US bank would have won under the old rules too, although it does flatter XTX.

Even with that caveat, what is still clear is that all these movements in the rankings – the consolidation of the hold of JPMorgan, the rise of specialist e-market makers and the fall of intermediate-sized full-service firms – are part of the same pattern.

There are, and always have been, two broad categories of customer: the kind that just want a price and the kind that see FX as a package of services, often tied up with other things a bank can offer, such as loans or origination.

For those customers who just want a price – as convenient, tight and reliable as possible – the new e-market makers have some inherent advantages over incumbents.

No legacy systems to try to work around, just a nice clean sheet of paper. No bank firewalls or interminable committees to negotiate. No regulatory restraints on pay.

It’s like being able to design a stripped down drag racing car where the only goal is speed, while your rivals need to put in a dog box and baby seats.

And so, as you might expect, the e-market makers dominate the FX trading platform category, the world of ‘just give me a price’. HCTech at third and Jump Trading at number three both have very decent totals (9.61% and 7.03% respectively), but XTX wins the category with a startling 18.49%. XTX’s position is not just about volumes. In the newly instituted customer satisfaction (CSAT) survey, the firm gets stellar marks in virtually every category.

What is more, it is not just in developed markets that the newcomers shine, they have also started to make a serious showing in the less developed markets. In emerging markets, XTX comes in at number three just behind such sector stalwarts as Standard Chartered and JPMorgan.

This should be a worrying sign for banks that might have thought that the wrinkles and peculiarities of emerging currencies would not suit robots. But maybe, with machine learning able to see complex patterns and connections that no human trader can realistically follow, this arena is actually even more suited to the machines’ advantages than the more liquid and heavily traded G20.

Away from the ‘price is right’ crowd, in the arena of ‘what else can you do for me?’, raw parental size is almost always the winning factor for this year’s survey.

Take the corporates category. Four of the top five banks – HSBC, JPMorgan, Citi and Bank of America Merrill Lynch – have the advantage of enormous scale, with the global reach and penetration that such scale brings.

The smallest of them, Citi, has a market capitalization of $200 billion; the largest (JPMorgan) has a market cap close to double that. The four of them are an order of magnitude bigger than rivals Deutsche (about $30 billion) and Barclays ($50 billion). All of which makes $50 billion Société Générale’s showing at number three even more praiseworthy.

The pattern is repeated in leveraged funds, where it is the two biggest banks – JPMorgan and BAML – at the top of the heap, and in the banks category, where JPMorgan dominates with 15.99% share (more than 4% points ahead of nearest rival UBS).

Even in the options product category – where one might expect smaller, plucky specialists to be able to shine – the top two slots are taken by BAML and JPMorgan, with an almost 30% share between them.

Deutsche (my old employer), which once ruled this category with number one slots from 2011 (when the category was first launched) to 2016, has now fallen to seventh. 

This slide is emblematic of the secular decline of the smaller full-service firms, trapped as they are between the twin pincer jaws of bulk (with its advantage of reach, resources and the ability to sit out or cross-subsidize profit pressure coming from low volatility) and of e-specialism (with organizational speed and flexibility on its side).

In Deutsche’s case, these problems have no doubt been amplified by the dysfunctional goings on at the level of the bank’s board: if FX is a dance, it must be tough to tango tied to a sick elephant.

But of course for the big successful firms, it is not simply the case that you just turn up to the party, point at your holding company’s balance sheet and wait for the customers to fall into your arms. You need a quality offering. By all accounts – and by the evidence of the CSAT scores – that is precisely what JPMorgan (and indeed XTX Markets) has delivered after years of steady, incremental improvement. 

Market insiders talk of the two firms’ policy of ‘zero hold time’ on their e-offering – a powerful marketing tool in a world in which using even 100 milliseconds of delay has become so controversial. The policy is a rather effective way of leveraging technological strength since only firms completely confident in their pricing can afford to release their grip on the ‘last look’ comfort blanket.

But it is also the case that JPMorgan has done well in other aspects of the service delivery. It is noticeable, for example, that they are the only firm to finish first or second in every regional category. This is a strong promotional angle when talking to large multinational corporates or macro funds and must increase the bank’s ability to take down risk – another age-old selling point in the global world of FX.

So is there any hope for firms that are not enormous or startups?

The performance of certain firms makes me think that the answer is yes. Take UBS, for example. UBS is nowhere near the size of JPMorgan or BAML and yet it has still finished second overall, despite its only category win being in swaps where the rules have changed this year.

But it has been consistently in the top five of many of the other categories: third in spot and forwards; second for banks and real money; fourth with leveraged funds and and fifth with platforms. Interestingly, however, it is outside the top 10 for corporates. This speaks of a degree of focus and specialism that has no doubt helped it in maintaining market share in other areas.

Other more specialist firms have also shone, especially in terms of customer satisfaction. I have already mentioned Standard Chartered (top in emerging and with excellent CSAT rankings to back it up); SocGen (ditto in the corporate world); and then there is State Street, with its strong lead in the vital real money asset manager category (and second in swaps as a result, no doubt) backed by CSAT customer raves for virtually every aspect of its offering.

What of the future? I don’t see the pincer of bulk and flexibility relaxing its grip on the unfortunate banks in the middle any time soon. They will probably need to make painful decisions on what to specialize in soon – whether by region, by product or by customer segment.

But there are still some fascinating battles ahead between the fortunate firms on the winning side of this pincer trend. Will UBS be able to continue to fight off its much bigger rivals or will BAML’s multi-year rise (12th place 10 years ago, fourth now) remain on trend to overtake it?

Can Citi reverse this year’s decline as it has a number of times in the past? From talking to senior people connected with the bank it appears that the slide has been caused in large part by a shift in emphasis away from market share towards a focus on pure customer profitability. This is a decision that could easily be reversed.

Last, and most interesting of all, what will happen to the specialist e-market makers now that they have moved from the fringe to become an established part of the top-tier of FX? Will they become white-labelled front ends for banks that no longer wish to compete in the increasingly high-tech battle of robots?

Or, given that the e-firms’ potential Achilles heel is that they ultimately rely on banks for credit via prime brokerage, will the banks fight back in any way by rationing or changing their pricing of credit to them?

I don’t have the answers, but I know an easy way to find out. We can wait for next year’s survey after what promises to be another fascinating year in the world of FX.

Kevin Rodgers is the former head of global foreign exchange at Deutsche Bank. His book, ‘Why aren’t they shouting? A banker’s tale of change, computers and personal crisis’, was published in 2016.