LEADER >>>
In general, the industry has responded to post-trade capacity or become self-clearing. Alternatively, the
bottle necks by asking “How do we perform more of prime brokerage business could fully utilize the
the same, more frequently?” rather than taking a processing capacity of the firm, constraining the
holistic view of the value-chain to optimize processing execution side of the business.
efficiency and eliminate risk. This focus on capacity
has worked to date, but has created neither the cost Beyond affecting execution decisions and liquidity,
savings nor the efficiencies that are needed for the post-trade processing automation is an important
market to move to the next stage – and leaves in place client service requirement for the buy-side. Concerns
significant bottlenecks to future growth. over counterparty and operational risk have
accelerated a trend towards buy-side
Historically, the cost of processing wasn’t a significant firms building large FX positions
factor in the execution decisions by market through many small notional
participants, but that’s changed substantially in this executions rather than the handful of
new paradigm. When discovering execution large notional trades which was
opportunities, automated execution algorithms use common just a few years ago. This
the cost of trading as a factor in deciding whether to shift requires automated post
execute or not. These costs are broken into the trade solutions to keep pace.
brokerage (or execution fee) and the cost of clearing; Consequently, this combination
prime brokerage fees or, for self clearing firms, the of higher frequency trading and
operational costs associated with booking, confirming smaller notional tickets has
and settling the transactions. In short, high post created an ‘arms race’ of post-
trade costs can squelch trade automation solutions
trading activity and act from major banks. If the
to constrain market additional realities of multiple
growth. prime brokers and multiple
managed account
In addition, the relationships are also
constraints imposed considered, the complexity
by post-trade costs only increases, and the need
are driving banks to for automation even more
carefully select the acute.
venues on which
they provide While these changes are
liquidity and carefully spreading through the traditional
choose the clients to CTA, asset management and
whom they provide hedge fund communities, a new
clearing. In the class of investors are causing
abstract, FX prime additional challenges. The desire
brokerage offers both the rental of the dealer’s credit to trade foreign exchange by a widening group of
as well as their operational processing abilities. What individual and institutional investors differs
this means is that dealers servicing prime brokered considerably with the way banks trade with each
clients have created internal competition for other or with their clients who are trading FX as a
operations capacity between their own proprietary hedging strategy. These retail investors and hedge
trading, e-commerce and the funds their prime funds typically trade very actively – as much as tens of
brokerage arm is servicing. While it’s clear that these thousands of tickets a day – often with relatively small
are the firms with the greatest processing capacity in notional amounts, and their positions tend to net.
the market – the fact remains that capacity is finite Because they are trading purely as an investment, and
and that operations is a constraint. If post-trade rarely hold positions overnight, they do not want to
bottlenecks are not addressed then in extreme cases take delivery of the actual currencies traded and tend
the dealer’s own execution processing needs could to settle only in dollars. The phenomenon includes a
compromise the prime brokerage business’ ability to spectrum of investors from retail up through funds
service high velocity clients – causing the clients to ranging from small to proprietary trading shops
migrate their business to firms who still have excess which generate massive volumes.
|22 october 2009 e -FOREX
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