Credit challenges faced by the FX PoP space
James Alexander, 26 Degrees Global Markets Chief Commercial Officer of APAC sat down with Finance Feeds Editor-in-Chief and podcast host Nikolai Isayev.
Highlights of this podcast include the shifts in the PoP (prime of prime) space, increasing credit demands in FX, the new 26 Degrees Global Markets office in Cyprus and Alexander’s first day in finance.
The shift in Prime of Primes space
The fifth podcast episode delved into the “super interesting time in the Prime of Prime space”, commented Alexander. Marked recently by the departure of Jefferies, who may or may not be looking to transition its FX PoP business to another party.
“Jefferies exiting the space is big”, said Alexander as he explained the direct implications in the sector. “It sends a message about where Prime of Primes need to focus, where they need to deliver value and derive value for themselves, and how to structure engagement with clients.”
Quality of execution, non-core aspects like market data, and robust access to credit – which is not a given – are key features of a serious PoP offering today in the eyes of 26 Degrees Global Markets and James Alexander, who noted that other tier 1 Prime Brokers such as Credit Suisse are also exiting segments of the Prime Broking space.
“Credit and access to credit and being able to clear trades is the most boring conversation but, like oxygen, as soon as it starts running a little low, it’s the only conversation in the room”, states Alexander.
Alexander believes it is likely that small Primes with no consistent access to credit will struggle to find scale over the coming year, while PoPs with continued access to the tier 1 Prime Brokers will do well, and this trend may continue over the foreseeable future.
The 26 Degrees Global Markets senior executive noted that due to the lack of a cohesive regulatory landscape in Asia regarding requirements around the quality of execution, retail brokers in the region should pay particular attention to the service they are receiving from their PoP.
Market data enters Prime of Prime offering
“As the conduit to the global equity and futures exchanges for many retail brokers, Prime of Primes have a significant role to play in delivering quality multi-asset market data, as this has become a key requirement for ongoing growth and scale for many retail businesses”, explains Alexander.
He continues, “This opportunity also represents a key point of responsibility as well as a key challenge for Prime of Primes. As the retail broking segment looks to continue its progression into multi-asset trading, the responsibilities of correct market data billing and reporting are only growing. Given much of this market data flows through the Prime of Primes as the providers of liquidity, there is a unique responsibility to ensure they are providing the market data in a way that is compliant with all exchange reporting and billing requirements. Failing to do so will leave their broker clients in a highly compromised position and it is in this area that the Prime of Prime market should be leading by example.”
All in all, the FX industry is headed in the right direction with a focus on scaling into multi-asset trading solutions.
Alexander added that analysis of execution quality remains highly relevant, pointing out the rapid advancements in execution analysis capabilities offered by higher quality technology vendors as well as ample access to independent price data from ECN and interbank venues. “This allows retail brokers to analyse any skew that may be present in the feed from their Liquidity Provider, something that can be costly if that broker is relying on a single aggregated price which should reflect a neutral view of the market mid-rate”, explains Alexander.
26 Degrees Global Markets in Cyprus
26 Degrees Global Markets opening its Cyprus office in 2021, led by Riana Chaili, has allowed them to better serve clients in the EMEA region.
The Cyprus office – in its operational support stage with thirteen staff – has allowed the PoP broker to help support their clients in their local time zone and language.
What does he see coming?
Questioned about his longer view into the future, the executive said he speculates that the regulatory environment will remain restrictive, thereby perpetuating the opportunity for certain entity types to flourish. As was the case for the non-bank market makers, many of whom have acquired considerable market share in FX liquidity provision, equities, futures and fixed income markets. Those Prime of Prime entities with strong balance sheets and ample access to credit will fill the credit intermediation void left by tier 1 banks that are stepping back from certain Prime Broking activities.
Alexander predicted that Prime of Prime brokers with a strong balance sheet will prevail over the others, but investment in technology will remain crucial for Liquidity Providers, Prime of Primes and retail brokers.
To this end, 26 Degrees Global Markets has recently upgraded its core trading infrastructure and aggregation engines, replacing several vendors with a more scalable and streamlined solution that aims for faster quote delivery and greater resiliency than was previously possible.