Asset managers are now working hard to try and cut out any banks from Forex dealings. They are trying to stop them from leaking information about trading costs and they are also trying to stop them from leaking pension funds too. Big investors are becoming more and more concerned because banks are able to see their trading patterns and they are even allowed to profit from it as well. This is not good at all, and that is why so many people are finding new ways to try and get things done. Some fund and even asset managers are able to trade in a huge amount of currencies every single day and a lot of people believe that this is why they are able to see funds and changes before they happen.
Banks are holding 95% of the cards when you look at the industry, and other people are sending the orders too. This comes from a director in the UK. He believes that one way to push back would be for people to try and cut dealers out of any trade altogether. They need to slice up any large orders that they place into much smaller chunks and they also need to avoid creating large exchange rate moves too. Sure, the first few slices will normally get a very good price but after that, dealers will then nudge the prices higher and this means that every single purchase becomes more and more expensive. Dealers have to worry about the cost of trading doubling when 4pm hits and this is worrying to say the least.
An analysis was done over 3,000 trades and they all showed that patterns are easiest to decipher because you have over $5.1tn in flow passing through the market in 5 minutes alone. The nature of the market leads to asymmetries and this is done between both dealers and clients. This comes from Yazid Sharahia, who is actually the global head of Norges Bank. He operates one of the biggest wealth funds in the world and he believes that there are absolutely no rules stopping banks from looking over the behavior of their clients. This gives them a significant edge and there is nothing to stop them from profiting either. Banks have very sound and good reasons for trying to find out what their clients are going to do next as it will help them a lot with their own risk management. As if that wasn’t enough, they are also trying to reduce the advantage that clients have over them. In 2017, it was noted that the high cost of intermediation that stems from structural changes really does how that there is a significant area of improvement. Matching platforms have existed since the year 2000 and investors are working hard to try and grow or even rely on banks. This will give them access to credit and it will also help them to trade currencies too. On top of that, they can get credit for access prices.
Not all is lost, however. A new project called Siege is being led by an ex-HSBC professional. Claude Goulet is trying to cut dealers out of the flow and he is doing this by matching trades before they are sent to the market. Currencies are swapped during a regulated and live reference rate and this is going to be provided by New Change FX. They are not going to be paying for the spread, but they are going to try and sell currencies. Trades are going to be executed at a midpoint and they are also trying to cut down on cost as well. They are not claiming to try and meet all orders, but in their opinion if they can meet 25% then this would give their clients a ton of savings. People who are involved in this are going to say that they have a much higher chanced of success when compared to previous adventures. Banks are not going to like this one bit, but a lot of people believe that there is so much that other people don’t like about banks. This brings some degree of balance to the situation, and it also means that people can be given the help and support they need to feel confident in their trading ability at all times. Of course, people have come out to say that they are not worried at this stage at all and Siege is certainly not concerned about damaging the banking relationship.
A lot of people are very concerned about speaking publicly about the matter, but Siege is not worried about damaging his banking relationship at all. He has faced a ton of hurdles in the past and this happened way before the launch. He really wants the launch to be a success but for this to happen, he needs to make sure that he is generating a good amount of cost savings. Investors are also very worried about missing out on good prices given the planned launch. If everything was to go smooth, then you have to make sure that people are not missing out on a good price while they wait for the match. There are execution requirements and the main drawback with all of this is that you end up losing control over the market. Mr Goulet believes that the way that the system works ultimately means that you will never lose out on any market prices. This is all due to the live benchmark rate. Any trades that are not matched can still be sent out to the usual channel. Siege is working hard to try and make sure that the trades are completely separate from the main market and they are also trying to make sure that information leakage is kept at an absolute zero too. The daily flows will have a huge impact on this and it will be hard to do, but that doesn’t mean that it will be impossible at all and with everyone working hard, it’s certainly a possibility.