Forex Magnates reached out to Jeff Wilkins, Managing Director at ThinkLiquidity, for his perspective on one of the most destabilizing and crucial realities in today’s FX market, the ongoing drought of liquidity.
Firms across the world are employing a number of tactics to mitigate the challenges created by the current lack of volatility. For many, this involves questioning their existing practices, cutting costs, and chasing other short term fixes to maintain profitability.
According to Mr. Wilkins, “There are myriad things driving the lack of volatility. But regardless of the causes, the lack of volatility is squeezing revenues and if this environment continues only the strongest firms will survive. When market conditions do rebound, the firms that were able to weather the storm will come out of this like a slingshot. Those that were not will have already been forced to close or sell at a steep discount.”
Furthermore, “When volatility returns to even normal levels, companies will see revenue increase 30-40% immediately. But only the firms still around at the time of this rebound will be able to reap the benefits,” he added. His full-length interview can be read below.
1. Do you foresee the present volatility drought and tranquil markets leading to widespread broker attrition, with a few players emerging out of this quagmire?
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The thing that differentiates the big players from other brokers throughout the world is the strength of their balance sheets. Companies with the strong balance sheets are more able to withstand reductions in revenue and volume. If necessary, they have the free capital to operate for an extended period of time even while incurring losses. Some of the smaller players, however, cannot survive more than a month or two of losses before a serious threat is posed to the viability of their business.
While market conditions have affected nearly every firm, the street can only see results with clarity for the large public entities because they have the benefit of being able to review publicly available financial information. Ultimately, the firms doing the best are the ones who have better adapted via a risk management standpoint and who prepared for potential market downturns by building capital reserves when times were good. At ThinkLiquidity, we have the benefit of seeing the operations and results of many different firms across the globe. This environment has not been as tough as you would think for many of our customers.
It is also important to note that we are not seeing across the board reductions in volumes from all of the firms we work with. This often depends upon what growth phase the broker is in (new brokers v. established brokers). But even for some established brokers, volumes continue at a level that will allow the firm to be profitable if the revenue generated from that volume is maximized. This requires regular, rigorous review of risk management practices and the ability to make rapid adjustments to shifting market conditions.
I don’t think that the lack of volatility is impacting private companies differently than the public ones. But the public companies may be under increased pressure to make changes as their financials are publicly reported and scrutinized by shareholders and analysts. When net revenue, earnings per share, and other financial targets are missed, shareholders want to know what will be done to fix it, and they want to know immediately.
This can place public firms in the position of making short-term decisions to help results (altering risk management practices, modifying partner relationships, etc.) rather than continuing with the long-term strategy that got them to their current strong position in the market.