ADS Securities Sees Lack of Prime Brokers Stifling Global FX Market Growth

According to estimates made by ADS Securities there is a gap of $1.3 trillion that needs to be filled.

ADS Securities has published an opinion piece in which key executives from the company elaborate on a list of challenges that are apparent across the foreign exchange market a year and a half after the Swiss National Bank (SNB) event wreaked havoc on the industry.

According to the company, the lack of solid prime of primes has contributed to difficulties for a number of companies that have been seeking a well capitalized entity to clear their trades with. Even worse – the market conditions have opened the market for some unethical companies in the industry that have claimed to have the solid balance sheet to handle flows from numerous brokers.

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With the decline in the number of prime brokers and the increasing number of companies that are in need of access to top tier liquidity, the growth potential of the foreign exchange market is greatly affected. According to ADS Securities, a 25 per cent drop in credit lines available to market participants is causing an increase in spreads and higher prices of transactions.

In recent years companies such as CFH Clearing and Sucden Financial have proven that the prime-of-prime services that they have been offering to the market are backed up with a solid capital base to provide a quality service. ADS Securities is one of the companies that has been a long time coming into the market and has already started its efforts in the space after making key executive hires over the past several quarters.

The lack of credit will lead to much wider spreads and increased pricing for all

The Chief Operating Officer of ADS Securities London, Marco Baggioli, explains: “A daily global FX industry credit gap potentially affecting as much as US$1.3 trillion in daily volume is extremely significant and is changing the overall balance of the market. The lack of credit will lead to much wider spreads and increased pricing for all, from banks, to hedge funds, international businesses and all FX traders and, at the moment, no one is facing up to the problem.”

The study of ADS Securities outlines that growth is unlikely to materialize since 2013’s average daily volume of $5.3 trillion according to the Bank of International Settlements’ Triennial Survey. The outlook for growth to $6.5 trillion by September 2016 is now looking overtly optimistic due to the changed market dynamics, and the pull out of Foreign Exchange Prime Brokers (FXPBs).

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“I see a need for prime-of-prime services that are a true reflection of a direct prime brokerage relationship, with direct access to liquidity backed by strong capital and credit relationships,” Baggioli added.

ADS Launch of PoP Service

The study that ADS Securities published coincides with the company’s launch of its prime of prime (PoP) institutional service. The company has long been preparing to make the move after hiring a number of key executives to prepare its institutional PoP FX offering.

After the on-boarding of Marco Baggioli from BNP Paribas, the executive team at ADS Securities has been bolstered with the hire of Conor Canny as VP of Pricing and Liquidity.

Two years ago a broker with $5 million capital might have been able to access a PB, not anymore

Mr Baggioli has repeatedly talked about the challenges that are facing the FX market: “Two years ago a broker with $5 million capital might have been able to access a PB, but the capital they must have now have has gone up to as high as $50-75 million – so many cannot get the credit lines they need.”

“Some smaller firms may be able to trade bilaterally with each liquidity provider and post margin accordingly, but this approach has a lot of limitations, including netting of risk and margin requirements. The situation is as dire for start-up Hedge Funds or those whose assets under management do not make the cut with the FX PBs,” he elaborated.

According to the COO of ADS Securities London, leading brokerages should have a role sitting between clients and their own PBs, providing access and sharing their credit lines.

“Clients will need to pay for the service, but at least they will be trading and will remain in business. Savings need be found elsewhere in their FX value chain,” he concluded.

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