Reported last September that it was in the works, LMAX Exchange’s Prime of Prime (PoP) offering, LMAX Prime, is officially launching this week. The launch comes as the FX prime brokerage sector has witnessed contraction due to several firms exiting the market or scaling back their business due to risks involved. Providing credit to customers to trade with banks and trading venues, FX prime brokers are vulnerable to volatile moves in the market as well as runaway algorithms that can trigger client losses above levels of collateral held at the prime broker.
This problem was experienced during January’s Swiss Bank triggered volatility which caused an array of brokers and hedge funds to be wiped out from the move in the franc. As a result, since January, several large prime brokers have stated publicly that they have been reviewing their customers, with many riskier ones having their accounts closed. For LMAX Prime and other PoPs, this has created an opportunity to service customers affected by the contraction of credit from select prime brokers.
Learning more about the new PoP service, Forex Magnates connected with Scott Moffat, COO and Gareth Bowles, Head of LMAX Prime Sales. The two explained that as LMAX Prime arrives to the market, they will be targeting “brokers, asset managers, funds wanting credit intermediation and bespoke liquidity arrangements with access to multiple venues.” They added that unlike several prime brokers who have limited their exposure to high- frequency trading (HFT) clients due to credit risks involved, LMAX Prime is comfortable with their pre-trade risk model to handle such account types, and “they do not present any more risk than non-HFT clients.”
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In regards to monitoring pre-trade risk, LMAX Prime believes that their technology to manage such risk is one of the unique characteristics they provide to the market. Moffat and Bowles explained that building such technology in-house is superior to that of other prime brokers who are integrating solutions from third parties. This is due to having control of the product to deliver upgrades, as well as providing end-user clients with less technology friction which could increase latency.
One of the questions asked when it was first reported that LMAX would be launching a PoP was whether it would cannibalize the firm’s existing business from which it collects revenues from trades executed on its matching platform. Moffat and Bowles believed that LMAX Prime wouldn’t compete against its existing business as they were targeting a new client base. The added that they foresaw customers who were satisfied with the prime service eventually trading with LMAX Exchange as well. They added though, “We are also realistic enough to understand that clients like having some form of redundancy and access to more depth across the market, as a whole. We are willing to work closely with our clients and create bespoke liquidity arrangements, this requires us to have as agnostic approach as everyone’s needs are going to be different.”
Bowles and Moffat also believed that the current post ‘Black Thursday’ environment in the FX industry provided an opportunity for LMAX Prime to gain market share. They explained that Black Thursday “created a lot of opportunity for the ones who are confident in their risk controls and still keen to offer PoP services. Clients are being off boarded from traditional FXPBs after the Swiss franc move and these customers need a home.”
They added, “Another side effect will also almost certainly see an increase in the cost of clearing for customers looking to access multiple liquidity pools. The days of competing in terms of fees alone are long gone and clients will be acquired and retained with great customer service and reliable technology.”