Morgan Stanley and its role in the FX market - an interview with Harry Moumdjian

With banks becoming more and more involved with Retail FX aggregation we managed to catch up with Harry Moumdjian, Executive Director of Morgan Stanley and Head of eDistribution for the Americas, in order to discuss the bank's role in the market.

Intro: The breadth and spectrum of the Morgan Stanley FX franchise enables the Firm to interact with a wide range of customers and grow with clients as their needs evolve. Morgan Stanley’s EFX platform goes beyond being an FX Execution Execution Execution is the process during which a client submits an order to the brokerage, which consequently executes it resulting in an open position in a given asset. The execution of the order occurs only when it is filled. There is typically a time delay between the placement of the order and the execution which is called latency.In the retail FX space, reliable brokers always strive to deliver best execution to their clients in order to maintain a solid business relationship with them. This is a co Execution is the process during which a client submits an order to the brokerage, which consequently executes it resulting in an open position in a given asset. The execution of the order occurs only when it is filled. There is typically a time delay between the placement of the order and the execution which is called latency.In the retail FX space, reliable brokers always strive to deliver best execution to their clients in order to maintain a solid business relationship with them. This is a co Read this Term provider and provides a full range of services including Liquidity Liquidity The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent Read this Term in multiple products, prime brokerage, clearing and other tailor-made solutions for clients.

Please describe MS and its role in the EFX market

Morgan Stanley has developed an FX eCommerce offering based on the principles of a consolidated market view, scalable technology and a scientific approach to pricing and order flow management.

Morgan Stanley provides fx liquidity through a number of different channels, for a variety of different client segments. The Firm offers two single dealer platforms, Matrix and Passport, which deliver both FX execution capabilities as well as a multitude of other Firm utilities. Matrix, an innovative content and execution platform, focuses on the fixed income and currency markets. Passport has an equity and listed derivatives focus that includes intuitive real-time fx execution capabilities. Morgan Stanley also provides liquidity through Direct API solutions and the household names in the multi-dealer community.

The scale and diversity of the Firm allows Morgan Stanley to optimally manage order flow and perform it’s role as an authentic liquidity provider during normal and stressful market conditions. One of the league tables showed Morgan Stanley doubling its ecommerce footprint last year.

How has the EFX market changed in recent years?

Building on the emergence of global FX as a mainstream asset class over the past decade, the electronic fx market has itself expanded in recent years.

In addition to a proliferation of execution venues, new entrants to the market - both price takers and makers – have facilitated the growth of EFX.

The level of sophistication of price providers and price takers in the EFX market has also exponentially increased market in recent years. To adapt to these increasing volumes and changing market dynamics, banks have had to make investments in core architecture, modeling, and ticket compression technologies.

What are the key trends in the EFX market and will those trends continue looking to 2013?

Co-location and infrastructure optimization: In the co-location space, we have seen market participants increasingly concerned about the impact sub-optimal infrastructure has on their bottom line. This has led them to seek points of presence in the major FX data centers across the globe.

Move to fewer but more meaningful price providers: In terms of price providers, liquidity consumers are increasingly aware of their reach in the FX market. This has led to the concept of fewer but more meaningful providers and brought the sales/client relationship back to the forefront of the EFX market.

Retail Aggregators: The Firm continues to see a trend where retail intermediairies move into straight through processing models as opposed to accumulation strategies. Increasingly, retail intermediaries are looking to banks to affect the ultimate risk transfer from their clients, which results in a lower risk business model and a more predictable revenue streams for the intermediates and their investors.

Why should Retail Aggregators use MS price feed?

Retail Aggregators should use MS price feed because we optimize our liquidity curves, technology and service level according to the needs of the liquidity consumer client. We are able to price both accurately and aggressively at the top of the book, while simultaneously providing the depth of liquidity that intermediaries need to service their clients. As a top tier investment bank, we also understand the need to provide liquidity at all times and through periods of market dislocation. This is when clients need us the most and we are there for them.

How does MS feel about RA's aggregating its feed with other banks?

Multi-bank aggregation is a common configuration. We understanding that framework and optimize our technology and liquidity allowing the Firm to be a meaningful participant in a clients liquidity pool. We stress two-way communication with all RA’s that aggregate our price with market participants. The worst thing that could happen is an overcrowded aggregator becomes stale, which could make a RA uncompetitive. RA’s must be careful not to dilute their usefulness with too many providers and potentially miss out on the benefits of a strong partnership.

Are there any benefits of using MS feed exclusively?

Yes, we are able to completely optimize our pricing according to our clients' requirements, sometimes in ways that we would not be able to do in aggregated environments. We are market leaders in this space and continue to innovate to meet the changing needs of our clients.

Has MS figured out how to show pricing at 5:00 pm when other banks typically turn off their feed for daily maintenance as this is something RA's want?

Morgan Stanley's commitment to innovation and, more importantly, adapting to client needs drove us to implement true 24 hours per day pricing to carry consumers across each of the 4 weekly date rolls. When it became clear that it was of paramount importance to our top RA clients, we shifted resources to address this issue.

How have RA's contributed to MS EFX total growth in past 12 months?

RA's have been a key component of both the EFX markets growth and MS's growth in this space over the past 12 months. We understand the importance of this segment to our business and we are proactive in our efforts to engage with RA’s. Specifically, we have been focused on closely covering our RA accounts and building meaningful, mutually beneficial relationships. We have a number of exciting new partnerships going live in the later half of 2012 and believe this trend will continue into 2013 and beyond.

How can banks add value in ways other than spreads and rejection rates?

Banks can add value by understanding what a retail intermediary needs and responding accordingly. The key benefit of dealing with a bank like Morgan Stanley is that we smooth out a lot of the noise in the interbank markets - to the extent that our clients want us to do so. Clients can trust the liquidity that we provide to them. They know that we stand behind our liquidity and if there is any issue, to pick up the phone and talk to us. Ultimately, adding value through superior client service is essential to our offering.

How important are relationships in Electronic FX?

Relationships are increasingly important given the changing market dynamics. One of the trends in the EFX market is the move from dozens of price providers to a handful of core counterparties. While this may seem counterintuitive, we've seen the benefits of this increased level of interaction for both ourselves and, more importantly, our clients. The key to making the "fewer but better" counterparty model work lies in having incredibly strong relationships. The most successful clients in this space are the ones that have the best relationships with their bank counterparties. This trend towards a more relationship based coverage model will only continue.

What is causing the increase in RA fx flow over the past few years?

Flows from RA’s to the street have increased as more RA’s adopt the STP business model. Technology is ubiquitous - enabling this trend to continue and attracting more participants. For this reason, it is an incredibly exciting area.

Have you experienced a steep decrease in fx volumes in the Q1 just like most of the brokers/banks in the market did?

We’ve seen fluctuations in volumes from one quarter to the next over the years and attribute these changes to the cyclical nature of markets. However, while overall market volumes have decreased, our YTD global FX e-Commerce flow volumes are up.

How do you differentiate yourselves in terms of client service?

In order to best serve clients, Morgan Stanley is committed to understanding the marketplace, finding new ways to make your business better as well as quickly adapting to changing trends or regulations. This is where we think we really differentiate ourselves. We constantly challenge ourselves to identify what the next generation of retail aggregation will look like, and we’ve begun building the tools necessary to support upcoming changes. Morgan Stanley has been in the business long enough to witness the trends, missteps, and external threats to the marketplace and this perspective provides a strong foundation from which we can act as a trusted advisor to our clients.