For foreign exchange brokers, docking a liquidity means depositing a deposit there. Is it possible for an institution to directly put funds there, so that it can dock liquidity? Just manage a company directly.
The liquidity of many brokers in official website shows that they can connect with more than a dozen or more than 20 banks to obtain better liquidity. We know that if a broker wants to directly connect with the liquidity of a bank, then you must put a margin there, and every bank's requirement for margin is not low. The liquidity of more than a dozen banks is undoubtedly a huge sum of money for brokers, and it is very inconvenient to manage funds and control risks.
Then, can you find a middleman and put all the money on the middleman's side, so that he can dock the liquidity?
This is the concept of Prime Broker, the main broker. We will talk about this topic with you today.
[What is Prime Broker]
Prime Broker is the main broker. For the foreign exchange market, the first echelon of liquidity provision is the major international banking giants. The huge and diversified customer base enables them to provide real market liquidity. They have launched an integrated credit foreign exchange service, which is called Prime Broker.
[Function of Prime Broker]
FXPB's main function is to give you a credit line. You can use this credit line to get quotations from different banks and foreign exchange companies. Traditionally, when you open an account in a bank, it will give you a quotation. However, if you have FXPB, you only need to put money in FXPB. No matter whether you are with more than a dozen banks or more than 20 banks, you don't need to put a deposit in the bank. FXPB will help you make a delivery. He quite helps you to do a neutralization, saving you time, cost, calculation method and risk management. You only need to manage one account, and you can manage all the different LPs.
The main broker service is currently positioned to provide real benefits to foreign exchange companies and fill in the gaps. One of the more obvious benefits of the main broker is to access the liquidity that the company can afford, so that the company can obtain inter-bank and ECN liquidity and benefit from economies of scale.
In addition, the main broker reduces transaction costs: in the foreign exchange market, companies generally use the liquidity of multiple liquidity providers. If a customer opens an account with two liquidity providers and integrates liquidity supply, they usually build a long position in one liquidity provider and a short position in the other. It depends on the market trend. One liquidity provider account will make money, while the other will lose money.
To balance this risk, we must sell the position of the losing account and open another position in the earning account. When the broker does not use the main broker to carry out related operations, it must pay the price difference, which is quite high. For example, the one-point price difference generated by closing the position of 100 million euros in the liquidity provider account will cost the company 10,000 dollars.
However, clearing related transactions through the main broker enables small-scale brokers to avoid the challenge of closing accounts at various liquidity providers, thus avoiding additional costs. In addition, while reducing transaction costs, the main broker also enables customers to obtain the benefits of liquidity provider integration.
The main broker becomes the ultimate counterparty of every transaction, no matter which liquidity provider takes orders. If a liquidity provider is absent from a transaction, the main broker must take responsibility and reach a solution with the customer.
[Relationship between Prime Broker and Institutional Liquidity]
Where does the liquidity of STP-ECN brokers come from? To understand this problem, we must first look at the three categories of institutional liquidity. Without institutional liquidity, IB (Introduction Broker) or individual customers simply cannot trade through brokers. And for brokers, not every retail foreign exchange broker can contact banks directly, and prime of prime is needed to provide liquidity services.
First-level institutional brokers, also known as prime broker, are mainly large banks (also known as bank brokers). General big banks have or have had PB business. Being able to access the liquidity of tier-one institutions requires not only high cash capital, but also highly intensive technology.
Secondary institutional brokers call it PoP or prime of prime. Provide liquidity for small and medium-sized brokers. Represented by ADS\CFH, they have considerable credibility and technical qualifications. Generally speaking, they all have two first-level institutional brokers, and usually one will be reserved. For example, the PB of ADS is also BNP Paribas, and the PB of CFH is also BNP Paribas.
The third level is some foreign exchange brokers, which are relatively few and generally large in scale, and directly contact with the first-level institutional brokers. For example, Fuhui and Yingtou Securities
These three types of brokers are the bridge between institutions and retail, without which retail foreign exchange can not be discussed.
In addition, there is a special retail foreign exchange broker, that is, the banking giants jointly launch a retail foreign exchange platform with some large foreign exchange brokers, and these banks are white-label customers of foreign exchange brokers. This phenomenon was popular from 2006 to 2008, such as dbFX jointly launched by Deutsche Bank and Fortune, CitiFX Pro launched by Citigroup and Shengbao, and so on. At that time, the technology was still primary at ECN level, STP technology had not been involved in the foreign exchange market at all, and banks did not provide liquidity to them, but only used their names to outsource retail business. Liquidity/risk control was mainly based on broker operation, which was of course MM mode.
[Current Status of Prime Broker]
Because of risk aversion, some major banks almost gave up most of the foreign exchange market. After experiencing serious losses during the global financial crisis in 2008, major banks became more cautious about the main foreign exchange brokers.
Morgan Stanley has stopped doing this business since 2013, and SEB has stopped doing it. In 2015, when the Swiss franc black swan incident happened, these FXPBs also lost money. There were no four or five FXPBs in the whole market, but only a few FXPBs are doing it in the world.
And now the main brokers have raised their requirements, and many main brokers will not consider companies with capital below 50 million US dollars at all.
[consequences of withdrawal of Prime Broker]
1. The decline of Foreign exchange trading volume weakens the market depth and enlarges the spread.
Aite Group5 announced the overview of the global foreign exchange market in 2016 on May 24th.
Aite pointed out that compared with 2014, the trading volume of OTC foreign exchange industry fell by 9%-11% in 2015. "The main reason is that the regulatory measures have led to the bank's business restructuring, including reducing the credit of PrimeBroker (PB) and making it higher. The cost is passed on to the buyer, and the commercial terms are re-established." The report emphasizes that the supervision of foreign exchange industry is still one of the key worries in the foreign exchange market.
2. Retail brokers enter the PoP field
Market participants with abundant capital, such as major banks, have withdrawn from the market, or reduced their risk exposure. Retail brokers are entering the main broker field, and many PoP services appear. Technology is used to maintain competitive advantage and provide important value to customers.