Is regulatory scrutiny preventing best execution in the foreign exchange markets? Is the buyside getting the most from its high-touch sales trader coverage?
According to a new report from market consultancy Greenwich Associates, the buyside is demanding more alpha generating trade ideas and data from its broker coverage but due to strict regulatory mandates and rules, brokers have been ratcheting back their best trades.
In the new study, “FX Salesperson: Jack of All Trades or Master of One?,” from Greenwich Associates, three-quarters of FX client trading volume was executed electronically in 2014-up significantly from less than 60% back in 2010.
“Even in the electronic age and with regulatory scrutiny at an all-time high, human insight about the market is critical to many FX users,” said Greenwich Associates consultant Jasper Clark and author of the report.
Clark wrote that following regulatory scrutiny, dealers are distancing themselves from anything that could be perceived by regulators as compromising client confidentiality. Salespeople and traders are now reluctant, or are by bank policy prohibited, to continue the longstanding practice of providing market flow commentary based on “anonymized” client trading data-information that is highly valued by many clients.
Changing Coverage Models
Direct scrutiny from regulators, increased use of e-trading and higher fixed costs are forcing dealers to segment their clients carefully according to their needs and their ability to pay. A higher cost of capital is also causing banks to sort clients according to their ability and willingness to compensate for differentiated levels of service.
Even once clients are properly bucketed, the question remains as to what type of sales coverage they will receive. Dealers will need to structure their sales forces such that they can provide service levels that are appropriate for clients’ differing requirements and their ability to pay for such services.
