What key attributes are clients now looking for from leading prime-of-prime brokerages?
I think the landscape has moved on from simple price and technology provision to a more solutions-based approach, and to assist clients to be more successful in achieving their business goals (improving risk-adjusted returns). Clients are looking for demonstratable value-adds from their prime-of-prime, and this can take the form of bespoke liquidity solutions, managing provision to a high standard, understanding and delivering complex technology solutions, and facilitating risk management outsourcing.
At a base level, institutional clients require quality access to liquidity provision, transparency in execution, technology that is fast and robust, and reliability as a counterparty. Many clients of prime-of-primes are firms that are accountable to their customers (retail brokers, asset managers, etc). It is important that prime-of-primes, as the legal and trading counterparty, are financially secure even before the commercial aspects are assessed. These requirements haven’t changed in years, but the expectations are higher as the clients have grown in size and scale.
In what ways have prime-of-prime services moved onto the next level from just a few years ago and seen raised client expectations?
As the latest BIS survey showed, retail and prime-of-prime flows are now a notable proportion of global FX volumes. Prime-of-primes are the conduit for this flow and are significant market participants as a result. I believe that prime-of-primes have benefited from being plugged into these disparate but independently evolving segments - institutional FX and the retail FX sector. We have seen improvements in technology for price consumption, aggregation and distribution and custodians of liquidity through the emergence of quality real-time data analytics, to manage and monitor flow and liquidity provision.
On the retail FX side, prime-of-primes have had to manage real-time margin, multi-asset product delivery, sophisticated liquidity requirements, processing an extremely high number of tickets and integration with an increasing list of third-party vendors that interact with the MetaQuotes ecosystem or proprietary technology.
Prime-of-primes have also had to evolve accordingly to demonstrate adherence to the changes in regulation (Best Execution, Global Code, leverage/capital requirements). The demand for aggregated, quality liquidity and even the facilitation of access to risk managers means that there is also a broader range of quality services that a prime-of-prime looks to offer to institutional customers, over and above the simplistic singular ‘one-size-fits-all price-feed’ that was commonplace in the early iterations of prime-of-prime businesses.
Part of this is due to the increasing audience that prime-of-primes can service. Professional trading firms, smaller market makers and asset managers historically could have faced Prime Brokers for credit and therefore cultivated direct relationships to replicate (at a higher cost) the setup that a prime-of-prime can now offer. Through off-boarding or reassessment of capital utilisation, prime-of-primes are now a sensible option to service these clients and have raised their level of service provision to meet these increasingly sophisticated requirements.
How can prime-of-prime solutions help regulated brokers to grow their businesses?
Regulated retail brokers have had a tough time over the last few years navigating an increasingly tougher regulatory environment bringing increased capital requirements, along with more competition and lower margins from a more discerning and sophisticated audience. Prime-of-primes can help brokers grow by providing a one-stop shop for efficient risk management. By providing a capital and resource efficient route to accessing appropriately managed liquidity, brokers leverage our collective balance sheet and bargaining power to access liquidity that they would require a lot more capital to access. Retail brokers in the main require a reliable and consistent quality of execution, whether it is manual hedging of a risk book via a GUI, or STP execution of end-client orders.
The contraction in credit access has made replicating a prime-of-prime’s liquidity setup much more resource intensive in recent years, as well as the requirement for dedicated liquidity managers to build strong partnerships with bank and non-bank market makers, and technology resources to manage distribution. Prime-of-primes have built up a unique skillset over the last 10 years by straddling the institutional liquidity environment with a strong understanding of the complex retail broker ecosystem. We combine the usage of institutional grade infrastructure with the flexibility and agility of a smaller firm to deliver a highly customised experience for our clients and help them scale up by delivering the right combination of credit intermediation, market access and technology agnostically.
In what ways can the direct margin and PB credit facilities from leading firms like Z.com Global Markets assist Hedge Funds & Asset Managers?
As Z.com Global Markets has top tier Prime Brokerage relationships, this gives hedge funds and asset managers the flexibility to consume our pricing on a margin basis (facing Z.com as a legal and trading counterparty) or via respective Prime Brokers (via a 3 or 4-way give-up) where Z.com is an executing broker.
This allows us to work with the hedge fund or asset manager in a capacity which fits their business as they scale over time. A consequence of the contraction in credit means that smaller institutional customers who historically may have had direct credit via a PB can begin with Z.com Global Markets on a margin basis to consume our pricing, and as they grow to have their own Prime Broker relationships for credit, continue to consume our pricing via a 3 or 4-way relationship.
How can Z.com Global Markets help Boutique Market Makers with their liquidity requirements?
Boutique market makers can benefit from a one-stop credit and technology solution to access multiple differentiated liquidity pools. In addition to our curated liquidity pools from direct relationships, we can offer a single point of access to execute on a variety of ECNs. This ability to provide unified access to multiple quality sources makes improved price making and taking opportunities in what is still quite a fragmented liquidity environment.
Because the profile of makers and takers differs in Cboe FX to 360TGTX for example, our clients can make in one pool and take from another to maximise their profit from their risk acquisition and offsetting activities. Our technology allows for interaction with multiple ECN orderbooks from a single API integration, which we believe brings a significant value-add.
Why is technology such a differentiator in the highly competitive prime-of-prime space?
Technology is the foundation that prime-of-prime firms are built on. It is how a prime-of-prime business can monetise its balance sheet, credit and liquidity access. Crucially, solid front office delivery technology needs solid post trade systems for client visibility and reconciliation.
As a prime-of-prime, you are the client’s legal counterparty as well as their liquidity provider. Therefore, clients need to be able to rely on your technology - to execute their trades reliably, and to see via a post trade system what their exposures are, how their equity is moving, and so on. We have taken the time to select the best-of-breed institutional infrastructure to ensure all facets of the trade life cycle are delivered to the highest quality – from price discovery and execution, to real-time position management and post-trade reporting. At Z.com Global Markets, we can deliver what our clients are looking for by combining the highest quality access, the best-in-class of technology and strong financial security as part of the GMO Internet Group.