Mid-way through this year’s FIA conference, a panel of CEO’s were brought together to discuss some of the challenges facing FCMs. Recent years have brought these companies declining revenues, reduced trading volumes as well as a general lack of confidence in the sector following the demise of companies like MFG and PFG Best. The panel underlined some of the root causes of these issues, contemplated potential changes and looked at some silver linings among the aforementioned clouds.
So what were some of the current challenges highlighted by the industry chiefs?
- Near zero interest rates – reducing investor appetites for trading.
- Reduced commissions.
- Increased Capital requirements – put in place as part of Basel III.
- Higher proportion of High Frequency Trading.
- Lower liquidity – partly as a result of the new regulations.
Pooling the problems described above, one CEO noted, “It’s been a perfect storm for FCMs, but I still see a bright future”.
So what does the future hold for these companies?
The expansion of electronic trading has already resulted in excess capacity in the industry causing many firms to be squeezed out, but the panel agreed that further consolidation was a must. If we categorised these companies into small, medium and large – Small focused on retail clients and niche market areas, whereas large attended to institutional investors and Medium sat somewhere in between. There was a general consensus that the latter category would need to pick a side (S or L) or risk being driven out of the market.
Despite low interest rates, the excess capacity has also seen to it that commissions have also remained low. The industry experts believed that changes to pricing were also a necessity for these firms to survive; pricing models needed to become more sophisticated. For example, by unbundling customer fees and allowing the prices the clients pay to reflect brokering costs more closely.
While consolidation will raise the prospects of those who survive, the panel noted some other potential avenues to be positive about:
- New products – a range of new derivatives contracts becoming available on many exchanges.
- Emerging markets – opportunities opening up as more countries participate, especially so in China once it starts permitting outgoing business.
- Futurisation of swaps – swaps becoming exchange traded and cleared will generate huge business opportunities for FCMS, it will also see doors open for Tech Vendors such as Caplin.
- Prospective end of QE– could see more liquidity come into the markets.
Part 5 of this blog will take a closer look at the opportunities mentioned above. The next part will take look at discussions around Swap Execution Facilities and Swap Futures from the conference.
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