Value vs cost of FX liquidity provision

Interesting article in FX Week, about banks pulling their liquidity provision back from a number of multi-bank platforms due to the high cost fee structures on those platforms.

According to Kurt Vom Scheidt, COO of Markets in Saxo Bank, speaking on a conference panel at FX Invest Europe in Frankfurt…

“With banks struggling to make adequate returns across the board, connections to expensive trading platforms are on the chopping board”

He further commented that….

“Banks are looking at the cost of liquidity distribution. A lot of these venues charge significant fees to the banks… We’re now getting to the point in e-FX where, because of the decrease in yields, people have to focus on optimising revenues. That can put pressure on venues that charge for liquidity distribution,”

At Caplin, the feedback and metrics we gather from our numerous client projects and engagements is that banks are certainly measuring the cost of liquidity provision across their various platforms.

However, the more astute banks are looking beyond cost to measure the ‘value of client flows‘ across distribution channels”, and then optimise the value of those flows by seeking to migrate them to the optimal distribution channel.

Looking beyond just the platform fees and brokerage rates, banks are building models that also incorporate client hit rates, price sensitivity by currency pair and time, the toxicity of the flows, and the proportion of that clients flow they are able to internalise, (some major banks internalise upwards of 80-90% of client flows) and then model the overall profitability of the client flows across their various distribution channels.

What they are finding is that not all flows are equally valuable to a bank, and that at the margin:

Flows through their FX Single-dealer platform are typically 300-400% more profitable to the bank than those same flows through a multi-bank platforms.

Of course not all clients can or will trade on an SDP, but banks should be building models to enable them to measure the cost of liquidity provision by channel, and the value of resultant client flows across those channels, and then seek to migrate that flow to the optimal channel, that they own and control.

Full FX week article here (password required)

3 Responses

  1. Hi Russell,

    Yes I read the article you wrote in Best Execution. I thought much of it resonated with what I have already written here following the recent Bank of England and BIS survey analysis in this post:

    But well done anyhow!


  2. […] therefore important that all banks consider the value vs cost of FX liquidity provision to clients across various […]

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