FX salespeople of the world, unite! Rise up, resist the tyranny of trading technology spend. Wave your laptops and mobiles in the air, thump your kitchen tables or wherever you happen to be home-working and demand, “Give us the tools to be able to do our jobs and cover clients as they deserve!” An unlikely scenario, perhaps? But certainly, one every FX sales or business head should seriously consider.
Over the past nine months or so, it seems that, on a personal, national and global level, there has been a wave of soul searching, triggered in part by the Covid-19 pandemic. The what, why and how of daily life has rarely been more intensely pondered over. The same holds true for the business community, contemplating structural changes the likes of which have not been seen for over fifty years, or indeed, ever. The FX market has emerged pretty unscathed. Indeed, an upswing in volatility at the start of the pandemic, accompanied by a widening of spreads has produced bumper harvests, swelling coffers that were starting to look worryingly bare. Industry participants might feel that climbing back onto the old horse and spurring it back into the same race was proving to be a sensible and profitable option. They would be wrong to do so.
It is rare that one sees clearly delineated stages in any industry, but in FX, there appear to have been three stages compressed within these past nine months.
Stage 1: Coping with the logistical challenge of turning the impossible into the possible.
Banks have often taken the view that, for those employees in a Front Office role, working from home was neither effectively possible nor desirable. Disaster recovery sites, whether an out-of-town mini trading room, or a reliance on subsidiary offices located in other countries, were designed for localized disasters, and to replace a set of activities with stripped down, temporary versions of those same activities. They were not designed to cope with the situation in March 2020. Within a few short months, screens, chairs, laptops and recorded mobiles had been dispatched far and wide, coverage rotas set up, compliance rules reviewed and adapted. Risk was at the forefront of everyone’s mind – market, credit, conduct – as volumes soared, and all systems, from trading, risk management and even basic communications were put to the test. New business plans were put on hold as the world watched and waited.
Stage 2: Coming up for air.
Now that the first wave appeared to have passed, firms started to anticipate the return to the office and to a previous version of normality. Some banks dealt with this by dividing staff into teams and rotating them through the office on alternate weeks, others blessed (cursed) with excessive expensive office space separated teams onto different floors so that staff able or willing to come into the office could work in a socially distanced manner. The home-working setups were retained for use in those weeks out of the office, for situations anticipated, like a new lockdown, and unforeseen. Business plans conceived in former times were tentatively resurrected. The usual merry-go-round of staff turnover continued.
Stage 3: ‘Toto, I’ve a feeling we’re not in Kansas anymore...’
It is too soon to say how many banks’ FX divisions have looked at the impact of Covid-19 on their working practices and on those of their clients,and asked themselves whether their current business models are still suited to the continuously evolving needs of their clients and to the demands of their shareholders. What is clear is that the client-facing FX industry has arrived abruptly at a fork in the road. The direction individual institutions take now, could make or break them.
Within most investment banks there has always been a healthy tension between ‘Sales’ and ‘Trading’. Much of this has to do with the historical perception of revenue generation and risk culture, of the direction of the business, and hence of the pecking order within that organization. Taking time out to research and predict clients’ needs in great depth has been viewed as dangerous navel-gazing in some quarters.
So, as well as being in competition for the top slots, trading and sales managers have also been competing for technology resources. In a business viewed as continuously accelerating in the same direction, a technology arms race has meant that trading has often won this resource battle, arguing for more money to improve rate engines, reduce latency, refine hedging strategies and develop execution algorithms, all key components of a successful market making business. If client facing efforts have had a look in, they have invariably been in developing ever more elaborate (and sometimes costly) client portals, including research sites and single dealer execution platforms. Some banks have benefitted from this massive investment, becoming flow monsters with enormous, diverse client franchises. For many smaller banks, it has been akin to turning up with a knife to a gunfight.
One area that seems consistently to have suffered from lack of investment, is that of tools for the salesperson. One reason for this is that plenty of salespeople always used to make plenty of money from plenty of clients. As long as the model remained the same, there was no urgent need to invest in the sales function as it neither generated substantial additional revenue, nor impressed clients and encouraged them to do more business.
The Global Financial Crisis of 07/08 was a financial crisis that infected the real economy. Events in financial markets and a series of conduct scandals led to a buildup of pressure on a bank’s ability to generate profit from client flows.
Changes in regulation restricting proprietary trading, emergence of global codes of conduct that affected behaviour, and wariness of opaque structured products all began to have an impact. An increase in transparency, whether through simple price comparison which had been in existence since the earliest days of multi dealer platforms or enforced disclosure of client margins reduced further the wiggle room available to banks. Technology advances in that most unglamorous of areas, compliance, weeded out unsavoury practices to which some institutions had turned a blind eye. And all the while, competition was increasing, whether from non-bank market makers, online only banks and FX providers, and new models such as peer to peer or alternative credit operations.
The current Covid-19 crisis is a truly global crisis being reflected in financial markets. Its impact will be felt in the real economy for many years and will affect the motors that drive activity in the FX market, like global trade and investment. If these take a long time in returning to pre Covid-19 levels, then it’s likely that FX activity will do likewise. The surge in volatility, spreads and hence profitability seen in the Spring may prove to have been a temporary blip. Banks will, yet again, accelerate the cost cutting measures already in the pipeline, consolidate around areas where they have a competitive advantage, and see how they can do more with less as the industry moves to a leaner footing.
The trading function is already in the firing line and has been for some years. Smaller banks – and even some surprisingly large ones – have looked to outsource liquidity provision in part to a panel of larger market makers. Some are taking the logical step of exiting the market risk taking function entirely and moving to an outsourced white-label solution with banking and technology partners whist retaining control of the profitable ‘last mile’ client relationship.
This leaves us with the role of FX Sales, and the plea at the start of this article. Smaller clients are being directed towards a more self-service offering and need to be wooed with enticing workflow and mobile solutions whilst freeing up salespeople from more administrative type tasks. If voice sales coverage of larger clients is to survive, it needs to become far more productive and innovative. Fewer salespeople will need to cover more clients, in greater depth, and better sales coverage for this segment can lead to stickier and more profitable clients. The past nine months have taught us that salespeople do not always need to be in a dealing room – they can work effectively remotely and can share coverage efficiently, but they need the tools to do so, and that means investing in the sales function.
In addition to access to pricing and execution tools, Sales need quickaccess to CRM systems which are only as good as the data they contain. Some banks are successful in managing to get salespeople to update CRM systems with contact names, numbers and roles within the client organization. Other banks’ salespeople maintain the view that the clients they cover are THEIR clients rather than the banks’, and their personal edge is the relationship and knowledge of that client. Some CRM systems have APIs which enable integration of data into a smart sales dashboard. Yet many clunky legacy systems do not.
Real-time access to credit systems enables better and speedy decision making and reduces risk, especially if those systems calculate whether putting on new trades increases or actually decreases net risk. Updated regulatory status and onboarding information can mean the difference between being in breach of a regulation or not. At present, many banks have these data points in separate systems, often siloed, which makes the sales job very cumbersome.
Forward thinking banks have realized that the FX salesperson of the future may well be part of a global coverage team tasked with delivering seamless coverage to many more clients than before, might be working from home or another remote location, and could even be job sharing. Increasingly, and especially in medium sized banks, there is a focus on client-first multi asset sales coverage, requiring a greater breadth of product knowledge and familiarity with the client. These salespeople will need smart dashboards, pulling together this information in a single window using a minimum of desktop space or on a well designed mobile app. Details of past trades, both executed and missed, along with upcoming maturities or options expiries will give salespeople the ability to anticipate client needs and provide a value added service. Artificial Intelligence of sorts is being used to predict client behaviour. Integration of newsfeeds and selective search engines can display client-specific and relevant industry information based solely on an incoming phone number. Some banks are trying to develop such systems in-house, getting around the deficiencies of legacy systems rather than updating them. Others are turning to specialist fintech firms experienced in GUI design and integration services to help them jump-start the process.
In both cases, clients will benefit from a higher quality service, and be less dependent on a single sales individual. Banks will improve productivity, reduce key-person risk and be better placed to increase their client base without the boom/bust, hiring/firing cycles that have characterized the past twenty years. There is no time to lose – the current Covid-19 crisis has opened a window and allowed banks to survey the sales landscape of the future. Rather than lower the blinds, banks should raise their game and invest in the Sales function like never before.
This article first appeared in E-Forex Magazine.