5. Is proprietary trading growing or diminishing as a share of the business?
A conclusive 72% of respondents affirmed that, whichever way it is measured, proprietary trading has rocketed as a proportion of banks’ FX business. Whether or not it is growing as a separate business from FX market making or as an adjunct to it, volumes are up and will continue to grow, say most respondents.
Some banks have brought prop trading in from the cold – acknowledging it as core to the business and crucial to increasing revenues, especially in a world of compressed spreads. “We have now mainstreamed proprietary trading as a core revenue generating activity,” says Standard Chartered Bank’s Mr Drammeh. “Almost non-existent two years ago, proprietary trading now comprises 20% of our FX revenue and a significantly higher share of FX volumes. We have a deliberate and well-orchestrated strategy to grow this business as a means of complementing our FX revenue stream in view of shrinking margins on FX spot sale transactions.”
Mr Foch says that it is a growing part of BNP Paribas’ business and acknowledges that the bank has structured its teams to capitalise on opportunities. “We set up a specific team at FX level, which completes a broader set-up, including rates and credit. It is adding to the risk profile of the business and to its bottom line. Trading opportunities are growing across markets and we want to upgrade our risk profile.”
Many argue that while prop trading is good for the bank, it provides as many benefits for customers. At PNC Bank, Matthew Lifson, managing director and chief FX dealer, says that growth in the bank’s prop trading means better prices for clients. “We believe that taking positions when the situation arises helps us to be able to competitively quote our corporate clients,” he says.
JPMorgan’s Mr Rawlins, agrees: “We are more relevant to our clients and able to offer better pricing and service if we do not rely solely on spread retention to pay for liquidity provision.”
Other banks argue that increasing prop trading is the only way to augment disappointing revenues from client trading but that it is not a permanent trend. RBC Capital Market’s Mr Henderson says: “Proprietary trading is growing by necessity rather than by desire: we have seen five of the most stable years in the history of currency trading. In order to sustain profits – given the smaller spreads in client business – firms have had to increase their prop trading business to take advantage of their knowledge of the flows, etc. However, this growth is likely to reverse in the longer term.”
