In today’s FCM world, it’s tough to be different.
The job is still pretty straightforward – help clients execute trades and manage the post-trade process. There are more steps and pieces that come with that than most participants know or want to know. Most just want to get a trade done and booked and move along to the next one.
The revamp of regulations over the past 10 years has made FCM brokerage more difficult in many ways and certainly more expensive from an audit and compliance perspective. The good news is that the industry has also become far more technology driven. Yes, this is old news, but the growth of FCMs is firmly embedded in technology – for connectivity, trading tools, access to more markets and even in the algorithms used by traders today.
John O’Hara, head of prime brokerage and clearing business for the Americas at SG Americas, said the firm has been moving into all of those areas as customers search for new ways to generate alpha. Everything from working with clients on developing algos that accelerate activation of trading strategies to expanding connectivity to markets is the path SG believes it must take to keep and grow its market share.
O’Hara said that with most global regulations essentially “hard coded into the system” the strategy is finding ways to work with both OTC and futures participants. Exchanges are doing the same, of course, as more markets were moved onto centrally cleared platforms. Exchanges have also tried hard to bridge some of those execution gaps that still exist between OTC and listed markets. CME Group’s FX Link, which launched in March 2018 and removed two separate legs of a trade for forex participants on OTC and listed futures, is just one example. Those types of innovations are helpful to firms like SG Americas, which ranks 5th among US FCMs, according to CFTC reports. SG Americas held $15 billion in customer segregated funds in January, putting it fifth among US FCMs, and ahead from a year earlier when it held $12.8 billion. Segregated accounts are considered a barometer of the size of an FCM.
O’Hara said SG’s FCM team has also worked to improve its trade reporting suite and throughput in the system and upgrade the robustness of its clearing services. But as technology has improved and some aspects of technology have dropped in cost, many aspects of the FCM model have become standardized. That is good on some levels, but differentiation among firms requires some subtle but potentially valuable services and add-ons. In SG’s case, it has worked to improve capital efficiencies with collateral relief through position netting and to expand its connectivity to markets globally. The firm now connects to 100 global exchanges across all assets classes. SG has also has begun to explore components of blockchain technology and where it can be applied toward improving clearing for customers.
These are all areas where SG is trying to set itself apart. As O’Hara puts it, the more siloed organizations are going to struggle and indeed some banks have closed various commodity and financial desks in recent months. The combination of tech and broader services is where the FCM sees some opportunity in 2019 and beyond. In other words, sticking with full-service desks and improving the processes may be the differentiation that customers want.
“At SG, we’ve bought into the tangible longevity of the business,” O’Hara said.
Editor’s note: Full disclosure, Jim Kharouf provides content services for SG Americas separately from John Lothian News. This article was written and produced with JLN’s editorial guidelines and standards.