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By Patrick Graham and Jemima Kelly
LONDON, May 19 (Reuters) - Abu Dhabi-backed ADS Securities launched a prime-of-prime broker service for hedge funds on Thursday, the latest operation to offer access to the top level of the global currency market for smaller players cut off by changes in how big banks operate.
The world's biggest lenders have driven broad changes in the $5 trillion daily market in currencies by closing "prime-broking" businesses, which provide huge amounts of leveraged credit and conduits for clients to trade at tighter interbank pricing.
Half of the dozen or so top-tier banks who provided the service to hedge funds and high-frequency traders have ceased doing so or stopped taking on new clients since 2014 - a major reason why the growth of currency trading has halted.
The London arm of ADS follows others including ABN Amro, Denmark's Saxo Bank and U.S.-based INTL FCStone who use their own broking relationships with banks to bring in smaller players.
ADS estimates that the value of credit lines in the market overall has been reduced by around 25 percent over the past three years, reducing potential turnover by more than $1 trillion daily.
Average daily trading in currencies has retreated to just under $5 trillion a day, dashing hopes for further growth in one of the traditional cash cows of banks.
"There is a real risk of FX liquidity going down because of the shrinking prime brokerage commitment," says Marco Baggioli, an ex-Deutsche Bank and JPMorgan manager who is chief operating officer for ADS in London.
"Two years ago a broker with $5 million in capital might have been able to access a PB, but the capital they must now have has gone up to as high as $50-75 million - so many cannot get the credit lines. Many players have been left orphaned."
Whereas many of the existing trading houses in London are focused on servicing high-frequency traders who tend to trade and close positions within a day, ADS brings with it $400 million in capital that allows it to fund more trades overnight.
Managing director James Watson said that allows ADS to target different kinds of speculative hedge funds and private wealth managers who have also had to shift away from being directly serviced by investment banks under changes in regulation.
It also allows ADS to provide its own competing price stream to that which it passes on to clients from its own broking relationship with the larger banks.
"Well-capitalised FX brokerages need to step up and support the institutional FX market," said Watson. "We're beginning to take the role that banks took in the past."
(Writing by Patrick Graham) ((patrick.graham@thomsonreuters.com; +44 207 542 9429; Reuters Messaging: patrick.graham.thomsonreuters.com@reuters.net))
LONDON, May 19 (Reuters) - Abu Dhabi-backed ADS Securities launched a prime-of-prime broker service for hedge funds on Thursday, the latest operation to offer access to the top level of the global currency market for smaller players cut off by changes in how big banks operate.
The world's biggest lenders have driven broad changes in the $5 trillion daily market in currencies by closing "prime-broking" businesses, which provide huge amounts of leveraged credit and conduits for clients to trade at tighter interbank pricing.
Half of the dozen or so top-tier banks who provided the service to hedge funds and high-frequency traders have ceased doing so or stopped taking on new clients since 2014 - a major reason why the growth of currency trading has halted.
The London arm of ADS follows others including ABN Amro, Denmark's Saxo Bank and U.S.-based INTL FCStone who use their own broking relationships with banks to bring in smaller players.
ADS estimates that the value of credit lines in the market overall has been reduced by around 25 percent over the past three years, reducing potential turnover by more than $1 trillion daily.
Average daily trading in currencies has retreated to just under $5 trillion a day, dashing hopes for further growth in one of the traditional cash cows of banks.
"There is a real risk of FX liquidity going down because of the shrinking prime brokerage commitment," says Marco Baggioli, an ex-Deutsche Bank and JPMorgan manager who is chief operating officer for ADS in London.
"Two years ago a broker with $5 million in capital might have been able to access a PB, but the capital they must now have has gone up to as high as $50-75 million - so many cannot get the credit lines. Many players have been left orphaned."
Whereas many of the existing trading houses in London are focused on servicing high-frequency traders who tend to trade and close positions within a day, ADS brings with it $400 million in capital that allows it to fund more trades overnight.
Managing director James Watson said that allows ADS to target different kinds of speculative hedge funds and private wealth managers who have also had to shift away from being directly serviced by investment banks under changes in regulation.
It also allows ADS to provide its own competing price stream to that which it passes on to clients from its own broking relationship with the larger banks.
"Well-capitalised FX brokerages need to step up and support the institutional FX market," said Watson. "We're beginning to take the role that banks took in the past."
(Writing by Patrick Graham) ((patrick.graham@thomsonreuters.com; +44 207 542 9429; Reuters Messaging: patrick.graham.thomsonreuters.com@reuters.net))
