Despite notable exits, there have been a lot of new entrants in the foreign exchange (FX) prime brokerage market, such as Saxo Bank and Forex Capital Markets. With the number of new entrants, the brokerage scene is changing rapidly and giving way to the rebirth of the prime brokerage model.
New entrants and smaller players have found that regulatory changes and increased levels of competition make it very hard to participate in the market. Prime brokerage has become a game of scale. It benefits more the big players who can take advantage of multi-asset platforms. These big players have been broadening their service platforms and giving rise to the new “prime of prime model”, which concentrates on micro contract trades and aims for volume.
Advantages of consolidating
A big player in prime brokerage, JP Morgan has led the way in consolidating infrastructure to boost competitiveness and efficiency. They provide clients with a single platform across all products that they trade and strive to maintain a single standard of service. Moving away from the traditional silo approach, they have consolidated their services by looking at clients in a more holistic framework
Operational and capital efficiency are hallmarks of a great prime brokerage company, leaving smaller firms at a disadvantage. However, the availability of outsourced financial services has given boutique firms more options. Startups can take their cue from brokerage giants like JP Morgan and begin structuring a consolidated platform from the get go. This will give them the needed edge in a highly competitive market.
“Prime of Prime”
A prime of prime is a brokerage that provides services to traders, especially FX traders who need micro-contract trades. They allow for trades that have greater leverage, albeit more risk.
The need for prime of primes that provide credit services to smaller brokerage firms increased after credit allocation the market decreased and various firms have exited the scene. These conditions have allowed prime of primes to grow their market share, with FX as their specialization. Carving out their own niche means being able to provide services that are more tailored to the needs of their clients.
Technology as leverage
The changes in the industry and the market have been drastic. It is no longer enough to simply have a big balance sheet. Smaller prime brokerage firms have learned that to compete with the big players, they not only need a more consolidates service platform, but also the advantages of leveraging technology. An efficient technology structure will allow them to scale, produce consistent results, and offer solid services.
