Maximising the benefits of prime access can change the fortunes of smaller hedge funds

Mario Sanchez, FXCM Pro


As hedge funds take stock of the events of last year – the Covid-19 pandemic, geopolitical tensions and the collapse of the oil market to name a few – 2021 will be a year of opportunity for hedge funds. Facilitating participation in the world’s largest financial market is more important than ever before, writes Mario Sanchez (pictured), Managing Director and Global Head of Sales at FXCM Pro.

It’s no surprise to see smaller non-bank financial institutions (NBFIs) wanting better access to credit and security following the events of last year. Even before COVID-19, banks were tightening credit conditions and raising asset requirements to who can access their prime brokerage solutions. Over the last few years, this has squeezed out smaller hedge funds from accessing trading opportunities and better liquidity – a pain keenly felt during a time of unprecedented market volatility. 

The complex and multi-layered effects of last year’s economic, geopolitical and health crises are still ongoing, and their implications are yet to unfold in their entirety. What this means is that smaller market players, such as hedge funds and private family offices, will be at the back of the queue relative to their larger peers.

Access to a prime broker and all the benefits and security of they offer have never been more important than today. Luckily, as the pool of market participants has expanded over the last decade, and hedge funds no longer rely solely on tier-one banks to access better trading opportunities, liquidity and the added security of trading through an established broker and credit provider. 

The same services are available at faster and cheaper rates than traditional tier-one banks – and this is an avenue that small and medium-sized hedge funds should carefully consider.  

Managing credit risk in times of volatility

While capital market participants are no strangers to volatility, no one could have been ready for the stress brought by the COVID-19 pandemic. Last April saw the largest outflow of investment from hedge funds since the financial crisis. In some financial markets, trading volumes hit record highs while ceasing altogether in others. 

Like banks, the biggest challenge for most firms offering prime-of-prime services is often how to manage credit lines efficiently across a range of platforms. Given the volatile nature of the markets, the prices offered by trading platforms vary significantly, meaning that hedge funds may want to trade and speculate across several platforms at any given time in order to hedge their exposure effectively and get the best prices. 

A true prime broker can help manage this exposure with low-latency software and by conducting sophisticated and thorough pre-trade and post-trade credit checks on every trade that goes to the system. 

Accessing the best liquidity 

Without a prime broker, financial institutions are not only cut off from the best pools of liquidity but also see stunted trading opportunities. Trading only with institutions of the same size can limit trading opportunities as market participants are constrained by the size of their trades to the frequency of their trading activity. How can smaller hedge funds compete in such an environment?

By leveraging a prime broker, a neutral intermediary that facilitates access into a bigger and bolder trading space, such constraints are less likely to occur. Participants can have more trading opportunities at better prices and trade at a greater frequency with bigger institutions, while accessing customised liquidity.  

As the markets continue to see the growth and variety of new participants, the market environment itself should complement an all-to-all trading model, whereby users can act as both liquidity providers and liquidity takers. While some brokers will use the words ‘prime’ to suggest they offer these services, not all offer the same depth of institutional liquidity that should rightly be expected from a prime broker. 

In this respect, its key to recognise the difference between those offering direct market access to multiple venues while acting as a clearing partner, and those offering access to their liquidity pools while claiming to be a neutral prime-of-prime broker.

Broadening the trading community with smaller participants

The increasing participation from smaller players in the FX markets is a welcome development. Prime-of-prime brokers can take on the exposure that prime banks are unable to provide and help support this all-to-all trading environment. 

A broader trading community with a diverse range of actors and institutions is not only necessary for the growth of our dynamic market, but it is a rapidly materialising reality thanks to the growth of prime brokers. As the access to bigger and better trading opportunities is widening, a true prime of prime broker can be the golden ticket to greater market access, greater liquidity, and ultimately, greater profitability. 

FXCM Pro provides retail brokers, small hedge funds and emerging market banks access to wholesale execution and liquidity while providing high and medium frequency funds with access to prime brokerage services via FXCM Prime. FXCM is a Leucadia company. For further information, please visit

FXCM Pro offering and services are intended for institutional and professional clients. Trading on margin carries risk.

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