One aspect of the prime brokerage model that is emerging in parallel with technology advancement is greater agility and responsiveness to clients' needs. At traditional bank-owned prime brokers, regulatory reform is weighing on them and creating a degree of inertia, causing them to overlook their small and mid-sized hedge fund clients.
This is something that is playing straight into the hands of Sydney-based Invast Global, a subsidiary of Japanese listed Invast Securities Co Ltd. Employing a prime-of-prime model, Invast leads the industry in the provision of multi-asset high-quality, non-bank Prime Services. It provides credit intermediation, access to liquidity (both OTC and exchange), sophisticated trading platforms/API connectivity options and complements these services with high quality global equity, FX and commodity research.
"We operate at the top end of the PoP space in terms of how we are structured. We currently use three Tier 1 prime brokers but by the end of Q1 2017 we expect to have four in place. We have made a lot of investment in the back-end so that our clients don't find themselves capacity constrained," says James Alexander (pictured), Chief Commercial Officer, Invast Global. He adds:
"We are busy refining the Liquidity Provider (LP) mix with banks and non-banks. We have some fantastic LPs and some that don't price us the way they used to. The landscape is shifting in terms of people's pricing behaviour. One of the big components of what we do is to manage that change for our clients."
Invast currently has 20 bank and non-bank FX and Commodity LPs. What makes its model unique is that it allows clients to structure their own liquidity mix in real time, with analysis and advice from Invast's expert liquidity team. Ordinarily, using a direct prime broker the client gets precious little support in respect to liquidity management and quality of execution.
"More and more managers coming into the industry realise that a conventional bank PB can be an inflexible, constrained environment in which to execute trades; it's a challenging infrastructure for them to navigate. We have a dedicated 24-hour team whose sole job is to focus on liquidity. This is ideal for emerging fund managers. We can provide a turnkey solution for them that doesn't have the same credit constraints and is much more flexible. We can typically onboard a client within a week. No bank prime broker can do that," says Nick Briscoe, Director and Head of Prime Services at Invast Global.
With respect to liquidity, when a client connects with Invast they are unlikely to see all 20 LP names in their stack; they might see 15 they might see eight, depending on their trading strategy.
"It is about knowing how to mix the LPs and use them most effectively for the client to achieve the right outcome. Every client is different," adds Alexander.
All fund managers need to keep on top of trading costs. Therefore, by knowing that their prime broker counterparty is able to deliver the most appropriate feed to optimise the manager's investment strategy is a huge fillip. Invast is able to do this across FX, Commodities, equity swaps and futures.
"It's all about quality of execution at the end of the day," emphasises Alexander. "Managers who live and die by their trade performance statistics will be watching those executions so closely and we welcome that level of scrutiny. We provide full pre-trade and post-trade transparency.
"Any PoP worth its salt can put together a price feed that gets you EURUSD0.3 or EURUSD0.2 but there is a vast difference in execution quality and consistency of feed and that's where the PoPs that do that well can really shine; in the execution experience."
For a lot of managers with less than USD50 million in AUM, if they are trading risk-weighted strategies such as systematic FX, the banks aren't in a position to cater to them. This is presenting a unique situation for a PoP firm like Invast.
A lot of the banks have had to reduce their risk appetite because of regulation and capital requirements. They face more scrutiny; not just in FX but across all asset classes supported by prime brokerage.
"The banks who have traditionally internalised large amounts of flow are now not willing, or are unable, to do so and some are turning to the agency model (though not necessarily a full agency model). There is definitely a shift in the liquidity landscape. This requires an understanding of the pricing that the banks are now providing and how it has changed. Similarly, some of the non-banks are pricing in different ways for a lot of flow. The situation is quite nuanced," explains Briscoe.
Hence why having a liquidity management expert that also has your best price execution objectives at its heart is helping Invast, and others, shake up the established order. Prime brokerage has become a more complex beast, and as banks further retreat from their market making activities, managers will likely need more support from their counterparties.
In many respects, the Tier 1 primes that Invast has relationships with appreciate the fact that they have a trusted partner that they can lean on to direct flow from smaller and mid-sized clients that they simply cannot support.
"In effect what we are doing is aggregating clients that they can't service," says Briscoe. "They appreciate the fact that this flow is being aggregated by a significant counterparty. Although they are pulling back, they understand the changing market dynamics and the ability to still see that flow (which Invast directs back to the Tier 1 prime) helps to create a mutually beneficial relationship," concludes Briscoe.