FxPro Financial Services Limited (‘FxPro’) has launched a Prime-of-Prime service in a bid to attract institutional investors and enable them to benefit from greater transparency and trading cost efficiencies. With FxPro Prime, hedge funds, in particular start-ups (as well as other asset managers), will be able to trade against the high quality liquidity pool that FxPro has across 11 liquidity providers and avoid having to establish prime brokerage relationships.
“Those initial set-up costs can be high, the manager has to put up a lot of collateral, making it quite inaccessible for start-up funds or small operators. The way a prime-of-prime service works is that we have the established relationships. The client then deals with us for everything from collateral, to give-ups and trade reporting,” says Charalambos Psimolophitis (pictured), CEO of FxPro.
The 11 liquidity providers FxPro currently uses, including the likes of Goldman Sachs and Nomura, are used to taking their retail flow. Consequently, the trade rejection rates are very low. With FxPro Prime, institutional investors will now be able to interact with that unique and high quality retail liquidity.
FxPro moved from a being a market maker to an agency model broker in 2012; something that was important to Psimolophitis, who says: ““We believe that the industry in general should push towards the agency model, especially in FX, because there are huge conflicts of interest when you are a market maker. As we believe in the model, we’ve invested a lot of capital over the last couple of years and have created one of the best aggregation engines. We can give hedge funds, and other institutional investors, very competitive prices.”
Not only are clients’ interests more closely aligned with FxPro Prime, the cost efficiencies are enhanced, as well as margining requirements.
In general, a hedge fund would have costs of approximately USD50-60 per USD1m traded. With FxPro Prime, the overall cost is around USD35-50 per USD1m traded; a near 30 per cent cost reduction.
“Suppose you’re a hedge fund trading EUR100m of EUR/USD. You would have to post 2 per cent margin to the prime broker to hold that position because it’s a directional trade, requiring the bank to take the opposite position. In our case, the manager’s trade is netted off against other clients’ trades and would require them to only post 1 per cent margin.
“Also, because the bank is the market maker, if a hedge fund is not trading much or in an unconventional way, the result can be a gradual widening of the spread to the point where it’s no longer profitable for the hedge fund. Since FxPro has so many LPs and considerable flow coming from many different clients, our spreads would not widen in the same way,” says Psimolophitis.
The aim is to have at least 20 liquidity providers supporting exotic currency pairs as well as all major currencies. “We are also working on a sophisticated reporting tool that will allow the counterparty to have all their liquidity exposures presented in real time; at the millisecond level. We hope to launch that in February,” confirms Psimolophitis.
“We want to see greater adoption of the agency model so that brokers no longer trade against their clients. We now offer the ability for hedge funds, asset managers etc, to leverage off our technology and relationship with the banks via FxPro Prime.”