Big banks merging Gold trading into their Forex operations

As commodities desks within large banks shrink, the use of high technology has driven a trend toward integrating interbank gold trading with FX desks

Just how compatible is the long-established world of physical commodities with the highly liquid FX business?

According to a report today by Reuters, a necessity has arisen within interbank gold dealing and FX desks to consolidate operations as a result of the ever-increasing use of technology on financial trading floors.

Thus far, the trend has been for banks to integrate their precious metals operations into the same business unit as their FX operations, and run it as a separate unit from other commodities activities, a move indicative of the shrinking presence of dedicated commodities desks.

According to the report, automation is prevalent to the degree that it is likely to displace traditional gold bullion traders, and major banks including Deutsche Bank, UBS, JPMorgan Chase & Co and Morgan Stanley were joined on Tuesday this week by one of the world’s largest FX dealers, Barclays, which announced its intention to retain its gold trading business whilst hiving off most of its international commodities interests.

As far as operational efficiency is concerned, placing interbank gold dealing and FX trading on electronic platforms under one business unit is resulting in a far easier means for FX traders to execute precious metals deals, allowing banks to reduce operating costs by consolidating asset classes into one e-trading business unit.

There is a sea change going on because of regulation, squeeze on capital, reputational risks. Banks don’t want to do certain things anymore, while what’s left tends to be more computerised,” Niki Beattie, CEO of consultancy Market Structure Partners explained to Reuters.

“Where you saw banks paying a huge amount of trading and sales staff, (those) salaries could ultimately be going into technical support roles. That’s what happened in equities a couple of years ago” concluded Ms. Beattie.

“Banks still want to have a complete institutional product offering, so as a result they need to retain precious metals as part of their product family,” stated George Kuznetsov, of analytics firm Coalition.

Contributing further to the report, Mr. Kuznetzov continued “Banks have been struggling with capital, so they’ve been much more selective in terms of the products they’re betting on for the future. Commodities come with a big question mark.”

As far as compatibility is concerned, despite being a benchmark physical asset, there is a general consensus among analysts that gold is compatible with FX as it is a more liquid asset class than most other commodities, with daily trading volumes comparable to some currency pairs, while its volatility is more in line with foreign currencies.

For more on the global Forex industry see the LeapRate-Dow Jones Forex Industry Report.


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