Raj Sitlani is a highly experienced industry veteran who has enjoyed almost three decades of seniority within the FX industry, in London’s global financial center. Mr. Sitlani talks openly to LeapRate in reflection on a remarkable career in which he has experienced market-changing events such as the 1987 crash and the recent removal of the peg on the EURCHF, which Mr. Sitlani refers to as ‘Franc-ogeddon’.
In a highly detailed discussion with LeapRate, Mr. Sitlani looks at his path from the mid 80s, via his time at Goldman Sachs, as senior management at London’s Sucden Financial, to the establishment of ISPrime, and all of the interesting events along the way.
I would like to think that with 28 years of experience in the financial markets I have seen my fair share of event driven market volatility and black swan events. There was the 1987 crash, LTCM, the Russian crisis, the dotcom bubble, 9/11, the Iraq war and the credit bubble of 2008 to name some of the more well-known ones. However as with many of my peers and indeed those market veterans to whom we still aspire (because of their wisdom and longevity in the markets), we all know that there will always be a nasty surprise around the corner when we probably least expect it.
This was crystallised by the event which took place in mid-January which caught most of the market by surprise. There have been several references made and nicknames given to the day in question, namely 15.01.15, but my personal favourite is Francogeddon which has a certain poignancy to it. This once in a lifetime event certainly left many casualties in its wake and highlighted once again that the markets will continue to deliver shocks.
I am a relative newcomer to the world of FX having spent the first 23 years of my career (the last 10 of which in e-trade) predominantly involved in futures, options and equities or ‘exchange traded markets’. My historical FX experience was therefore pretty much focused on CME currency futures, EFPs and from time to time the execution of large FX orders for a certain type of corporate or institutional account.
However with 5 solid years of e-FX at an institutional level under my belt together with the above-mentioned experience at some high calibre institutions, I think I am perhaps well placed to offer some perspective and insight to the FX industry today. As a pre-cursor to my thoughts I will first elaborate on the last 5 years of my career.
The Sucden Years
As my ex Goldman Sachs colleague Jonathan Brewer and I started to build the e-FX business at Sucden Financial in 2010 as part of the multi-asset class e-trade project, we could see that there was a trend in the market in favour of a broker demonstrating full transparency to a client base that was shifting from pure B-Book to a Hybrid or STP (A-Book) model.
This was intuitive to us given our background in exchange traded markets, where showing a client ‘the print on the exchange’ is a given. We decided that if we could offer an audit trail on a client order, our e-FX broker clients would be able to differentiate themselves from the crowd by showing greater transparency to their clients. It was this philosophy which enabled us to win a significant amount of business and market share in a relatively short period of time. This coupled with Jonathan’s management of our liquidity, which I believe was first class, saw us build a business which when we left last August was comfortably hitting a very respectable ADV.
Although we were able to build our business around an STP philosophy we still encountered many clients who were seeking other associated products and services.
The first of these being outsourced risk management. These clients were typically e-FX brokers who did not have the in-house expertise, capabilities or regulatory permissions to fully monetise their flow. The second big driver was the concept of a flexible, institutional only CFD API. Pretty much all e-FX brokers offer the most popular index and commodity CFD products. They are however almost always reliant on a retail CFD pricing which they invariably receive from competitors who operate directly in the same retail space.
Jonathan and I decided that within the right environment and backed by a substantial and credible quantitative partner we could deliver a market leading institutional-only CFD product. Above and beyond these two key areas we wanted to offer our clients robust, bespoke technology solutions coupled with real-time reporting packages and something more than just vanilla aggregation. The final cornerstone was the idea of being able to offer unique order driven liquidity. In order to deliver this we required access to a meaningful order book.
Raj Sitlani and Jonathan Brewer identify Lord Fink’s ISAM as appropriate partner
Jonathan and I identified ISAM (a top class systematic hedge fund led by Lord Fink) as being a very appropriate partner. They are one of the most successful asset managers in London, use state of the art technology, employ a world class team of quants (there are conservatively 15 people with PhDs from world class academic institutions in situ) and understand the need for robust risk management. In addition to the flagship systematic fund (which currently has AUM of circa $750m), ISAM runs an FX manager allocation platform called Fusion.
The diverse portfolio of managers on this platform trade various FX strategies across many currency pairs and consequently leave a multitude of orders across the order book. In summation, ISAM’s structure satisfied our requirement for the unique order driven liquidity mentioned above, as well as providing many additional benefits. The end result was the decision to launch IS Prime in the Autumn last year. It turned out that our timing was opportune; it could for example be said that we were fortunate to have been largely only live with internal clients on the 15th of January, which means that we have been spared the bruises that many of our peers suffered on Franc-ogeddon.
Franc-ogeddon and beyond
So what has happened within the industry since the SNB’s surprise decision to remove the EUR peg? I suppose that the most alarming reaction is the kneejerk fashion in which many brokers, notably the primary PBs, have increased margins for trading. I remain unconvinced that such steps will prevent the type of fallout we saw on 15.01.15.
The second most notable reaction is that many e-FX brokers are questioning the STP model which they feel is broken. Their stance is that when it mattered most the bank LPs broadly let the markets down by not pricing for a very long period of time. This may have protected themselves to a certain extent but it almost certainly exacerbated losses for their clients, many of whom are e-FX brokers either trading directly or through PoPs. Last but not least, several primary PBs are taking the opportunity to withdraw fully from the market which I think provides a great opportunity for us and our segment of the market.
It is however very naïve to think that just by deploying an off the shelf aggregator and hooking up some big name LPs you have become a PoP that people will want to do business with. Clients’ demands have changed. Yes there is a subset that is happy with this type of basic offering. The more sophisticated players however want the combination of deep and competitive aggregated liquidity, advanced and proven risk management capabilities, real-time reporting and a broker that will step up to the plate and have some ‘skin in the game’. This can only be achieved by the niche players.
What we have specifically seen is a huge inflow of inquiries asking about revenue share and outsourced risk management models. This does not come as a surprise and indeed reinforces the view that Jonathan Brewer and I took when we set up IS Prime with the backing of ISAM. Namely that the e-FX business is a risk management business and accordingly today’s e-FX businesses need to offer a flexible approach, hybrid execution models and bespoke technology solutions or as we refer to it, next generation e-FX.