Is Barclays an FX dealer or a service provider? Financial giant begins charging banks for benchmark orders

The interbank FX market is dominated by a handful of the world’s largest financial institutions, most of which are based in London’s financial district, known colloquially as The Square Mile. With FX volumes and revenues down considerably this year, the pinch is being felt not just by small retail FX firms but also global giants such as Barclays, JP Morgan Stanley and HSBC, resulting in a number of changes having been made internally, some of which have been drastic, such as the action taken by Barclays, a firm whose performance has suffered tremendously this year, in which it lined up 19,000 members of staff for redundancy earlier this year.

Indeed, in such straitened times, Barclays has now developed a new method of generating revenue in that the bank has begun charging a fee for executing benchmark orders on behalf of other banks and sell-side institutions, rendering it not only a bank, but indeed a service provider to its rivals.

In March this year, LeapRate reported that just four global banks handle 46.7% of the entire order flow generated by foreign currency trading, particularly in their transatlantic businesses. At that time, the incremental increase in electronic execution of FX trades among institutions strengthened Deutsche Bank, UBS, Citi and Barclays’ US market 2013 share by 42% compared with 2012 as American institutional FX went from strength to strength. On this basis, the execution and handling of order flow is clearly an area of business in which Barclays can take a fee for processing, thus ensuring that many firms will have to pay this fee in order to continue their operations without change.

The method by which this has been applied is that Barclays will continue to offer fix-order execution to clients without any added spread, but the firm has taken a decision to move away from the practice of processing fix orders at a mid-price for free. Instead, Barclays now charges banks and sell-side institutions a spread when handling benchmark orders.

According to a report today by FXWeek, Barclays currently retains its former model of executing benchmark orders at mid-price for clients.

Large banks often handle these resource-consuming orders for smaller peers without charge in order to maximize their knowledge of flows in the market. Meanwhile, the smaller banks that have to offer these services, but are not always equipped to handle the amount of risk involved, get their client orders executed.

This lead by Barclays could result in a precedent being set in which smaller banks may find it economically not viable to offer benchmark services, or they may have to apply charges in addition to the orders in order to compensate the larger firm for taking on the risk.

Barclays is the first major bank to implement changes to fix-trading mechanisms, another measure which could well be echoed by other large financial institutions.

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