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Screenshot of a breaking news alert e-mail from Q2 2017
Globalization has brought some rather unexpected parameters to the somewhat dominant FX industry of London, partly due to the most important byproduct of looking further afield – the lack of requirement to depend on the local economy.
The juxtaposition that this has created is somewhat reminiscent of the days prior to the industrial revolution, albeit in circumstances generated by modern, cutting edge technology instead of the cast iron machinery of old.
The fervent interest which international FX companies are demonstrating in establishing operations in London, with some entering into large scale capital expenditure programs in order to purchase very specialist, domestic market orientated CFD and spread betting firms has increased exponentially recently, showing that many already successful international firms from all sectors of the FX industry are keen to base themselves, regardless of cost, in the number one financial center worldwide.
Whilst London’s FX sector is going from strength to strength, and the City’s financial district, colloquially known as the Square Mile, hosts banks whose FX order flow dominates the lions share of the interbank market, and whose gargantuan corporate purses can easily set aside over £1 billion to settle the recent FX benchmark fixing sanctions placed on it by the local regulator, and another $1.5 billion to satisfy the FCA’s stateside counterpart.
Such enormity is creating even more enormity, with seasoned experts such as GAIN Capital’s Glenn Stevens having explained to me last week quite candidly that the company over which he presides, and has dutiful responsibility to ever satisfied shareholders, is keen to reap high rewards from its $118 million investment in 30-year milestone British firm City Index – within quite a short time. The investments in London are, however, coming from overseas.
Mr. Stevens’ candour was as relaxed as it was enthusiastic, clearly bolstered by his unflappable confidence in the British market, which he sees as more vital than that of North America.
Indeed, globalization of the industry has enabled the giants of London to establish bases internationally – CMC Markets was the first to go into Canada, and IG Group has operations all over the Far East as well as one of the only two binary options exchanges in North America showing that equally, whilst investment in British firms is coming from overseas, British firms are targeting overseas investors with equal vigour.
A major factor that is worthy of concentration here is the kudos and status that London’s electronic trading sector holds with international clients, rather than jaded British public who have had their investing wings clipped and optimism curbed by 7 years of scithing recession and economic struggle.
And it is not over yet. Quite the contrary if we are to believe the opinions of many mainstream financial reporters and media organizations over the last week.
As the FX industry accelerates and London’s plate glass institutions get ever stronger, the British domestic economy just one mile outside of the Square Mile in each direction, spanning the entirety of the nation, paints a totally different picture and is subject to totally different circumstances.
Since 2008, small and large businesses, and even the very same banking institutions whose FX businesses are the mainstay of the entire global currency markets, have experienced bankruptcies, credit difficulties and contractions in size to a fraction of their former selves, with no sign of improvement.
Since the British government nationalized the major banks seven years ago, the economy has not recovered, partly due to Britain’s dependence on tertiary sector such as financial markets, insurance, and telecommunications rather than having a diversified manufacturing base which provides wealth outside of London’s financial district.
Just yesterday, the Bank of England announced that it expected to lower its growth and inflation forecasts, as it painted a gloomier picture of the domestic economy than had initially been anticipated.
Another area which is often used as a measure of British confidence is house prices. Unlike many regions in which home ownership is much higher than tenancy, Britain’s property market has been largely funded by very high loan-to-value ratio mortgages with very little equity required from the purchaser. This has been as a result of a period of time whereby property was considered a speculative investment.
In turn, this has in the past driven prices up, especially in London, however, today the five year forecast for mainstream markets in Britain has shown that London’s house prices are set for a downturn, especially as investors now have to come up with a sizeable downpayment post-credit crunch.
Bearing in mind that London’s currency markets and investment banking sectors are reaping huge rewards, and yet house prices are dwindling, this demonstrates foreign investment and overseas interest in financial institutions – whether end user or shareholder – and a difficulty for domestic residents to afford homes or to obtain mortgages due to the wider domestic population’s involvement in other, less lucrative activities outside of London’s global electronic trading sector.
Adding to this possibility is that the remainder of the UK, which is absolutely not dependent on the financial markets industry as that is confined specifically to London, the house prices are rising steadily.
Drawing this conclusion may appear somewhat tenuous, but indeed it could be used as a good yardstick by which to measure where the investment is coming from in the capital markets sector. Indeed, the most recent large scale capital investments have been, aside from the aforementioned GAIN Capital, from Swiss FX stalwart Charles-Henri Sabet in his purchase of London Capital Group and the subsequent installation of a very international board of directors, entries into the market from firms such as IronFX and Admiral Markets, both global companies that wanted the polished reputation of FCA regulation and a London office, with international directors and staff.
This applies to the technology sector as much as it does to the brokerages themselves with First Derivatives having raced home with substantial profits as per the company’s annual report last week, largely due to contracts with overseas regulatory authorities such as Australia’s ASIC which has invested in, and relies on, First Derivatives’ Delta Suite surveillance software for market surveillance across its electronic trading sector. This is a very lucrative and long term contract, which has borne fruit and is being emulated by other regulators – again overseas.
Location of the capital markets industry in the UK is perhaps part of the reason for this disparity, but there is more to it than that. In North America, there are three large financial centers – Chicago, New York and Toronto. Each are affluent, metropolitan cities with different roles to play – Chicago and New York host proprietary trading desks and institutional giants, whereas Toronto is a stock and equities city.
Other cities in North America which are not party to the financial sector, such as Houston or San Francisco, are home to technological innovators, medical science companies, pharmaceuticals, venture capital firms and the petrochemical industry. As a result, there is not that much disparity between lifestyle and professional career in these very different cities. In the UK, however, step outside London, and the entire nation, despite its large, sprawling cities across the Midlands and the North, are devoid of any notable industry which comes close to rivaling London’s banking and electronic trading sector.
For this reason, combined with the US authorities’ rulings that American clients must use American financial services companies only for their trading, the US is as domestic market orientated as the UK is international.
Realizing the value of British CFD firms, therefore, is to realize their international appeal and potential of attracting high net worth overseas clients to their fold, as well as large firms and high net worth shareholders to purchase their stock, whilst other mainstream markets in the UK fall by the wayside.
With commentators and government officials conceding that Europe, along with Britain, are far from out of economic misery, the FX firms of London are a shining star of hope.
Chart courtesy of the Daily Mail, and relates to the proposed contraction in non-financial markets, mainly property.