The end of the road for mid-price execution as banks begin applying spread

True to all too familiar form, when a large, influential financial institution takes the lead in instigating a charge for performing a specific task, it is never too long before a precedent is set and others follow.

Barely a week has elapsed since LeapRate reported that Barclays had begun charging other banks for executing benchmark orders in the interbank FX market, and already the veritable deluge of banks have begun amending their corporate policy to include charges for various types of execution.

As last week drew to a close, it became ever more apparent that the practice of mid-price execution among large banks may be consigned to the history books, signifying a potential end to non-chargeable fix execution.

A number of banks have now begun notifying clients that they will be charging a spread for executing benchmark orders, which could potentially have been driven by one of two factors – firstly that they may be following the path established by Barclays, or they are executing benchmark orders through Barclays and therefore have no other means of covering the extra cost levied by Barclays other than to pass it on to the client.

The likelihood of costs being incurred for fix execution and adoption of a model by which spread may be charged instead of guaranteeing mid-rates has extended itself outside of the banking sector and across institutional firms who may process orders on the interbank market.

On Friday, a spokesman for an asset management firm explained to FXWeek “We have been told we can no longer get guaranteed mid-rates for fixing orders at the mid-price, but instead we will have to pay the spread.”

Corporate directives of this nature have also prevailed among banks, with a senior executive at a large bank having stated to FXWeek last week that “”We have calculated internally that we lose $200,000 every year on a large client that has a lot of fixing business to do. We used to be happy to take the hit because we provided fix execution as a service and as part of a broader relationship. But in the current business environment it makes no business sense for us to continue doing this for free, and then on top of that to get accused of wrongdoing as well.”

Whether large banks are adapting this business model in order to mitigate the ever increasing cost and lower profit margins resulting from executing benchmark orders or with guaranteed mid-price on execution, or whether they have realized that such a vast percentage of order flow from other institutions is being processed via banks which themselves are experiencing a severe downturn in revenue therefore view the charging of spread as a business opportunity with which to increase chargeable volume by default is perhaps a moot point, however in these straitened times, the nickels and dimes clearly count for more than camaraderie.

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